Tax Found. Hawai‘i v. State, SCAP-16-0000462

• Decision Date: 21 March 2019
• Docket Number: SCAP-16-0000462
• Parties: TAX FOUNDATION OF HAWAI‘I, a Hawai‘i non-profit corporation, on behalf of itself and those similarly situated, Plaintiff-Appellant, v. STATE of Hawai‘i, Defendant-Appellee.
• Court: Hawaii Supreme Court

439 P.3d 127

TAX FOUNDATION OF HAWAI‘I, a Hawai‘i non-profit corporation, on behalf of itself and those similarly situated, Plaintiff-Appellant,

v.STATE of Hawai‘i, Defendant-Appellee.

SCAP-16-0000462

Supreme Court of Hawai‘i.

MARCH 21, 2019

OPINIONS OF THE COURT

PART ONE

(By: Recktenwald, C.J., with whom Nakayama, McKenna, Pollack, and Wilson, JJ., join)

I. Introduction

Appellant Tax Foundation of Hawai‘i challenges the State of Hawai‘i’s implementation of Hawai‘i Revised Statutes (HRS) § 248-2.6 (Supp. 2015), which authorizes the State to be reimbursed for its costs in administering a rail surcharge on state general excise and use taxes on behalf of the City and County of Honolulu. More specifically, the issues on appeal are: (1) whether we lack jurisdiction because this is a "controversy with respect to taxes" under HRS § 632-1 ; (2) whether Tax Foundation has standing to bring its challenge; (3) whether the State violated HRS § 248-2.6 by retaining 10% of the gross proceeds of the surcharge without calculating the actual cost of administering the surcharge; and (4) whether the State’s application of HRS § 248-2.6 is unconstitutional.

We conclude that: (1) the circuit court had jurisdiction to hear Tax Foundation’s claims because its complaint was not a "controversy with respect to taxes" within the meaning of HRS § 632-1 ; (2) Tax Foundation has standing² ; (3) the State did not violate HRS § 248-2.6 by retaining 10% of the gross proceeds of the surcharge; and (4) the State’s application of HRS § 248-2.6 does not violate the Hawai‘i or United States Constitutions. Accordingly, we vacate the circuit court’s order and judgment granting the State’s motion to dismiss for lack of jurisdiction, and remand this case to the circuit court with instructions to grant the State’s motion for summary judgment on the merits.

II. Background

A. Act 247

In 2005, the legislature enacted Act 247, authorizing counties to impose a surcharge of up to 0.5% on state general excise and use taxes. 2005 Haw. Sess. Laws Act 247, §§ 3-4 at 770-72. The purpose of Act 247 was to allow counties to levy surcharges "to fund public transportation systems." Id., § 1 at 770. The county surcharges are levied, assessed, collected, and otherwise administered by the Department of Taxation (DOTAX). Id., § 3 at 771. After collecting the surcharge, DOTAX transmits the funds to the State Department of Budget and Finance (Budget and Finance), which deposits them into special accounts. Id., § 5 at 773. After deducting and withholding costs as specified in HRS § 248-2.6,³ Budget and Finance disburses the remaining balance to each applicable county’s Director of Finance. Id., § 5 at 773.

B. Proceedings in the Circuit Court⁴

1. Tax Foundation’s Complaint

On October 21, 2015, Tax Foundation of Hawai‘i (Tax Foundation) filed a class action⁵ on behalf of all taxpayers in the City and County of Honolulu. The complaint alleged⁶ that after Act 247 was enacted, the City and County of Honolulu enacted Ordinance 05-027, imposing a surcharge on state general excise and use taxes (Honolulu County surcharge). Tax Foundation asserted the following about the surcharge. Honolulu is the only county to have adopted such a surcharge. Budget and Finance has retained 10%⁷ of the Honolulu County surcharge amounts collected by DOTAX since it was initially levied, and disbursed the remaining 90% to the City and County of Honolulu. During the fiscal years ending June 30, 2012, 2013, 2014, and 2015, Budget and Finance retained approximately $21.2, $19.3, $24.2, and $24.8 million, respectively, which went to the State general fund. As of December 31, 2015, the cumulative total of the State’s surcharge withholdings was $177,865,487.24.

Tax Foundation also alleged that the State violated HRS § 248-2.6(d) by retaining 10% of the City and County of Honolulu’s surcharge gross proceeds without calculating the actual costs of administering it.⁸ Tax Foundation alleged that the 10% retained by the State "grossly exceed[ed]" the costs incurred to assess, collect, and dispose of the Honolulu County surcharge funds. Tax Foundation further alleged that City and County of Honolulu taxpayers were required to pay a higher state tax than taxpayers of other counties as a result of the State’s failure to follow HRS § 248-2.6, that the State had violated the general laws provision in Article VIII, § 1 of the Hawai‘i Constitution, and violated the equal protection clauses of the Hawai‘i and United States Constitutions.

Tax Foundation sought declaratory, injunctive, and mandamus relief. In Count I, Tax Foundation sought an "order enjoining the State from continuing to violate" constitutional provisions and injunctive relief in the form of reimbursements, to the plaintiffs "and/or" the City and County of Honolulu, of amounts "improperly kept by the State." In Count II, Tax Foundation sought "mandamus directing the State to follow HRS § 248-2.6(d), and deduct and withhold only the cost of administering the Oahu surcharge and to pay the remaining balance of the 10% county surcharge initially withheld to Honolulu."

2. The State’s Motion to Dismiss

The State filed a motion to dismiss the complaint, asserting: (1) the circuit court lacked jurisdiction because HRS § 632-1 (1993)⁹ prohibits declaratory relief in " ‘any controversy’ with respect to taxes," (2) mandamus and injunctive relief was not warranted because HRS §§ 40-35 (Supp. 2006)¹⁰ and 232-14.5 (Supp. 2006)¹¹ provided adequate and exclusive remedies for tax disputes in tax appeal court, and (3) Tax Foundation lacked standing. Regarding the relief sought by Tax Foundation, the State argued that "any taxpayer can pay a tax under protest and file suit for a refund under section 40-35, HRS, or timely file a tax refund claim and appeal from a denial of the refund claim to the Tax Appeal Court under section 232-14.5, HRS."

3. Tax Foundation’s Opposition to the State’s Motion to Dismiss

Tax Foundation opposed the State’s motion to dismiss, arguing that the circuit court had subject matter jurisdiction because its complaint did not challenge the assessment or collection of taxes, but rather sought to correct mishandling after assessment and collection of the Honolulu County surcharge. Tax Foundation argued that the matter was not a "tax controversy" or an attack on the State’s ability to collect taxes, and was instead an attempt to force the State to comply with HRS § 248-2.6.

Tax Foundation analogized to the ICA opinion in Hawaii Insurers Council v. Lingle, where the ICA held that HRS § 632-1 ’s prohibition on actions regarding taxes did not apply because the plaintiff was not attempting to keep the State from assessing and collecting taxes. 117 Hawai‘i 454, 184 P.3d 769 (App. 2008), aff'd in part and rev'd in part on other grounds, 120 Hawai‘i 51, 201 P.3d 564 (2008).

Tax Foundation also changed its position regarding the relief it was requesting. Although Tax Foundation initially sought reimbursement to itself "and/or" the City and County of Honolulu in its complaint, in its opposition, it stated that it "does not seek any refund for itself or any other taxpayer." Tax Foundation argued that since it did not seek a declaratory ruling as to its own liability for taxes, and only sought to have the State pay its excess surcharge withholdings to the City and County of Honolulu, its claim did not belong in tax appeal court.

Tax Foundation asserted that it had standing because it paid general excise tax on income derived from fundraising that it conducted to support its activities. As to the injury suffered, Tax Foundation argued that if the State returned the excess funds it had diverted to the City and County of Honolulu, the Honolulu surcharge "could end sooner." Tax Foundation argued that this injury was traceable to the State’s actions, and was redressable, asserting that "the State could, if it chose, determine the costs" of administering the Honolulu County surcharge.

4. Motions for Summary Judgment

Tax Foundation filed a motion for summary judgment, and argued, inter alia, that the "plain and unambiguous language of HRS § 248-2.6" supported its interpretation, and that the State’s reading of HRS § 248-2.6 is unconstitutional and forces the City and County of Honolulu taxpayers to subsidize the rest of the State.

In its cross-motion for summary judgment, the State argued: (1) the circuit court lacked jurisdiction over Tax Foundation’s claims, (2) HRS § 248-2.6 expressly requires that the State retain 10% of the Honolulu County surcharge, (3) retention of 10% does not violate the equal protection clause, (4) retention of 10% is consistent with the general laws provision of the state constitution, and (5) Tax Foundation was challenging a "policy decision" and should seek a statutory amendment from the legislature.

5. Hearing on the Motions

At a hearing on the various motions, the circuit court found that Tax Foundation’s complaint presented a controversy arising out of a tax, and that it lacked jurisdiction over the dispute based on HRS § 632-1, stating that HRS § 632-1"broadly implies many controversies that can arise out of a tax." Tax Foundation orally requested leave to amend its complaint to clarify that the declaratory relief it sought was not subject to HRS § 632-1 ’s prohibition against tax controversies. The circuit court denied the request. The circuit court also determined that it lacked authority to impose mandamus relief on another branch of government. Thus, the circuit court granted the State’s motion to dismiss, and did not reach the issue of whether Tax Foundation had standing. The court further ruled that the cross-motions for summary judgment were moot.

The circuit court subsequently filed its written order granting the State’s motion to dismiss. The order stated:

The court, having read the memoranda in support and in opposition to the motion and the declarations filed therewith, and having heard the arguments of counsel, and based on the records and files

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