C. Brewer and Co., Ltd., Matter of

• Citation: 649 P.2d 1155,65 Haw. 240
• Decision Date: 31 August 1982
• Docket Number: No. 7311,7311
• Parties: In the Matter of the Tax Appeal of C. BREWER AND COMPANY, LIMITED, Taxpayer.
• Court: Hawaii Supreme Court

Page 1155

649 P.2d 1155

65 Haw. 240

In the Matter of the Tax Appeal of C. BREWER AND COMPANY,

LIMITED, Taxpayer.

No. 7311.

Supreme Court of Hawai'i.

Aug. 31, 1982.

Syllabus by the Court

1. The general excise tax is imposed upon entrepreneurs for the privilege of doing business, and it applies at all levels of economic activity and to virtually all goods and services.

2. HRS Chapter 237 renders taxable, with only the exclusions and exemptions provided by the statute, all receipts by reason of the investment of the capital of the business engaged in.

3. Though it may be axiomatic that a taxpayer can order its affairs in any manner not proscribed by law to minimize the impact of taxation, the Director of Taxation is not bound by the accounting practices of the taxpayer.

4. It is fundamental that the Director of Taxation can look at the substance rather than the form of a transaction in fixing tax liability.

5. The actualities and consequences of a commercial transaction, rather than the method employed in doing business, are the controlling factors in determining excise tax liability.

6. That there is no actual payment of money or its equivalent is of no consequence for purposes of excise taxation. What is significant is value proceeding or accruing from economic activity.

Jack Spradlin, Honolulu, for taxpayer-appellant.

T. Bruce Honda, Deputy Atty. Gen., Honolulu, for appellee Director of Taxation.

Before RICHARDSON, C. J., LUM and NAKAMURA, JJ., and Retired Justices OGATA and MENOR, assigned temporarily.

NAKAMURA, Justice.

C. Brewer & Company, Limited, a Hawaii corporation (Brewer or the taxpayer), appeals from a decision of the Tax Appeal Court sustaining the assessment of general excise taxes on the value of services it rendered on behalf of or furnished to wholly owned subsidiary corporations and the interest on funds borrowed and disbursed on their account. The taxpayer maintains the transactions in question were not within the purview of the general excise taxes imposed by HRS § 237-13, because they entailed neither the payment of consideration by the subsidiaries nor the reimbursement of the parent company. The vast net of excise taxation cast by the legislature nonetheless encompasses the value of the services rendered or supplied and the interest payments assumed, and we affirm the Decision, Order, and Judgment of the Tax Appeal Court.

I.

During the relevant period, January 1, 1976 to December 31, 1976, Brewer was the sole stockholder of fourteen subsidiary corporations; it was also the parent of other subsidiary corporations where its stock ownership was substantial but less than 100%. The present controversy is centered on Brewer's practices of performing managerial and administrative functions, supplying professional and other services, ¹ and borrowing money to disburse to or on behalf of the wholly owned subsidiaries, ² although functions and services were performed for and furnished to less than wholly owned subsidiaries too. The tasks assumed by the parent covered the training of personnel, data processing, materials and budgetary control, accounting, engineering, industrial relations, and purchasing. Services procured at the parent's expense included auditing, legal services, and consultant services. See note 1 supra.

Where the administrative and managerial functions and services were rendered or supplied to the less than wholly owned companies, Brewer charged all of the expenses incurred to the subsidiary involved, ³ and there is no dispute related thereto. The taxpayer acknowledged that the transactions were subject to taxation by reporting their value as taxable gross income. But where the expenses, including interest payments on funds borrowed and disbursed, were incurred on account of wholly owned companies, Brewer neither charged the subsidiaries for such services nor sought the reimbursement of the expenses. ⁴ Brewer treated all of the foregoing expenses, including the interest liability it assumed, as contributions to the capital of the wholly owned subsidiaries. ⁵ And the value of the services and the interest was not reported as gross income.

The Director of Taxation (the Director) determined that the tax liability on the unreported gross income amounted to $237,869.93; the assessment also included interest amounting to $19,290.60. The taxpayer paid the assessed taxes and interest and appealed to the Tax Appeal Court, which affirmed the Director's determination.

II.

"In enacting ... (the general excise tax), the legislature cast a wide and tight net." In re Tax Appeal of Island Holidays, Ltd., 59 Haw. 307, 316, 582 P.2d 703, 708, reh'g denied, 59 Haw. 408, 582 P.2d 709 (1978). The tax is "imposed upon entrepreneurs for the privilege of doing business," and "applies at all levels of economic activity ... and to virtually all goods and services." In re Tax Appeal of Central Union Church, 63 Haw. 199, 202, 624 P.2d 1346, 1349 (1981). It is levied upon them "on account of their business and other activities in the State measured by the application of (prescribed) rates against values of products, gross proceeds of sales, or gross income, whichever is specified." HRS § 237-13.

"Read as a whole, ... (HRS Chapter 237) subjects to the general excise tax virtually every economic activity imaginable." Pratt v. Kondo, 53 Haw. 435, 436, 496 P.2d 1, 2 (1972). HRS § 237-13(1)-(9) delineates persons engaged in nine specific categories of businesses or activities to whom the tax applies. Under the rubric of "(t)ax on other business", HRS § 237-13(10) provides a catch-all for those not otherwise covered; it reads in pertinent part:

Upon every person engaging or continuing within the State in any business, trade, activity, occupation, or calling not included in the preceding paragraphs or any other provisions of this chapter, there is likewise hereby levied and shall be assessed and collected, a tax equal to four percent of the gross income thereof.

And it matters not whether the business is conducted between related or unrelated persons or entities. In re Tax Appeal of Island Holidays, Inc., supra. "A person or company having shareholders or members (a corporation, association, group, trust, partnership, joint adventure, or other person) is taxable upon its business with them, and they are taxable upon their business with it." HRS § 237-20.

A legislative design to reach virtually all transactions with economic gain or benefit as the object may also be observed in HRS § 237-2, reading:

"Business" as used in this chapter, includes all activities (personal, professional, or corporate), engaged in or caused to be engaged in with the object of gain or economic benefit either direct or indirect, but does not include casual sales.

The term "engaging" as used in this chapter with reference to engaging or continuing in business also includes the exercise of corporate or franchise powers.

The receipts subject to taxation are likewise described in expansive terms. "Gross income" taxable under HRS § 237-13 comprehends

the gross receipts, cash or accrued, of the taxpayer received as compensation for personal services and the gross receipts of the taxpayer derived from trade, business, commerce, or sales and the value proceeding or accruing from the sale of tangible personal property, or service, or both, and all receipts, actual or accrued as hereinafter provided, by reason of the investment of the capital of the business engaged in, including interest, discount, rentals, royalties, fees, or other emoluments however designated and without any deductions on account of the cost of property sold, the cost of materials used, labor cost, taxes, royalties, interest, or discount paid or any other expenses whatsoever.

HRS § 237-3.

The statute thus "renders taxable, with only the exclusions and exemptions provided by the statute, all receipts by reason of the investment of the capital of the business engaged in." In re Tax Appeal of Island Holidays, Inc., supra, 59 Haw. at 316, 582 P.2d at 708.

III.

Brewer nevertheless asserts the rendering and furnishing of services and the disbursements on behalf of its wholly owned companies were beyond the scope of HRS Chapter 237. Characterizing the activities in question as gratuitous transactions, it argues nothing in the law compels a corporation to charge its subsidiaries for the expenses related thereto. In our opinion, the transactions were still within the bounds of the statute.

Brewer does not claim the gross income taxed by the Director fell within any of the exclusions and exemptions provided in the statute. But it contends that where ...