Ë'lnsT ctRütJtT tCIurìi S1.¿\Ti: Sir FIÅ\irAll r""¡Luü Of Counsel: ALSTON HTINT FLOYD & ING 20lt J&ru e I åF{ llr | 7 Attorneys atLaw A Law Corporation F t rÅþii. PAUL ALSTON 1126.0 CLINK THOMAS E. BUSH 4737.0 LORI K. STIBB 9670-0 1001 Bishop Street, Suite 1800 Honolulu, Hawai'i 968 13 Telephone: (808) 524-1 800 Facsimile: (808) 524-4591 E-mail: [email protected] tbush@ahf,r.com lstibb@ahf,r.com

Attorneys for Plaintiff TAX FOLINDATION OF HAWAII, A Hawaii nonprofit corporation, on behalf of itself and those similarlv situated

IN THE CIRCUiT COURT OF THE FIRST CIRCUIT

STATE OF HAWAI'I

TAX FOLINDATION OF HAWAIi, A Civil No. 15-I-2020-10 ECN Hawaii nonprofit corporation, on behalf of (Other Civil Action) itself and those similarly situated, PLAINTIFF'S CROSS-MOTION FOR Plaintiff, SUMMARY JUDGMENT AGAINST DEFENDANT STATE OF HAWAI'I; VS, MEMORANDUM IN SUPPORT OF MOTION; DECLARATION OF THOMAS STATE OF HAWAI'I, E. BUSH; EXHIBITS uA" - "M"; NOTICE OF HEARING PLAINTIFF'S CROSS- Defendant. MOTION AND CERTIFICATE OF SERVICE

Hearing Date: February 2.4,2016 Time: 2:00 p.m. Judge: Honorable Edwin Nacino

Trial Date: Not Set Yet

94872Iv1-/721.78-L PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANT STATE OF HAWAI'I

Pursuant to Rule 56(a), H.R,C.P., and Flint v. MacKenzie, et al,, 53 Haw. 672,

501 P.2d 357 (1972), and based on the pleadings frled by Defendant State of Hawai'i ('the

State") in support of its Motion to Dismiss Cornplaint filed November 10,2015, and in the

Memorandum in Opposition filed by PlaintifÏtherein, Plaintiff cross-moves for an order granting summary judgment in its favor and against the State for its violation of HRS 5 248-2.6 bV (1) failing to calculate and withhold only the costs of assessing, collecting and disposing of the Oahu surcharge proceeds collected by the State, and (2) failing to return the remaining balance to the

City & County of Honolulu.

Plaintiff fufther requests that pursuant to Counts I and II of its Complaint that

Mandamus and an Injunction issue against the State to (l) calculate the costs incurred in assessing, collecting and disposing of the County Surcharge, and (2) for prior distributions, disgorge and pay to the Cíty & County of Honolulu all amounts in excess of its costs that the

State has kept, and (3) lor current and future distributions, keep from the City & County of

Honolulu only its costs incurred in assessing, collecting and disposing of the County Surcharge.

There are no material facts in dispute and Plaintiff is entitled to summary judgment as a matter of law pursuant to HRCP 56.

DATED: Honolulu, Hawai'i, .$AN 2 r 2ür8

PAUL ALST THOMAS E. BUSH LORI K. STIBB

Attorneys for Plaintiff TAX FOUNDATION OF HAWAII

948721vL/1-21"78 7 2 IN THE CIRCIIIT COI]RT OF THE FIRST CIRCUIT

STATE OF HAWAi'I

TAX FOLINDATiON OF HAWAII, A Civil No. 15-I-2020-10 Hawaii nonprofìt corporation, on behalf of (Other Civil Action) itself and those similarly situated, MBMORANDUM IN SUPPORT OF Plaintiff, MOTION

VS

STATE OF HAWAI'I,

Defendant.

94642'l v -1/12118-l TABLE OF CONTENTS

Page

I. INTRODUCTION '.'.'.,,,'2

II. RELEVANT FACTS ...... 3

A. Act247, Allowing for the Imposition of the County Surcharge, is Passed a and Codified as HRS ç248-2.6 J

B. Prior to the Enactment of Act 247 , the State, through DOTAX Estimated Its Anticipated Costs to Implement and Administer the Surcharge 4

C After the Enactment of Act 247,DOTAX Received Additional Staffing and Funding to Implement and Administer the Surcharge and Reported that the Implementation and Administration were "Relatively Smooth". 5

D As of December 31,2015, the State Has Diverted 5177,865,487 .24 to Its Coffers from The County Surcharge As Its 10% Deduction, Generally Exceeding DOTAX's Entire Operating Budget

E The 10% Deduction Bears No Relation to the State's Costs to Assess, Collect and Dispose of the County Surcharge, and the State Has Never Attempted to Ascertain These Costs Because It Believes It Has No Obligation to do so 7

III. ARGIJMENT 9

A Lega| Standards to Apply In Construing HRS ç248-2.6 ...... 10

B HRS $248-2.6 Requires that the State Calculate the Costs to Administer the Surcharge and Remit the Remaining Balance to Honolulu...,...... 11

C The State's Interpretation and Implementation of HRS $248-2.6 is Unconstitutional...... ,. T2

The State Discriminates Against Plaintiff and Similarly Situated Taxpayers in Violation of the Equal Protection Clause l3

2 The Purpose of HRS ç248-2.6 Vy'as to Allow Honolulu to Raise Money for Its Mass'fransit Rail System 14

J The State's Interpretation and Implementation of HRS $248-2.6 Creates a Separate Class and an Arbitrary Burden on that Class t4

D A Writ of Mandamus and/or Injunction Should Issue to Compel the State to (1) Calculate the Costs Incurred In Assessing, Collecting and Disposing of the County Surcharge, and (2) For Prior Distributions, Disgorge and

916421 v3121'18-l Pay to the City & County of Honolulu All Amounts in Excess of its Costs that the State Has Kept, and (3) For Current and Future Distributions, Keep fiom the City & County of Honolulu Only Its Costs Incurled in Assessing, Collecting and Disposing of the County Surcharge.. 16

I Plaintiff and the Flonolulu Taxpayers l-Iave a Clear and indisputable Right to the Relief Requested with No Other Remedy 17

2. Calculating the Costs and Reimbursing the Remaining Amounts Aftel Costs Are Deducted fiom the l0o/o is Mandatory and Not Discretionary; and Mandamus and an lnjunction Should Issue Against the State 18

IV. CONCLUSION t9

946421v312)18-l TABLE OF AUTHORITIES

Page(s)

State Cases

Barnett v. Broderick, 84 Hawai'i 709,929P.2d1359 (1996) l8

Dines v. Pacific Insurance Co., 78 llawai'i 325,893 P.2d 176 (1995) ,,,,.I0,12

In re Doe, 96 Hawai'i 73,26P.3d562 (2001) 1l

Hanabusct v. Lingle, 119 Hawai'i. 341, 198 P.3d 604 (2008) 16,18

Hasegau,a v. Maui Pineapple Co., 52 Haw. 327, 47 5 P.2d 679 (1970) 13, 15

Hawaii Gov't Employees Ass'n, AFSCME Local 152, AFL-CIO v. Lingle, 124 Hawai' i 197, 239 P .3 d I (20 10) ...... l0

Kema v. Gaddis, 91 Hawai'i 200 334,338(1999) 16

Office of Hawaiian Affuirs v. State, 110 Hawai'i 338, 133 P.3d 767 (2006) .... 17, 18

Ramsay Travel, Inc. v. Kondo, 53 Haw. 419,495 P.2d 1,172 (1972).. t7

Spencer v. McStocker, 1l Haw. 581 (1898) ..17

State v. Nakata, 76\l,awai'i360 (1994) l3

Widemann v. T'hurston, 7 Haw. 470 (1888)...... I7

State Statutes

HRS $ 248.2.6 ...... pqssrm

ROH $$ 6-60.1through 6-60.3 ...... 17

94642'7 v3/121'18-l MEMORANDUM IN SUPPORT OF MOTION I. INTRODUCTION

Plaintiff has one simple goal: to have the State of Hawai'i follow the law and

properly retain from the county surcharge ofone-halfper cent (the "County Surcharge" or

"Surcharge") on the general excise tax ("GET") only the amount it costs the State to assess,

collect and dispose of the County Surcharge. This is mandated by the authorizing statute, HRS

ç248-2.6, and by the Hawai'i and U.S. Constitutions. The State has failed to so act. Instead, the

State has taken and kept 10% of the Surcharge for itself, even though that amount bears no

relation to the State's cost to assess, collect and dispose of the Surcharge. The end result is that

since the State began collecting the County Surcharge in2007, it has improperly kept over

$ 177,000,000 of County Surcharge money that should have been remitted to the City and County

of Honolulu ("Honolulu") for use on Honolulu's rail project.

The clear and plain language of Hawai'i Revised Statute ("HRS") $248-2.6(d) requires that out of the 10% of the Surcharge, the State retain only the amount necessary to reimburse the State for the actual costs to administer the Surcharge. After cost reimbursement, the State is required to refund the remaining amount of the l0% deduction to Honolulu.

However, since 2007, the State has failed to calculate its costs associated with the

Surcharge and has unjustly retained the full 10% deduction which constitutes millions of dollars' worth of Honolulu taxpayers' money. The State refuses to refund the remainder to Honolulu in accordance with the statute.

A mandamus should issue to compel the State - or the director of finance - to follow the statute and disgorge tax revenues improperly retained in the State general fund. An injunction should issue to prevent the State from further breaking the law for any current and future Surcharge amounts collected.

946427 v3 /12]r1 8-1 U. RELEVANT FACTS

A. Ãct247, Allowing for the Imposition of the County Surcharge, is Passed and Codified as HRS ç248-2.6

ì-- ^,--l i,^ ^lJ--^^^ tl-^ ¿,-^1ti^ ^^,---^-¿l^,, ^..C/^^,-^ I l--. ¡1-^,-^-:l---r^ ^a |t ¿vvJ)^A^a ailu lil pi1il, tu auursss rils uailrs çuilggsuuf l Sulrgrçu uy Ulg Igsluçilts ul

I{onolulu, the Legislature enacted Act247. Act247 afforded each county the opportunity to impose a surcharge of one-half per cent (112%) upon the GET. The Surcharge would be collected by the State's agency, Department of Taxation ("DOTAX") and administered by another agency, the Department of Budget and Finance.

Act247, part of which is codified in HRS 5248-2.6, provides in pertinent part in subsection (a) that:

Ifadopted by county ordinance, all county surcharges on state tax collected by the director of taxation shall be paid into the State treasury quarterly within ten working days after collection, and shall be placed by the director of finance in special accounts. Out of the levenues generated by county surcharges on state tax paid into each respective state treasury special account, the director of finance shall deduct ten percent of the gross proceeds of a respective counfy's surcharge on state tax to reimburse the State for the costs of assessment, collection, and disposition of the county surcharge on State tax incurred by the State. Arnounts retained shall be general fund realizations of the State.

HRS $248-2.6(a) (emphasis added.)

HRS $248-2.6(b) states that

f'he amounts deducted for costs of assessment, collection, and disposition of county surcharges on state tax shall be withheld from payment to the county by the State out of the county surcharges on state tax collected for the current calendar year.

I-IRS $248-2. 6(b)(emphasis added.)

Furtlrer, IIRS $ 248-2.6(d) provides in pertinent part that

[a.]fter the deduction and withholding of the costs under subsection (a) and (b), the director of finance shall pay the remaining balance on [a] quartcrly basis to the director off,rnance ofeach county that has adopted a county surcharge on state tax under section 46-16.8. (emphasis added.)

946421 v3 l2l'7 8-l -) According to the statute, the Surcharge (after collected from the l-Ionolulu taxpayers) is initially placed into a special account. From this account, the State is required to deduct the costs associated with the collection, assessment and administration of the Surcharge.

The State then keeps the amount of actual costs as described in subsection (b). After the costs are deducted, the remaining balance is paid to Honolulu.

While this statute on its face applies to all counties, only Honolulu has adopted a surcharge. After Act 247 passed, Honolulu enacted Ordinance No. 05-027, codified as Revised

Ordinance of Honolulu ("ROH") $$6-60.1 - 6-60.3 to fund Honolulu's mass transit rail project

("rail") with the effective date of January 1,2007 .

B Prior to the Enactment of Act 247, the State, through DOTAX Estimated Its Anticipated Costs to Implement and Administer the Surcharge

On March 21,2005, while the Legislature considered Act 247 (House Bill 1309,

H.D.2 and Senate Bill 1731), then DOTAX director, Kurl Kawafuchi, submitted written testimony to the Senate Committee on Transporlation & Government Operations in opposition to the Act as DOTAX did not wish to collect the Surcharge ("Kawafuchi3l2ll05 Testimony").r

Foremost among the reasons in opposition, Director Kawafuchi testif,red that DOTAX as the

"collection ageît" would "seriously detract from IDOTAX's] own efforts to maximize State collections and will utilize Department resources to enforce the county tax." Id. at 1. Director

Kawafuchi further testified that DOTAX would be "unable to implement a system to collect county taxes prior to July I,2006 due to the need to produce new forms, reprogram the computers to accept additional data entries, train staff and educate the public about the taxes."

Id. at2. Finally, Director Kawafuchi testified that "ft]here is no revenue impact on state funds, other than required appropriations for start-up for collections." Id. at 3. And, "[i]n order to t A of the Kawafuchi Testimony is attached hereto as Exhibit A. "opy

946427v312178-l 4 administer the tax, IDOTAX] estimates that it will require a one time appropriation of $3.6 million for hardware, software, and equipment and $2.5 million annually thereafter for recurring

staffing and operational costs." Id, (emphasis added.) Director Kawafuchi testified thatthe"lo/o

surcharge on GET and use tax would provide additional estimated revenues for [Honolulu

County ofl $296 million." 1d

On April 5,2005, Director Kawafuchi gave similar testimony to the Senate

Committee'Ways and Means regarding Act247. Ses Exh. B (hereinafter referred to as

"Kawafuchi 4105105 Testimony"). Director Kawafuchi repeated DOTAX's estimates of "a one time appropriation of $3.6 million for hardware, software, and equipment and $2.5 million

annually thereafter for recurring staffing and operational costs" and indicated that DOTAX could

"provide a more detailed breakdown of these estimates if the Committee so desires." Id. af 4.

C. After the Enactment of A.ct247, DOTAX Received Additional Staffïng and Funding to Implement and Administer the Surcharge and Reported that the Implementation and Administration were "Relatively Smooth"

On April 27,2007, then Governor Linda Lingle signed Act 045 into law allowing

for an emergency appropriation of "$5,04 1 ,69 1 or so much thereof as may be necessary for fiscal

year 2006-2007 to reimburse the department of taxation for costs incurred in implementing and

administering the county surcharge...including the costs of the computer vendor." See Ex. C at 4

In addition,in2007, the Legislature enacted Ãct2I3, SLH 2007 $ 121, which

tasked DOTAX to provide it was a report before the 2008 and 2009 regular legislative sessions

"detailing the of staff,rng and funding necessary to administer county surcharge collection;

provided further that the repoft shall describe the total workload related to collection of the

county surcharge, provide a listing of staff that support the collection of the county surcharge,

the budgeted annual salary for each position, and the approximate percentage of time each

position spends on the task," See Exh. D.

()4642'1v312178-1 5 In the first report, dated October 2007, DOTAX reported that Act 213 had granted

it 19 permanent positions and 4 temporary positions for fiscal year 2008 and 19 permanent positions and 1 temporary position for fiscal year 2009. See Ex. E (hereinafter "the October

2007 DOTAX Report"). This Report stated that the "Total amount budgeted" for these positions was5749,876forfiscalyear2008and$700,508forfiscalyear2009." Id.al2. Inreportingthe

approximate percentage of time each position spends on the task of collecting county surcharge,

DOTAX stated that it "does not have the resources or ability to perform cost accounting", before

stating that it "roughly estimated that about 60% of these employees time was spent on General

Excise/County Surcharge tax related" and that the "other 40o/o was spent on Individual Income tax, Business Income tax, Tax Clearance and other tax related matters." Id. at3. The Reporl

concluded by referencing "[t]he success of the implementation and administration of the County

Surcharge tax on the State's general excise tax on behalf of the City and County of Honolulu"

and noted that "[w]hen necessary, IDOTAX] will submit a request for additional resources to

enhance compliance with the new Iaw." Id.

In the second report, indicated to be for the period of July 7,2007 through June

30, 2008, DOTAX again reported that it had, pursuant to Act 213,19 permanent positions and 4

temporary positions for fiscal year 2008 and 19 permanent positions and 1 temporary position for

fiscal year 2009. See Ex. F (hereinafter "the 2008 DOTAX Reporl"). The total amount budgeted

for these positions remained 57 49,87 6 for fiscal year 2008 and $700,508 for f,rscal year 2009. Id.

at2. ln addition, DOTAX reported that it estimated that the pro rata share of staff costs due to

theCountySurchargeforitscompliancedivisionwas$439,166. Id. Thereporlconcludedby

stating that "[t]he administration of the County Surcharge tax has been relatively smooth to the

Department's knowledge" and noted that it had been "denied" funding for $233,000 that it had

requested for computer support needed to administer the County Surcharge tax. Id. at 3.

94642'7 v31217 8-1 6 D As of December 31,2015, the State Has Diverted $177,865,487.24 to Its Coffers from The County Surcharge As Its 10%o Deduction, Generally Excceding DOTAX's Entire Operating Budget

In response to Plaintiffs discovery request, the State has provided a chart detailing, on a quafterly, annual and cumulative basis, the amount of the County Surcharge collected by the State and the amount kept by the State as its 10%o deduction (hereinafter "the

State's Chart"). See Ex. G. The State's Chart shows that from the inception of the County

Surcharge midway through fiscal year 2007 through the second quarter of fiscal year 2015

(ending December 31,2015), the State has paid itself $111,865,481.24 of the County Surcharge as its 10% tithe. Id. Meanwhile, DOTAX has also provided in discovery certain "Annual

Reports." Based on information from DOTAX's Annual Repofis, during approximately this same period of time, DOTAX's total amount of operating expenses when considered on an annual basis has generally been less than what the State has taken as its 10olo deduction. See Ex

H (chart summarizing the operating expenses reporled by the State in its Annual Reports and 2. contrasting amounts reported in Exhibit G, as the State's l0% deduction) In other words, the

State takes more for itself from the Surcharge than it costs to operate the entire Department of

Taxation.

E The 10%" Deduction Bears No Relation to the State's Costs to Assess, Collect and Dispose of the County Surcharge, and the State Has Never Attempted to Ascertain These Costs Because It Believes It Has No Obligation to do so

It is thus evident that, as a matter of fact, the I0%o deduction kept by the State bears no relation to what it costs the State to assess, collect and dispose of the County Surcharge.

2The relevant portions of the Annual Reports that provided the underlying data for DOTAX's operating expenses are attached hereto as Exhibit l.

946427v3 121'78-1 7 This was established in the recent deposition f'ed Shiraishi, the State's 30(bX6) witness.3 When

he was shown the State's Chart, he identified this Chart as showing the l0o/o deduction that is

transferred to the State (in the first table on the Chart). SeeEx. K, Shiraishi Depo. at23:l*26:18

However, when he was asked if the Chart shows the costs of the assessment, collection and

distribution of the County Surcharge, he answered, "We don't know the cost of the . . .

assessment. collection. and distribution. We don't knorv the actual cost of that." Id. af

27:10*17 (emphasis added). He thus admitted the State's Chart would not show this

information. Id. af 27 :16-20.

When he was questioned as to the basis for the State's failure to determine these

costs, Mr. Shiraishi pointed only to one sentence in the October 2007 DOTAX Report, which

states that "[t]he Department of Taxation does not have the resources or ability to perform cost

accounting."), and the fact that the Department of Taxation did not think it "was necessary or required," Id. at 64:25-66:2.

I'{owever, when Mr. Shiraishi was questioned as to why DOTAX had indicated in the Octobet 2007 DOTAX Report that it did not have the resources or ability to perform cost accounting, he admitted that he did not knowl Id. af 57:10-14. When he was asked what

"resources" the State lacked to perform cost accounting, he testified that "it's my understanding that we did not look into it." Id. at 56:25 - 57:3. He fuither could neither conf,rrm nor deny that

3Plaintiff took a limited 30(bX6) deposition of the State's witness to discern, in part, whether and why the State could not calculate the actual costs to assess, collect or distribute the County Surcharge. See F,x. J (Amended Notice of Deposition). The State provided one witness, DOTAX current "Rules Officer" Ted Shiraishi. Mr. Shiraishi conducted no independent investigation to prepare himself for his deposition, but relied solely and entirely on the State attorney to provide him with materials that would be relevant for his testimony. See Ex. K, T. Shiraishi Depo. at 49:l 8-50: 1 3.

94642'lv3 121'/8-1 8 DOTAX's alleged lack of resources or ability to perform cost accounting was simply because it

"never looked into it." Id. 57:4-9.

Thus, from Mr. Shiraishi's testimony, it is clear that (1) lhe l0o/o deduction is

unrelated to the State's costs to assess, collect and distribute the County Surcharge, (2) the State

has never calculated (or even attempted to calculate) the costs associated with this administration

of the County Surcharge, and (3) the reason the State has not made any calculation attempts is

simply the belief that such a calculation was not "necessary or required." As succinctly

summarized by Mr. Shiraishi in response to a question from the State's attorney:

From IDOTAX]'s perspective, the law was clear in that the 10 percent allocation was a set amount; and it wasn't based on our need to do some kind of cost accounting or measure of those functions. And I guess - so, we just did not.

Id. at89:13-21.

Meanwhile, Plaintiff has retained Daniel Bowen, a Certified Public Account, as

an expett. Mr. Bowen has opined that the State could reasonably implement an accounting

system to identify and calculate its costs to assess, collect and distribute the County Surcharge.

See Ex. L, Declaration of Daniel Bowen and Ex. M (resume).

III. ARGUMENT

Applying well-established principles of statutory construction, this Courl should find that HRS $248-2.6 requires the State through its agencies, DOTAX and director of finance, to calculate its costs to collect, assess and dispose of the County Surcharge, subtract those costs fiom the 10% deduction, and remit the balance to the Ctly &. County of Honolulu. Any other construction of HRS Q248-2.6 would render it unconstitutional. Meanwhile, as noted above, the

State admits that it has never'even attempted to calculate these costs. Instead, it admits having

946421 v1 121'7 8-l 9 retained the full amount of the 10% deduction since 2007 . Under these undisputed facts,

Plaintiff is entitled to judgment as a matter of law on all claims in its Complaint.

A. Legal Standards to Apply In Construing HRS 5248-2.6

Certain well-established Hawai'i principles regarding statutory construction are relevant for the disposition of this Motion. In particular,

[T]he fundamental starting point for statutory interpretation is the language of the statute itself. Second, where the statutory language is plain and unambiguous, our sole duty is to give effect to its plain and obvious meaning. Third, implicit in the task of statutory construction is our foremost obligation to ascertain and give effect to the intention of the legislature, which is to be obtained prirnarily from the language contained in the statute itself. Fourth, when there is doubt, doubleness of meaning, or indistinctiveness or uncertainty of an expression used in a statute, an ambiguity exists. AndfiJih, in construing an ambiguous statute, the meaning of the ambiguous words may be sought by examining the context, with which the ambiguous words, phrases, and sentences may be compared, in order to ascertain their true meaning.

Hav,aii Gov't Employees Ass'n, AFSCME Local 152, AFL-CIO v. Lingle,l24}lawai'i 197,202,

239P.3d1,6(2010) (quoting Awakuniv. Awana,115 Hawai'i126,133,165P.3d1027,1034

(2007) (citations omitted)).

ln addition, "[i]t is a cardinal rule of statutory construction that courts are bound, if rationale and practical, to give effect to all parts of a statute, and that no clause, sentence, or word shall be construed as superfluous, void, ol insignificant if a construction can be legitimately found which will give force to and preserve all the words of the statute. Dines v. Pacific

Insurance Co.,78 Hawai'i 325,331,893 P.2d176,782 (1995) (quoting Camarav. Agsalud,6T

Haw. 272,215-16,685 P.2d 794,797 (1984) (citations omitted).

Moreover, the "doctrine of 'constitutional doubt', a well settled canon of statutory construction, counsels that, 'where a statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are

94642'1 v3 1217 8-l 10 avoided, [the courl's] duty is to adopt the latter."' In re Doe,96 Hawai'i 73, 81 ,26P.3d562,

570 (2001) (quoting, Jones v. United States,529 U.S. 848, 857 (1909)).

B" HRS $248-2.6 Requires that the State Calculate the Costs to Administer the Surcharge and Remit the Remaining Balance to Honolulu

The plain and unambiguous language of HRS ç248-2.6 instructs the State in

subsection (a) to initially deduct 10% of the gross proceeds of the County Surcharge "to reimburse the State for the costs of assessment, collection, and disposition of the county

surcharge on state tax incurred by the State." In subsection (b), the statute requires that the

"amounts deducted for costs of assessment, collection, and disposition of the county surcharge

shall be withheld from payment to the counties by the State." Subsection (d) then provides that

"after the deducting and withholding of the costs under subsections (a) and (b), the director of finance shall pay remaining balance" to the counties.

I{RS $248-2.6 is clear and unambiguous. Subsections (b) and (c) mandate that the State, after deducting l)Yo of the total tax collected per subsection (a), withhold from payment to the State only those costs incurred by the State in the assessment, collection and disposition of the surcharge before returning the "remaining balance" to the counties. However, as admitted by Mr. Shiraishi in his deposition, the State has, in practice, kept the initial 10% deducted pursuant to subsection (a), even though it knows thalthat amount does not reflect the cost of the assessment, collection and distribution of the County Surcharge. -fhe State's defense of its conduct appears to be its understanding that the l0o/o deduction is - in Mr. Shiraishi's words - "a set amount" that it was entitled to keep from the

County. Plaintiff anticipates that consistent with a September 8,2015 Attorney General opinion

("Op. No. 15-1"), the State will focus on subsection (a) of HRS $248-2.6 to argue that the

94642'Ìv312178-1 11 legislature intended the State to retain the entire 10% deduction, regardless of the costs of assessment, collection and distribution of the County Surcharge.

HoweveL, this construction of HRS $248-2.6 is untenable because it ignores the lequirement in subsections (b) and (d) that only after deducting the costs incurred by the State in assessing, collecting and distributing the County Surcharge, the State leturn the balance to the

County. Per the State's reading of the statute, subsections (b) - (d) are superfluous as the State does not need to deduct its costs to assess, collect and distribute the surcharge. The State simply takes its 10% cut, even though it acknowledges that this amount bears no relationship to the costs it has been tasked to deduct, and -- given that the 10% deduction exceeds the operating expense of entire Tax Department - no doubt, grossly exceeds those costs. The State's construction of the statute must be rejected because it fails to "'give force to and preserve all the words of the statute."' Dine,78 Hawai'i at331,893 P.2d at 182 (quoting Camara,67 Haw. at276,685 P.2d at797). In addition, it would frustrate legislative intent as the fundamental reason for the enactment of Act 247 was to allow counties additional taxing authority to fund programs specific to that counfy - not to fund statewide programs.

C The State's Interpretation and Implementation of HRS $248-2.6 is Unconstitutional

As noted above, as the 10% deduction bears no relation to the State's costs of administering the Surcharge, Plaintiff and similarly situated taxpayers have been and continue to pay a liigher GET than that imposed on state tax payers of other counties. Since the 10% is deposited into the general fund, the State's interpretation and implementation of HRS $248-2.6 penalizes Plaintiff and the Ilonolulu taxpayers, forcing them to subsidize the remainder of the

State.

c)46421 v3 l2l1 8-l 12 To allow the State to discriminate against Plaintiff and sirnilarly situated taxpayers violates the Equal Protection Clause of the Hawai'i and U.S. Constitutions.

1. The State Discriminates Against Plaintiff and Similarly Situated Taxpayers in Violation of the Equal Protection Clause

In analyzing a claim that a statute violates the Equal Protection clauses of the

Hawai'i and U.S. Constitutions, the Hawai'i Supreme Courl applies a "rational basis" analysis where neither a suspect class nor fundamental right is involved. Under this analysis to avoid constitutional infirmity, the disputed statutory provision must have a rational relationship to a legitinrate government intelest. State v. Nakata,76 Hawai'i 360,379 (1994).

In Has e gaw a v. Maui P ineapple Co., 52 Haw. 327, 41 5 P .2d 67 9 (I97 0), the

Hawai'i Supreme Court employed a two-pronged test for determining whether a rational basis exists. In Hasegauta,the Legislature required private employers with more than25 employees to continue to pay the wages of employees who were selected for public service, e.g. jury duty, public boards, and public commissions. In analyzing if a rational basis existed for the legislation, the Supreme Court stated.

Firsl we must asceltain the purpose or objective that the State sought to aclrieve in enacting fthe statute]. Second, we must examine the means chosen to accomplish that purpose, to determine whether the means bears a reasonable relationship to the purpose.

Id. at330. (emphasis added.)

The Supleme Court then found that the legislation was unconstitutional because it created a "class distinction" between private employers to pay for state functions to benefit the general public instead of those particular class members. The State failed to "demonstratel] any special benefit to private employers that would justify this class distinction." Id. at332. "The cost of a proper state function conducted for the public benefit cannot be albitrarily charged to one class in the society." Id. at333 (internal citations omitted).

94642'1v3 12178-l 13 Applying this analysis to the State's interpretation and implernentation of HRS

ç248-2.6, renders this statute unconstitutional.

2 The Purpose of HRS 5248-2.6 Was to Allow Honolulu to Raise Money for Its Mass Transit Rail System

The first prong of analysis for the rational basis test is determining the

Legislature's purpose in enacting HRS $248-2.6. As outlined above, the purpose of HRS $248-

2.6 was primarily to assist the County of Honolulu in raising funds for its mass transit rail

system. In so doing, the Legislature granted Honolulu (as well as other counties) further taxing

authority to raise capital to fund the public transportation system for that particular county.

Since the Surcharge was added to a State tax (GET), the Legislature reasonably concluded that

for efficiency purposes the State agencies - DOTAX and Budget & Finance - would collect,

assess, and administer the Surcharge. The State would be reimbursed for the additional costs

associated with the Surcharge.

Honolulu exercised this taxing authority by imposing the Surcharge to fund its

ambitious rail transit system. The State can point to no law or testimony that the purpose of the

statute was, instead, simply to increase the monies into the State's general fund to be used for

statewide progratns.

3. The State's Interpretation and Implementation of HRS ç248-2.6 Creates a Separate Class and an Arbitrary Burden on that Class

The second prong of the rational basis test looks at the mechanism on how the

purpose of the statute is to be accomplished. I{ere, HRS $248-2.6, as properly constlued by

Plaintiff, is rationally calculated to achieve the legislation's purpose and thus does not violate the

Equal Protection Clause. The State's agencies will collect, assess and administer the Surcharge

on the State's GE'f. Since the State is already collecting the GET, reasonable efficiencies dictate that the State adrninister, assess and dispose of the Surcharge. However, recognizing the

<)46421 v3121'78-l 14 potential burden and estimated costs as described by Mr. Kawafuchi (then the DOTAX director),

the Legislature reasonably allowed the State to be reimbursed for all costs associated with

Surcharge, instructing the State to reimburse itself for "any and all costs, direct and indirect, that

are deemed necessary and proper to effectively administer this section . . . ." See HRS $248-

2.6(c). Such costs could include, for example, the costs to implement the surcharge, including

even the costs to determine what those implementation costs might be!

In contrast, the State's interpretation ignores any need to for the State to determine the costs "deemed necessary and proper to effectively administer" the law. Instead, the State

simply keeps l}Yo of what it collects from Honolulu taxpayers and puts that in the State General

F-und. These general funds are then used for state functions and/or programs for all Hawai'i residents - not just Honolulu. Honolulu taxpayers are thus a "distinctive class" under Hasegawa

since, as a result of the 10% deduction, they alone fund State functions and/or programs. In addition, because the l0o/o deduction bears no relation to State's costs to administer the

Surcharge, Honolulu taxpayers are arbitrarily charged with the cost of providing this state-wide benefit. This constitutes an equal protection violation because, as Hasegawaheld, the cost of a state function or general public benefit cannot be arbitrarily charged to one class. See also Dep't of Mental Hygiene v. Kirchner,60 Ca. 2d716,36 Cal. Rptr,488, 388 P2d 720 (1964),vacated and remanded,380 U.S, 1 94 (1965), realf d 62 Cal. 2d 586, 43 Cal. Rptr. 329, 400 Pzd 321

(1 e65).

The State may want to argue that the additional burden on Plaintiff and other

Honolulu taxpayers caused by the State takin g 10% of the Surcharge is 'Justified as a special assessment imposed on a particular group in society for a special benefit they have received."

Hasegawa, 52Haw. at334-35. (internal citation omitted.). The State may claim that Plaintiff receives a special benefit because under the statute, the State collects, assesses and administers

e4642'tv3t2t't8-t I 5 the Surcharge on behalf of Honolulu. Howevel, this does not constitute a special benefit since the Legislature considered that burden when it drafted HRS $248-2.6, and allowed the State to reimburse itself for those costs that are deemed necessary and proper to assess, collect and distribute the Surcharge. The State cannot credibly argue that because it has never calculated (or even attempted to calculate) those costs and does not know what they are, it is justified in assessing Plaintiff and Honolulu taxpayers an additional $24,000,000 a year and over

$177,000,000 since 2001. .]ee Ex. G.

Therefore, interpreting IIRS $248-2.6 to allow the State to keep 10% of the

Surcharge would violate the Equal Protection clauses of both the Hawai'i and U.S. Constitutions.

To avoid having to invalidate this legislation, this Court should confirm that the State is obligated under HRS $248-2.6 to (1) take the steps necessary and proper to calculate its costs to assess, collect and dispose of the County Surcharge; (2) deduct only those costs fi'om the I0o/o withheld from the gross proceeds of the County Surcharge; and (3) return the remaining balance to the City &. County of Honolulu.

D. A Writ of Mandamus and/or Injunction Should Issue to Compel the State to (1) Calculate the Costs Incurred In Assessing, Collecting and Disposing of the County Surcharge, and (2) For Prior Distributions, Disgorge and Pay to the Cify & Counfy of Honolulu All Amounts in Excess of its Costs that the State Has Kept, and (3) For Current and Future Distributions, Keep from the City & County of Honolulu Only Its Costs Incurrcd in Assessing, Collecting and Disposing of the Counfy Surcharge

A writ of mandamus is appropriate where "the petitioner demonstrates a clear and indisputable right to the relief requested and fthere is] a lack of other means to redress adequately theallegedwrongortoobtaintherequestedaction." Kentav.Gaddis,91 I-lawai'i200,204,P.2d

334,338(1999). See also, Ilanabusa t,. Lingle,119 Hawai'i.341,346,198 P.3d 604, 609 (2008)

(mandamus directing governor to engage in a nondiscretionary duty).

94642'1 v71211 8-1 16 This Coult has jurisdiction to issue the writ of mandamus against the directors of the State agencies involved. Ramsay Travel, Inc. v. Kondo, 53 Haw. 419, 428 &. 429, 495 P.2d

II72, lI79 (1972) ("If the taxpayers believe that the Director [of Taxation] has fviolated a duty], they may seek a writ of mandamus in the circuit court to compel the Director to act. ... And certainly the remedy afforded by state law (i.e., mandamus) assures them equal treatmeut along with all others similarly situated."). Spencer v. McStocker, 11 Haw. 581, 582 (1898) ("The

Judges of the Circuit Courts in Chambels have authority to issue writs of mandamus directing public officers to fulfill any of the duties attached to their offices, or which may legally be requiled of thern."); Widemann v. Thut'slon,7 Haw. 470, 480 (1888) ("It is the undoubted right and duty of the Court to interfere by mandamus or injunction to compel a Government offtcer to perform a Ministerial duty cast upon him by a statute, or to restrain him from doing any act in violation of a statute.").

This Court also has authority to issue an injunction against the State for

"prospective relief," preventing the State "from violating constitutional or statutory provisions."

O.ffice of HawaiianAffairsv. State,110 Hawai'i 338,357,133 P.3d 767,786 (2006). This includes the ability to issue an injunction where there is "a continuing violation of or ongoing breach.." Id.

1 Plaintiff and the Honolulu Taxpayers Havc a Clear and Indisputable Right to the Relief Requested with No Other Remedy

Plaintiffdoes not dispute that the surcharge is rightfully taxed utrder ROH $$6-

60.1 through 6-60.3. Plaintiff and similarly situated taxpayers have paid the Surcharge and will continue to pay the Surcharge. Therefore, Plaintiff has no remedy in Tax Appeals Court as

Plaintiff does not contest the amount of taxes paid. Instead, Plaintiff has showtr that it and sirnilarly situated taxpayels have a clear and indisputable right under IIRS $248-2.6 to ensure

94642'Ìv3 121'7 8-l t7 that the Surcharge amount collected is appropriately distributed to the County not the State, except to repay the State for its administrative costs. However, the State is not following this statutory mandate. Plaintiff s sole recourse would appear to be issuance of mandamus to compel the State to comply with the statute as well as an injunction to prevent further violations.

., Calculating the Costs and Reimbursing the Remaining Amounts After Costs Are Deducted from the l0o/o is Mandatory and Not Discretionary; and Mandamus and an Injunction Should Issue Against the State

Mandamus is appropriate whele the duty owed, as it is here, is ministerial and not discretionary. Through mandamus, the Court can compel a government actor to perform a duty if the claim "is clear and certain, the [] duty is ministerial and so plainly prescribed as to be free from doubt, and no other rernedy is available." Hanabusa at347 (citing In re Disciplinary Bd. of

Hawaii Supreme Court,9l Hawai'i 363,368,984P.2d 688, 693 (1999). See Barnett v.

Broderick,84Hawai'i 109, 111,929P.2d1359,136I(1996). "Adutyisministerialwherethe law prescribes and dehnes the duty to be performed with such precision and certainty as to leave nothing to the exercise of discretion and judgment." Hanabusa, Il9 Hawai'i at 347 (citing

Sallingv. Moon,T6Hawai'i273,274n.3,874 P.2d 1098, 1099 n. 3 (1994). In addition, "if there is a continuing violation of or ongoing breach resulting from a past action, then prospective relief, i.e., an injunction to stop the continuing violation, is available." Office o/ Hav,aiian

Al.fairs, I 10 Hawai' i at 351, I 33 P.3d at 786.

As shown above, I-IRS $248-2.6 (when read appropriately) is clear and not discretionary. The State "shall" deduct the costs (subsection b) and "shall pay the remaining balance" to Honolulu (subsection d). The duty to be performed is clear. Meanwhile, as also shown above, the State has never atternpted to calculate the necessary and proper costs incurred in adrninisteling the Surcharge because it did not think it "was necessary or required." See Ex.

94642'7 v3 1211 8- | l8 K, Shiraishi Depo. at 64:25-66:2. Instead, the State has and continues to simply keep the entire

l0% deduction, violating both the statute and state and federal constitutions. These wrongs must

be rectified. Accordingly, the Court should issue a writ of mandamus and an injunction to

require the State to (l) calculate the costs incurred in assessing, collecting and disposing of the

County Surcharge, and (2) for prior distributions, disgorge and pay to the Cify &. County of

Honolulu all amounts in excess of its costs that the State has kept, and (3) for current and future distributions, keep from the City & County of Honolulu only its costs incurred in assessing, collecting and disposing of the County Surcharge.

IV. CONCLUSION

For the foregoing reasons, Plaintiff requests that the Motion be granted.

DATED: Honolulu, Hawai'i, January 20,2016.

PAUL ALSTON THOMAS E. BUSH LORI K. STIBB Attorneys for Plaintiff TAX FOLINDATION OF HAWAII

946427v3 121'18-1 t9 IN THE CIRCIJIT COT]RT OF THE FIRST CIRCUIT

STATE OF'HAWAI'I

TAX FOUNDATION OF HAV/AII. a Hawaii Civil No. 15-1-2020-10 ECN nonprofit corporation, on behalf of itself and (Other Civil Action) those similarly situated, DECLARATION OF THOMAS E. BUSH Plaintiff,

VS

STATE OF HAWAI'I,

Defendant.

DECLARATION OF THOMAS E. BUSH

I, THOMAS E. BUSH, hereby declare as follows:

L I am an attorney in the law firm of'Alston FIunt F'loyd &.Ing, counsel for Plaintiff

Tax Foundation of Hawaii, in the above entitled action and am licensed to practice law before all courts of this state.

2. I make this declaration based on my personal knowledge and am competent to testify to the maters stated in this declaration.

3. I make this declaration in support of Plaintiff's Cross-Motionfor Summary

Judgment Againsl Defendant State of Hawai'i.

4. Attached hereto as Exhibit "A" is a true and correct copy of Kurt Kawafuchi's written testimony to the Senate Committee on Transporlation & Government Operations, dated

March 21,2005, perlaining to Act 247 (House Bill 1309, ILD.2 and Senate Bill 1731), which was published as a public record at the Hawaii State Archives, Kekauluohi Building, Iolani

Palace Grounds,364 S. King Street, Honolulu, Hawai'i 96813.

95135 lvl / 12178-1 5, Attached hereto as Exhibit "B" is a true and correct copy of Kurl Kawafuchi's

written testimony to the Senate Committee on Ways and Means, dated April 5, 2005, regarding

Acr247. which was published as a public record at the Hawai'i State Archives, Kekauluohi

Building, Iolani Palace Grounds, 364 S. King Street, I-lonolulu, Hawai'i 96813.

6. Attached hereto as Exhibit "C" is a true and correct copy of Act 045 which was signed

into law on April 27 ,2007 , by then Governor Linda Lingle. This Act is published on the Hawai'i

Legislative Bureau's website at http://www,capitol.hawaii.gov/session2007/bills/GM805_.PDF.

7 . Attached hereto as Exhibit "D" is a true and correct copy of Section 121 of Act

213 (A Bill for an Act Relating to the State Budget) which was signed into law on June 27,2007,

by then Governor Linda Lingle. This Act is published on the Hawai'i Legislative Bureau's

website at http://www.capitol.hawaii.gov/session2007/bills/GM984_.PDF.

8. Attached hereto as Exhibit "E" is a true and correct copy of the Department of

'laxation's Report as Required by Act 213, SLH 2007, Section 121 (2007). This reporl is

published on the Department of Taxation's website athttp,lltax.hawaii.govlslalsla5_lannual/.

9. Attached hereto as Exhibit "F" is a true and correct copy of the Department of

Taxation's Report as Required by Act 213, SLH 2007, Section l2I (2008). This report is also

published on the Department of Taxation's website athttp:lltax.hawaii.govlstatsla5_IannuaU.

10. Attached hereto as Exhibit "G" is a true and correct copy of a chart produced by

the State of l{awai'i in this litigation as bate stamp number DOTAX 0572.

1 1. Attached hereto as Exhibit "H" is a true and correct copy of a chart prepared by

our office. Column I identifies the State of Hawaii's fiscal years between 2008 and 2015.

Column 2 identifìes the operating expenses for the Department of Taxation as repofied by the

Department in its annual repofis, excerpts of which are affached as Exhibit "I". The particular

951351v1 I 12178-l 2 cite from which the operating expenses are obtained are identified in Column 2by the State of

Hawaii's bate stamp number. Column 3 identifies the 10o/o deduction from the County

Surcharge taken by the State of l{awai'i and placed in the State of Hawai'i General Fund as

shown on Exhibit "G".

12. Attached hereto as Exhibit "I" ate true and correct copies of relevant portions of

the State of Hawaii's Annual Reports that provided the underlying data for Department of

Taxation's operating expenses, as shown on Exhibit "H". The Annual Reports were produced by

the State of Hawai'i in this litigation and bear the bate stamp numbers assigned to them by the

State of Hawai'i in its production. The Annual Reports are published on the Department of

Taxati on' s web s ite at http : I I tax. hawai i. go v I stats I a5 _7 annual/.

13. Attached hereto as Exhibit "J" is a true and correct copy of Plaintffi'Amended

Notice of Taking Deposition Upon Oral Examination Pursuant to Rule 30(b)(6) of the Hawai'i

Rules of Civil Procedure; Exhibits '(A" - "8"; Certificate of Service, of the Designated

Representative of Defendant State of Hawai'i, filed in this matter on Decemb er 2I , 2015 .

14. Attached hereto as Exhibit "K" are true and correct copies of excerpts of the oral

deposition of Ted S. Shiraishi taken on January 4,2016.

15. Attached hereto as Exhibit "L" is a true and correct copy of the Declaration of

Daniel D. Bowen dated January 12,2016. The original Declaration is attached to PlaintilJ's

Opposilion to Defendant State of Hawaii's Motion to Dismiss Complaint Filed on October 2I,

2015, which was filed in this matter on January 12,2016.

16. Attached hereto as Exhibit "M" is a true and correct copy of the resume of Daniel

D. Bowen, Certified Public Accountant and authenticated by him in his Declaration (Exhibit

,,Lrr).

95l35lvl I 12178-l J I declare under penalty of law that the foregoing is true and correct.

Dated: Honolulu, Hawai'i, January 20,2016.

THOMAS E. BUSH

951351v1 / 12178-1 4 { LINDA LINGLE GOV€RNOR KURT KAWAFUCHI DIRECTOR OF TÂXAT¡ON JAMES R. AIONA, JR. LT. GOVERNOR MARIE C. LADERTA OEPUTY OIRECTOR

STATE OF FIAWAII DEPARTMENT OF TAXATION P.O. BOX 259 HONOLULU. HAWAII 96S09 PHONE NO; (SoB) sBZ_1510 FAX NO: (sos) sB7_15s0

SENATE COMMITTEE ON TRANSPORTATION & GOVERNMENT OPERATIONS S ENATE c OMMIT TEE oN IhnERG OVE-RNI\,ßNTAL ATFAIRS TESTIMONY ON H.B. NO. 1309, H.D. 2 RELATTNc ro raxerroñ

March Zl,200S

The purpose of this bill is to authorize each counfy on in the state to levy a counfy surcharge state tax to tundpublic hansit in rhe .o*ii.r Americans *.Ëffi;;;;:iilä;rying with the with Disabilities Act of 1990- Honolulu courrty is restricted u.iog build or repair public roads or tñ the firnds to highways. This bitl takes ,rr"., on on Jrure 30,20152. ¡orv i,ìôi'0, *¿ is repealed

The Deparhnent of Taxation @eparhnent) opposes the bill to the extent that Departnent must collect a cou:nty's the tà. r¡e D.p'rrt"r"t does not oppose any effort counties to confrol their own finances. by the

The Departnent notes the following concerns: c The bill requires the Deparknent to levy, assess, collect, and otherwise administer. the county surcharge' litire Deparmeíiir rrquir.d to áct as a collection agent for each counf¡r, it will seriously detract to*lir own efforts to maximize state collections and will utilize Deparhnent ,"rã*"", to enforce the county tax and needlessly involve the Deparknent in additional litigation, in.iuaing whether a taxpayer is liable to a parficutar county for a county,s surcharge.

ø This bill allows (but does-not require) the counties to enact a General ("GET") and use tax Excise Tax surcharg" orupí" iz. rn* tax piggybacks cnrrent on the state,s GET and use tax, except thát tansactions ,uui"."tîtrr.'-%% rate' or other fuansactions rate,l.5% exernpted rurder chapter 231, the IRS, are not subject to surcharge' This will create ã substantial problem for the Deparknent because of the various rates that may be impos"á *¿'u"ruure certain tansactions exempted ttre county a¡e swcharge but not the State forms wouldf91 GET and use tax. Tax become needlessly.*b"rrã*e and will becom" sã complicated as

j thar the A* was ät;.iff;i:tå* ffiï.åsil;11.0 effecrive upon its approvar EXHIBIT 4 WIT Shtraic h; DA|E: I '1 'l L M}üHTBTT- A SHAFON ROSS, CSB, CRR, RMB Testimony on H.B. No. t¡&, H.D.2 Date March2l,2005 Page 2 of3

to alienate and disenfranchise the business community and public alike, which already view the State tax system as overly burdensome anã business unfriendly.

o The Departn:ent also notes that establishment of an additional GET and use tax surcharge for only one counff, or different rates for different counties, could create a problem in enforcement, as taxpayers may attempt to attributå hansactions subject to the tax to a counly with no tax or a lower tax-rate than the count¡i in which the transaction actually occurred.

o Differing tax rates wilt also impede the ability of the Department to collect GET taxes on sales conducted through the internet or mail. Currently, work is underway on a multi-state level to timit the number of sales *á grorrul excise fype taxes that are imposed to lessen the reporting burdens on buiiness that conduct operations over the.internet and mail. The primary argument raised by these entities to Congress to prevent such taxation is that the mluttitude of taxes, and especially so with multiple rates \¡¡ithin a state, which create an overwh"lroirrg burden on these business to compry with individual state laws.

e The Deparknent would also need to promulgate rules and regulations covering diverse situations, including rules of apportionment when i*p"y, is subjeci to a surcharge in more than one counfy. Tax forms would also" become needléssly cumbersom. *q confising to taxpayers due to the need to provide ad.ditional information needed to administer the county surcharges. f¡. Departrnent believes that it will be unable to implement a system to collect county taxes prior to July 1, 2006due-to the need to produce new for¡ns, reprogram the computers to accept additional data entries, hain staff and educate tfre puUtic about the taxes.

o To reimburse the Deparhnent for the costs of adminishation, the bilt provides that the costs of administering the county's tax will be withheld io- *y payment due t'o the counties. The proper amount to be charged wili be difficult to åeierrnine and will be cumbersome as allocations of time will be needed for all personnel involved and the cost of equipment and other resource usage will be iequired. Appeals over the validiry and./or amount of a county surcharge will also involve the Departrnent of the Afforney General and will require cooidioatioo with that office over the proper amount to be charged for collèction of the counfy's taxes.

The e provisions in this bill closely resemble the original county surcharge tax provisions contained in $ $ 46- 1 6 .7, 237 -g.5, 23g-i.5, nd 2qa-2.s, IIR¡, which \¡iere repealed in 2003, since_no county had enacted the su¡ch arge'by the statutory deadline of october r, rggz.3 since then, changes were made tã châpter 23g, I{RS, to impose the use tax on imported servicei and confracting (in äddition to tangible personal properfy). If the committee is inclined to report'this bill out, we

biI also repeals chapter 5lD, which 'This IIRS, relates to the transit capital development ñurd, which was reievant to the counfy surcharge taxes authorized in 1990. { Testimony on H.B. No. 1309, H.D. 2 Date Marchzl,2005 Page3 of3

suggest that conforming amendments be made to Lines 14-21, Section 3 of the bilt to reference imported services and conhacting.

e If the committee is inclined to report this bill out, we also suggest that the counties be limited to imposing one rate, such as a I%o, and that the surcharge should be based on the GET and use tax as it exists or as it may be amended with no exceptions or deviations permitted to minimize public confi.rsion and the impact on the Deparknent.

There is no revenue impact on state filnds, other than required appropriations for start-up for collections. In order to administer the tax, the Departrnent estimates that it will require a one time appropriation of $3.6 million for ha¡dware, software, and equipment and $2.5 million annually thereafter for recurring staffing and operational costs

A l% surcharge on GET and use tax would provide additional estimated revenues for counties as follows:

Honolulu County: $296 million Maui County: $65 million Hawaii County: $44 milüon Kauai County: $23 million

(

Director of Ta:

STATE OF HAWAII DEPARTMENT OF TAXATION P.O. BOX ?59 HONOLULU. HAWAII 96M9 PHONE NO: (8oB) 587-1s10 FAX NO: (808) 58TnsSO

SENATE COMMITTEE ON V/AYS AND MEANS

TESTiMONY ONH.B. NO. 1309, H.D.2, S.D. 1 RELATINGTO TAXATION CWRTTTEN ONLÐ

April5, 2005

The purpose of this bill is to authorize each count¡r in the State to levy a county surcharge on state tax to fund public transit in the counties and/or for."p"nr* in complying wii¡ trre Americâns with Disabilities Act of 1990. Honolulu Counly is re,stricte¿ nom usine the ñmds build -'- to or rqrair public roads or highways. This bill takes efiect on ¡oly i¿æo.iär

The Departnent of . Taxation @eparfment) shongly opposes the bilr as it imposes sipificant burdens on the Dçarhnent in administ".ing ih" .å.-ty,*"rr.rg. to.

The Deparhnent supports the concept of homerule, including any effort to authorize the counfies to impose taxes. However, the power of the cou¡tier to .oinoí tneA own finances ougn taxing authority shouìd also F. encompass the duty of administering ih"ir o* tax system. The counties currently administer the assessment and cållectio" ortn"irfrortion of the public Service Company tax.

The Departnent notes the following concems with respect to this bill:

SECTION 2 1' of the bill requires the Department with the responsibility of administering the surcharge for the taxable year beginning after the adoptiån oit¡" or¿inarrce by a county.

a' The bill requires the Department to levy, assess, collect, a¡d otherwise administer the county surcharge' If the Department is required to áct as a collection agent for each county, will severely impact -it our efforti to meet our revenue collection targets' The Deparbnent would have to commit significant resources to this effort' Along with the systemic changes are ¡elateã impacts to staff training, taxpayer education, capacity to handle additionai phonå calls and letters, anî overall mitigation of this additional adminishativË task proposed. we also

' Tbt H'D' I ve¡sion was effectivc upon its approval. Thc H.D. 2 vcrsion was eflective on July l, 2010, and repealed on Junc 30, 2015. ' The companion Senare bill is SB 1731.

EXHIBIT 5 wtT: Shiratslnt

DATE t-ï -t l- SHARON FOSS, CSB, CRB, FMR MXFTTBTT B Testimony on H.B. No. 1309, H.D. 2, S.D l Date April 5, 2005 Page 2 of 4

anticipate additíonal litigation, including whether a taxpayer is liable to a particular county for a counfy's surcharge.

b. The Deparfment will require time to establish a workable system to collect the county tax. The bill provides that the tax becomes effective the following tax year after adoption by the county. If a county adopts such a tax this y.^r, th, Departrnent would need to have the system operationai byJanuary l, zooo. rn order to meet this deadline, substantial resources will be required. Most of the initial work will need to be ouþsou¡ced as the Deparbaent áoes not have the avaiiable resources to accomplish the task in this short time period. In the event the Department is forced to administer this surcharge, a July release rimeframe rather than ¡ January release is more realistic due to seasonal tax law changes and income tax filings during the Spríng.

2. SECTIONS 3 and 4 of the bill allow þut does not require) the counties to enact a General Excise Tax ("GET") and use tax surcharge of up to 1%. The tax piggybacks on the State's current GET and use tax, except that transactions subject to the t/l%ç¡te, LSyo rate, or other hansactions exempted under chapter 237, HRS, are not subject to the surcharge (e.g., only retail-type tansactions a¡e subject to the new tax).

a. The possibility ofdifferent rates oftax as well as various effective dates (based upon adoption by the counties) wiil create substantial cornpliance problems for the Deparhrent. Resulting enforcement problems may inciude taxpayers attempting to atbibute tansactions subject to the tax to a counfy with-no tax or a lower tax-rate than the county in which the kansaction actuallyoccuned.

Most importantly, the uncertainty of the tax ratcs and effective dates will require upfront appropriations to give lhe Department enough lead time to reprogram our computer system and to obtain tlre necessary resources to cârryout . the ncw worldoads.

If the committee is inclined to report this bill out, we also suggest that the counties be limited to imposing one rate, such as a ryo, arñ.t¡ãt tn" surcharge should be based on the GET and use tax as it exists or as it may be amended with no exceptions or deviations permitted to minimize public con-ñrsion and the impact on the Department. The possibility of differing rates and effective dates for each counry surcharge has a ripple effect, which amplifies difficulties in administering the surcharge.

b. The bill also directs the Deparlment to redesign tax forms to clearly show the separate imposition of the surcharge as distinct from the state tax. The taxpayer is responsible for ñling a schedule þrepared by the Department) showìng the amounts ofsurcharge taxes assigned to each county (depending upon whether the county has adopted the tax). The new forms may alienáte and dislnfranchise the business community and public alike, which already view the state tax system as overly burdensome and business uni-iendly. Testimony on H.B. No. 1309, H.D. 2, S.D 1 Date April 5,2005 Page 3 of4

current c. The failwe to file penalty under $ z3l-3g,HRS, shall apply to any failure to file the county schedule of surcharges levied. Tracking the-ncw application of the penalty will require changes to our compufer system.

In addition, the bill levies a separate 10% penalty that is applied to both the surcharge and the state tax (i.e., the penally is equal to 107" ofthe entire tax liability). The bill is silenr on whether the l\yo penalty will be a state or county realization, or both (meaning, the penalfy amount would be apporfioned between the State and the affected counties).

d. The Deparhnent would also need to promuigate rules and regulations covering diverse situations, including rules of apportionment when u iã*p^y-, is subjecl to a surcharge in more than one co'nty, Tax forms would also become needlãssly cumbersome and confirsing to taxpayers due to the need to provide additional information needed to administer the county surcharges. Tie Department beüeves that it witt be uuable to implement a system to collect county taxes prior to July 1, 2006 due to the need to produce new forms, reprogram the computers to accept additional data entries, train staffand educãte ihe public about the taxes.

e' The provisions in this bill closely resemble the original county surcharge tax provisions contained in gg 46-16.7 ,237-9.5,239-2.5, and zqã-z.s,HRS, which were repealed in 2003, since no county had enacted the surcharge by the statutory deadline of october l, rg9z.3 since then, changes were made tõ chäpter 23g, HRS, to impose the use tax on imported seryices and conhacting (in addition to 'we tangible personal properry). are unsurc whether this depaìrre from current law is intended, or an oversighL

3. SECTION 5 of the bill requires the swcharge to be tansmitted from the Deparhnent to the Departrnent of Budget and Finance (BtrF) to be placed into accounts wiihin to a"ys after collection. The state is reimbursed for the costs of assessment, collection, and disposítion of the surcharge.

a. we believe that l0 days will not provide the Department, BllF, and the Departnent of Accounting and General services (DAGS) with enough time to administer the deposit process.

provides b- The bill that BLIF withhold the costs of administering the county's tax from any payment due to the counties, however, the cost of administration is not retained by the Departmen! but instead is deposited into the general fund. If the Committee is inclined to report this measure out, then we ask tt¡atine Department be given the right to retain a portion ofthe collections to compensate for the resources expended.

3 This bill also repeals chapter 5lD, HRS, which relates to Lhe b.ânsit capital development fu¡d, which rvas relevant to the couÌry surcharge taxes authorized i¡ 1990. Testimony on H.B. No. 1309, H.D. 2, S.D I Date April 5,2005 Page 4 of4

4. GENERAL COlvß'fENTS

a. Appeals over the validiry and/or amou¡rt of a counly surcharge will also involve the Deparhnent of the Attomey General and will require coordination with that ofñce over the proper amount to be charged for collection of the county's taxes.

b. The 4%o capilal goods excíse tax credit under $ 235-110.7, HRS, should also be modiñed to recognize the new tax rates (e.g.,4%o plus the county surcharge, depending upon the counfy in which the capital good was purchased). However, administration of the credit will again be complicated by the possibility of different county tax rates. Such increase in this credit could result in revenue loss of between $6 to $8 million.

c. The State of Hawaii will also bear the burden of county taxes on its purchases from vendors. The additional revenue loss to the State from passed-on-GET on procurements will be $10 to $15 million.

If the Departrnent is forced to administer the tax, the Deparhnent estimates that it will requirc a one-time appropriation of $3.6 million for hardware, software, and equipment and $2.5 million annually thereafter for recurring staffing and operational costs. The Deparbnent can provide a more detailed breakdown of these estimates if the Corn¡nittee so desires. Please call me at 587-1513 or your staffmay call Jayna Uyehara at 587-1569 for more information.

A 1% su¡cha¡ge on GET and use tax would provide aldditional estimated revenues fo¡ courties as follows:

Honolulu County: $296 million Maui County: $65 million Hawaii County: $44 million Kauai County: $23 million

Respectfully L, KURTKAWAFUCHI Director of Taxation

HB ¡ 309_SD I _TAJ(_04-05.05_WAM.doc ffi{}v" ffis$" $tfi. Ë*,ff

ËXËCUTIVE ÇHAMBERS HONOLULI.J

LINDA LINGLE öôvËRNOR

Aprii 27,2tJ07

The Honorable Colleen Hanabusa, President and Members of the Seuate Twenty-Fourth State Legi slahrre State Capitol, Room 409 Honolulu, Hawaii 96813

Dear Madam President and Members of the Setrate:

This is to infirrm you that on April 21,2007, the following bill was signed into law:

I{BI4i4 HÐl SD2 A BILL FOR.{I.{ ACT MAKTNG AN EMERGENCY APPROPzuATION FOR DEPARTMENT OF T'AXATTON COTJ}I]'Y SURCHARGE IMPLEMENTATiON COSTS. (ACT 04s)

Sincerely,

LINDA I,INGLE

PXTTTBTT C Approved by the Governor tn APH 27 MI A,ÜT û4õ HOUSE OF RËPRESËNTATIVËS TWINTY-FOURTH LËGISLATURE, 2OO7 þ{"m. Nü"$É1; STATE OF HAWAJI A ffiILL FÜR Aru ATT

MAKTNG .AN E}4-ERGENCY ^AtrFROPRTÀTTON FOR DEPJ\RTME"NT OF TAXJ\TTON COIINTY SIIRCIII\RGE II"íPLEMENTATTON COSTS.

BE fT ENACTEì) BY T1TE I,EGTSI,ATU}IE OF T'}TE STATE TF HAIVAII:

1 SECTïON 1. This Act is recommended by the goveïnoï' for 7 immediat€ passage in accordance with article vTl, section 9, of 3 the Constitution of the State of Hawaíi.

4 SECTION 2. The purpoee of this Act is Lo make an emergency 5 appropriatíorr to the deparlmeni- of taxat,Íon to a.ddress 6 unbudgeted expenses incurred by Lhe depart.ment in irnp)"ementing '1 the administralion of the counLy surchärge on state general I excise tax provided for under section 46-16.8, Hawaii Rerrísed 9 statutes.

Iû SËCTION 3. Àct 247, Session Laws of Hawaii 2005, 11 aulhorized bhe counties to adopt a county surcharge on state 12 general excise t1*, the revenue from which wae to be deposiLed t.3 for Ll:e benefit of any adopting cr:unty. The purpÕse of the 14 county sr"rrcharge v/as to prowirle the counties wj-Lh. a means of 15 financing a preferred nìas$ transit alt.ernati.ve. Act 247 p:.-aced t6 Lhe þurden of adnrinistering and col.lecling the rounty surcha::ge 17 on the departrner:t of taxation. The bu::dens of administering the

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I county surcharge include as$essment, collection, processing, Z accounLing, ar:d enforcement of Lhe surcharge for the benefit of 3 an ettäcting county. 4 Althougl" i\ct. ?4? placed the administratlve duties of counEy 5 surcharge collectiön on t.he depã.rtment of taxation, Act 247 6 conLaíned no appropriatÍo:: to offset the direct costs incident "f Lo administerJ-ng the county surcharge. I The city and county of Horrolulu r¿as Lhe only county to 9 adopL a county surcharge on state gener:al excise tax. Jfdopting liÌ t.his surcharge triggered the department af Laxationts 11- responsibiLities regardi-ng assessrnent and collection of the 12 surcharge. f3 Àssessment, collectinn, prÕceËsillg, accounting. and 14 enfÕrcement of the county surcharge imposed a substanLiaL 15 fÍnancíat burden on the department of taxatíon that was not

16 resolved by Act 2.47 . Coste the department of taxation incurr:ed !7 include subst.antial computer upgr:ades, substantial persorrnel ancl 18 professional t.ime, public outreach, änd additional personnel Lo 19 assÍsL wit.h the department's other obligations. 2lì Tn response to the department of taxatj.onrs unfunded 2l mandate to assess and collect t.he county surcharge, the city and 3? county of Honolulu agreed t.o guaranJ:ee the department of 2Ot7-2788 HBl414 SÐ2 SMA.doc

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t taxat.ion's costs up to $5,000,000. fhis guarantee is fer costs J that have been incurred up unt,i} the 1egislature can cÕrrsÍder

3 t.his emergency appropriatÍon t.o pây the vendor and other costs.

4 Thris rÊqr¡eÊL for al-l appr"opriation j-s on an emergæncy basis because the cicy and. county of Honol-u1u has guaranteed the

6 payments to tfre Çomputer vendor and the deparf-ment of taxatiön's 7 oul-of-pockeL expenditures, up to $5,000,000, íf the legislature I does ncb appropríate moneys to Lhe departmenL of taxation that

I Ís sígned into law or: otherwise takes effect by March 30, 200'1 | It befcre the regular session of 200? is adjourned sine d.ie.

1I The l.egislature finds that. this emergency äpprÐpriation is

17, riecessar:y and in the best. interest of Lhe public to aÊsure thäf t3 the city and countY of Honolulu's county surcharge Çn stat.e

1.1 greneraJ. excise tax is not adversely impacted- An ädr¡erse impact 15 could ultimately affect, the funding of the city and county of 16 Honolulu's mass trar¿sit project., including t.he ability of the 1.7 cÍty and counLy of Honol-ulu to obtaÍn federal. fuudi-ng for the l8 masËi transit projecl-. Morecver, this emergency appropriation is tg necessary and in the best interesL of. the public .because faiLure 1{} to provi

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I SËCTTDN 4. Tn âccordance v¡iLh arLicle VTJ, secLion 9, of

7, the Constítution ôf the SLat-e of Havraii and sections 3?*91" and

3 3 7-93, Hawaii Revised Statutes, tl:e legislature llas det,ermined 4 that the general fund expendit.ure ceiling for físcal year 2006- 5 20o-l has a1r:eady been exceeded þy $90,137,694 or l-.68 per cent- 6 The appropriations confairled in this Act wíll cauÊë the staLe

7 greneral fund expenditure ceiling for fiscal yeär 2to6-20Ð7 to be 8 exceëded by an additÍonal" $5,04L,697- or an addit.ional 0.094 per I cent. The calculaticn.contained in t.he foregoing seïrLence I0 relates Õn1y to the amounL of general funds appropriat.ed ir¡ this

11 Act for físcal year 2006.-2007, The reasons for exceeding t.he 12 general fund expenditure ceiling are that the appropriations 13 made in this l\cl are necessary t,o 6erve [he public inLerest and

1.4 to meet the needs provided f or by this Act -

15 SBCTION 5. There is appropriated out of the general

16 revenues of the State of HawaiÍ the sum o.f $5,04l-,69]- or so mucb

17 thereof as mäy be n.ecessary for f iscal year 2006 -2öa7 Lo I8 reírnburse the departnient of taxation f<:r costs incur:red in 19 implementing and adminietering the cou:rty surcharge on state 2g general excise Larx, incl.uding the costs of the comput.er vendor:. 2l The sum appropriated shall- be expended by the department of 23, taxatj.on for the purpos€s of this Act *218 2oQ7 B HBL4:14 SD2 SMA " doc

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! SECTICIN 6. fhis Act shal-l- take ef f ect upon iÈs approval ,

?^"r APPROVED this day of ÁFfl , 2007

f

GOVERNOR OF THË STATË OF HAWAII

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EXECUTIVE CHAMBERS HONOLULU

LINDA LINGLE GOVERNOR

|une27,2007

The Honorable Colleen Hanabusa, President and Members of the Senate Twenty-Fowth State Legislature State Capitol. Room 409 Honolulu, Hawaii 96813

Dear Madam President and Members of the Senate:

This is to inform you that on .Iune 27,2007 . the following biil was signed into law:

HBsOO HDl SDI CD1 A BILL FOR AN ACT RELATTNG TO THE STATE BUDGET. (ACT 2r3) 4\Sincerely. LINDA LINGLE

MXTTTBTT Þ Page 133 500 H.B. NO. H.D. 1 S.D. 1 c.D. 1

I SECTION L20. Províded that of the general fund

7 appropriation for supporting services-revenue collection (TAX

3 1-07), the sum of $25,000 or so much thereof as may be necessary

4 for físcaI year 2007-2008 and the same sum or so much thereof as 5 may be necessary for fiscal year 2008-2009 shall- be used to

6 improve revenue forecasting accuracy for the council on revenues; and provided. further that the departmenc shall submit

8 a report to the legislature no later than December I, 2007 and 9 December L, 2008, or efforts to improve revenue forecastíng.

10 SECTION 1-21-. Provided that the department of taxabion

1l sha1l prepare a report detailing the level of staffing and t2 funding necessary Lo adminj-ster county surcharge collection; 13 provided further that the report shal1 describe the total t4 workload related. to collection of the county surchargre, provide 15 a listing of sEaff that support the collection of the county 16 surchargre, the budgeted annual salary for each position, and the 17 approximate percentage of time each position spends on the task; 18 and provided furLher that the department shall submiL the report 19 to t.he legislature no Later than twenty days prior Lo the 20 convening of the 2008 and 2009 regular sessions. 2l sEcrroN 122. Provided that of the general fund

22 appropriation for information processing services (AGS 131), Lhe

HB5OO CD]. FTN WAM 2OO1_544 DEPARTMENT OF TAXATION ANNUAL REPORT AS REQUIRED BY ACT 213, SLH 2007, SECTION 121 For the Period July 1,2007 Though October JL,2007

October 2007

Act2l3, SLH 2007, Section 121, required the Department of Taxation ("Department") to prepare a report detailing the level of staffing and funding necessary to administer county surcharge collections. The report shall describe:

L The fotal workload related to collections of the county surcharge. il. Provide a listing of staff that support the collections of the counfy surcharge. IU. The budgeted annual salary for each position. IV. The approximate percentage of time each position spends on the task.

The report shall be submitted to the legislature no later than 20 days prior to the convening of the 2008 and2009 regular sessions.

L Total Workload Related to Col tions of the Counfw Surcharse

Act 247,SLH2005, created the authority for County Surcharge tax. The Director of Taxation was charged with levying, assessing, and coilecting the County Surcharge tax. The Act required the Director of Taxation to remit the revenues from the County Surcharge tãx to the State Treaiury quarterly within ten wotking days after collection. The Act autholized the Director of Financé to deduct ten percent (10%) of the gross proceeds of the County Surcharge tax to reimburse the State for the cost of assessmettt, collection, and disposition of the tax incurred by the State. The effective date of this new tax was January 1,2007 .

The planning and implementation the County Surcharge tax required time and resources of the entire Department, from the customsr serv'ice agent level all the way to the Director's level. Due to the complexity of the tax tilat only applies to one counfy (City & County of Honolulu), the Department undertook extra steps in rnodifying the General Excise tax forms, its computer system, its retum processing procedures, and the reporting of tax collections. In addition, the Deparlment took a proactive approach to do extensive outreach activities to obtain inputs and to educate the public about the new law.

As of September 31,2007, the State has collected a cumulative total of $103,4 million in County Surcharge tax.

II. Lisfins Staff that Su the Collections of the Countv Su rcharge Tax

Act 213, SLH 2007 glanted , the Department of Taxation nineteen ( 1 9) permanent positions and four (4) temporary positions for FY 2008, and nineteen (19) permanent positions and one il¡

EXHIBIT WIT: Sh l5 DATE: I - +-rc ÐOT'AX 0565 SHARON BOSS, MXHIBTT'E CSR, CFR, BMR temporary position for FY 2009. Table 1 below lists the positions granted by Acr 213, SLH 2007, attd, the amount budgeted for each position.

I ADte I .A'Ct.¿tJ 5L_hr 2UU',l Staffthat Su ort the Collections of the Coun Surcha e Tax

Position Tiile SR Fv 08 FY 09 MOF FTE FTE FTE FTE

r Services S B ranch Custonter uiry (telephon Tax lnformation Techn ician III SR17A A r.00 7s6 L00 33 756 Tax Information Techn ician SRl5A 10.00 3 10.00 324 Customer In Tax Jnfo rmation Techn ician SRI5A 1.00 r,00 'lax 3 Info rmatio n Techn ician II SRI5A A I.00 0.00 Customer on

Tax Info rrnatio n Techn ician SRI5A A 1.00 ?) 1.00 Tax Info rmation Technician SR15A A l,00 0.00 ,4ccouttl Man cmeill Tax ln formatio n Techn ician SRI5A A 1.00 1.00 3 Revenue Äccountin B ranch Account Clerk I SRI¡A L00 1.00 64 Account Clerk SRI lA 1.00 2 0.00

S tems Adnrinis tration Man ment An I À st SR 22 2.00 63 16 2.00 oo Rules Office Rules S ecìalis Excm t ,/\ r.00 5 000 1.00 Tax ecialis SR-22 A r.00 31 1.00 144 ITSO ITS-IV, SR-22 ^ 1,00 31 r.00 144

Total Pcrsonal Service Costs 19.00 4,00 749 6 I 9.00 1.00 70 08

As the Director of Taxation testified before the Twenty Forth Legisiature, 2007, the request for the positions to suppoft the collection of the County Surcharge Tax did ñot include positions for the Department's Compliance Division (Collection Branch, Office Audit Branch, and Fìeld Audit Branch). The Department plans to review and evaluate the compliance Ievel of the County Surcharge tax prior to requesting positions for the Department's compriance Division.

trII. The Burìs eted Salarw for lrla Position

Table I above provides the budgeted salary for each positíon (FY 2008 and Fy 2009) that supports the collection of the County Surcharge tax. Total amount budgeted was $749,876 for Fy 2008 and $700,508 for FY 2009, There was a three-month budgetary rãstriction (three-month hiring delay) for the supporting Services Revenue collection positions.

2

DOTAX 0566 IV. The Annroximate Percentase of Time llach Posif on .S nends on fhe'llask

The Department of Taxation does not hâve the resources or abiiily to perform cost accounting. The Depariment's management and overail staff promulgated rules, ânswered inquiries, performed outreach, and did the recmitment and hiring of staff related to the County Surcharge tax. The additio¡al positions granted by Act 213, SLH 2007 , are to support the collection oi County Surcharge tax and to help alleviate the additionalworkloads caused by Còunty Surcharge tax to the rest of the Department.

A three-month hiring delay was imposed on four Supporfing Selices Revenue Collectíon's positions (two Management Analysts, one Tax Specialist, and one Infbrmation Technology Specialist) As of Octobet22,2007, those fourpositions were vacant. Of the fifteen permanentpositìãns'forthe Department's Tax Services & Processing Division, two were vacant as of Octob er 2i,2007. Of the three temporary positions for the Department's Tax Services & Processing Divísion, hvo were yacant as of October22,2007-

The Department roughly estimated that about 60% of the Act213, SLH 2007, authorized employees' tilne was spent on Gene¡al Excise/County Sulcharge tax related. The other 40% was spent on individual Income tax, Business Income tax, Tax Clearance, and other tax related matters. tt must be noted, however, that due to the nature of the County Surcharge tax (a surcharge on the State's General Excise tax) a decisíon was made to require all Department staff include those positions not funded via the County Surcharge tax, to work on County Surcharge matters as necessaiy. The Departrnent believes that this approach provides a better efficienc,y and a more effective use of its límited resources.

V. Summary

The success of the implementation and administration of the County Surcharge tax on the State's general excise tax on behalf of the City and Counfy of Honolulu *ui du" to an extraordinary effort by the entire Department. As of September 3J.,2007,the State has collected a cumulative total of $ I 03.4 million in County Surcharge tax. The Department greatly appreciates the support provided by the Lingle-Aiona Administration and the Legislature to carry out iti nr* responslUiiity. fne Deparlment plans to review and evaluate the compliance level of the County Surcharge tax prior to requesting positions for the Department's Compliance Division. When necessary, the Department will submit a request for additional resources to enhance the compliance with the new law.

J

DOTAX 0567 DEPARTMENT OF TAXATION ANNUAL REPORT As REQUIRED BY ACT 213, SLH 2007, SECTION 121 For the Period July 1,2007 Though June 30,200g

Acl213, SLH 2007, Sectian l27,1equired the Department of Taxation ("Department',) to prepare a report detailing the level of staffing and funding necessary to adminisìer iounty ,urðhurg. collections, The report shall describe:

i. The total workload related to collections of the county surcharge. iI. Provide a listing of staff that suppolt the collectionr óf thr surcharge. ilI. The budgeted annual saiary for each position. "ouity IV. The approximate percentage of time èach position spends on the task.

The report shall be submitted to the Iegislature no later than 20 days prior to the convening of the 2008 and2009 regular sessions.

I. Total Wol'kloarì to ColIections of th Counfv Su rge

Act247, SLH 2005, created the authority for County Surcharge tax. The Director of Taxation was charged with levying, assessing, and colleciing the County Surcharge tax. The Act required the Director of Taxation to remit the revenues fìom thð County Surcharge tà-x to the State Treasury quarterly within ten working days after collection. The Aðt autho¡ized the Director of Finance to deduct ten percent (10%) of the gross proceeds of the county surcharge tax to reirnburse the state for the cost of assessment, collection, and disposition ofthe taxlncurred Oy tne State. The effective date of this new tax was January I,2007.

The planning and implementation . the County Surcharge tax required time and resources of the entire Depaúment, from the customer sel'vice agent ievei ail tËe way to the Director,s level. Due to the complexity of the tax that only applies to one cóunry (City & county of Honolutuj, the Department undertook extra steps in modifying the General Exclse tax forms, its computer ryrt!*, its return processing procedures,.and the reporting of tax collections, In aádition, tir" nepartment took a to do extensive outreach activities to obtain inpurs and ro eáucate the public about Ineï:itl: new law.ifproach

For the period January 7,2007 through June 30, 2008 the State has collected a cumuiative gross amount of $241,708,816 million in County Surcharge tax (before deducting the l¡%administrative For the period January 99sts)' 1,2008 to June 30, 2-008 thà State has collected a cumularive total of 593,194,761 million in County Surcharge tax.

Lisfin II. of Staff tn t Sunnort e Coll of the Cou nfv Surcha Tax

Act 213, SLH 2007 granred the Department , of Taxation nineteen (19) permanent positions and four (4) temporary positions for FY 2008,-ánd nineteen ( 19) permanent positions and one (l) temporaryposition forFY2009. Table I below lists rheposltions granted byAcr2t3, sLH z0a7,and the amount budgeted for each position.

EXHIBIT I D wtï irai DATE: I - t -l l" DOTAX O56E MXTüTBXT F" SHARON 8OSS, CSR, CBR, BMR Table 1. Act 213 SLH 2OO7 Staffthat Su ort the Collections of the Coun Surcha Tax

D^^:¿:^-. T:rr 1 USrt¡U¡¡ rll¡ ôñ ùÃ Fy 08 ITY 09 MOF IìTE FTE IT) ($) FTE æ) FTE

r S ervices S B rnnch Customer In (teleph Tax In formation Techn ician SRITA A r.00 33,7s6 1.00 33.756 Tax Information Technícian Ii SRI5A A i0.00 324,240 10.00 324,240 Custoner Tax Information Technicían SRI5A A r.00 32,424 r.00 32,424 Tax Informatíon Technician SRl5A 1.00 32,424 0.00 Cttstomer eil Tax In formation Technic ian II, SRl5A A r.00 32,424 r.00 32,424 Tax information Tech nician II. SRI5A A 1.00 __.?-%!24 0.00 Àccouttt Management Tax Information Technician SRl5A A 1.00 32,424 I.00 32,424 Revenue Accountin B ran ch A ccount Clerk SRl IA A 1.00 26,664 1.00 26,664 Account Clerk SRl IA A I.00 26,664 0.00

s tems AtJminis on M ment A st SR 22 A 2.00 63,216 2.00 84,288 Rules Office Ru les t A t.00 50,000 L00 50,000 Tax S ecialis SR-22 A r.00 3 r .608 1.00 42,144 rTSO SR-22 A r.00 3 r ,608 r.00 42,144 Tofsl Pcrsonal Scrvicc Costs 19.00 4.00 7 49,97 6 19.00 1.0 0 700,509

in budget hearings before the Twenfy Forth Legislature, 2007, the Department testified that the current appropl'iation does not include positions for the Department's Compliänce Division (Collection Branch, Office Audit Branch, and Field Audit Branch). The estimated pro rata share of these staff cost is $439,166, uI.

Table I above provides the budgeted salary for each position (Fy 200g and Fy 2009) that supports the collection of the County Surcharge tax, Total arnount budgeted r¡/as $749,g76 for Fy 2008 and $700,508 for FY 2009. There was a three-month budgetary rãstriction (three-month hiring delay) for the supporting services Revenue collection positions.

2

DOT'AX 0569 W. The Approximate Percentage of Time E4ch Position Spends on the Task

The Department's managernent and overall staff promulgated rules, answered inquir.ies, perforined outreach, and did the recruitment and hiring of staff related to the County Surcharge tax. The additional positions granted by Act 213, SLH 2007 , are to support the collectioï of Coun-ty Surcharge tax and to help alleviate the additional workload caused by the Counfy Surcharge tai to the rest of the Department.

Due to the nature of the County Surcharge tax (a surcharge on the State's General Excise tax) a decision was made at the beginning to require utt O.pÀ*ent stiff, include those positions not funded via the County Surcharge tax, to work on Counfy Surchalge matters as nocessary. The Depadment believes that this approach provides a better efficiency and a more effective use of its limiied resources.

V. Summary

The administration of the Counly Surcharge tax has been relatively smooth to the Department's knowledge.

It should also be noted that the Department's request to the 2008 Legislature for an additional $233,000 for computer support needed to administer the County Surcharge-tax r¡/as denied.

3

DOTAX O57O @ N u? @ N @r d N N N o or N- o- ô1 v_ É o @ o @ @ N @ N @ @ o_ ts_ @- @_ c I o o ts r@ ci o o o N E @_ F- .l o o G d l- F- .9 oØ \t J oo N rts o NO Uî \úl -s6N @ oì .: o u? .:f s ¡ Ø oo. d; Y @ ón o o ôo o@ t- G t- qj .{ s- q_ o_ ó_ s(4 z o oó N o @ ':'- Ít o N Õ N NN @ r@ ú¡ É ó- o- @_ o ËN a- @- t Ë F. N@ o qiñ oi @o x @ o@ N @ @ lrl o Ø @_ N@_ =

@o qts ry o@ FO dñ ,xq ts ño o\ siñ @F õb o @o a oo oN €_ m- r: o, o- o n' NO h- N o6 oo a@ o v- @_ o_ @_ @_ N @_ r: o o ts t@ NN o @ s@ o N. Nç @Ø, l o oo o N oo ÈN 9 c!g q 1 q? oq ON @ó o @o o ON ø N6 o Ð FO a. c? o- f_ 4- o *J¡ E N ñ D. @o ø oo@ç o a- N_ @-: o- .: ç- o o; v@ o oo @ qo N oo Õ.

os o N@ts o 9ø (óo ol\cì FO NF\n @rN \ ññ N NN N o@o o o@ @_ o- o- o- a- @ ol o- o NO O@F o Ø@ N Nb Nñ Dq@ vb o qc! r r: q^ a- @_ ó. o- út haÐ o F@ @ vrq o o FA @ NO_

ts@ @ @@ .:o? u? q? cìq o6 uiq @@ a; NN @O OF o N@ É. fl €- 6- o. câ" @- n_ m- n¡ È þ q ro o o ON o ooo@ Ø N 1m- o- @ o- @- oÐ NN Ð oe ø dt+ o OQ F oo N F s ! @.6 o oÊ (J e Ð @o od q cc? c.a \ôl o .: 'q o N oo dq o @o @ tso @ @@ o dN o@ @ @@ o t: @- ts o_ N- ó- v- @_ o N FO @' o ts@ o @N @o o U) n- ô! ø- F q Q_ V- s É. o' tso b o no c r o o F@ @ Þ o U' (L F IU uJ N @F o qo N rt (, o o a? uì @ O@ Õ{ c.l oq cc! Na o o@ ': o ON ^i óo oå 6 o- @_ EY @- @. ts_ o_ q_ E N@ rt oo o 6N E o Or Ø oo NM E .l c @- n_ ryo. o F_ !: ¡ Nø @' ñ @Ô U) o E oo N INN o ,-c o o o 6l- = o E ttl E o ui o È o@ m a r f d q€q o c'l bQ @ trlE r a) a NN qi ¡ q¡ @ Fts gJñ @ oo> o o6 o c o- o- d o ON €- Fl o @ f .? ô Àl di di o ! o@ a'? Ë F ul o Õ C) o @_ Ë o c o- o o hg .: ol o-\ o oo @ sÐ fE E N ? I NË -c ãlF r t- o @3 j L >l ¡ð g dl io c a @ N @ f o @ Ë c? @ ol ol ð ð o o¡ N o @ uJl di d; .el3 @ ts o ø @ Fl@ @ o .91.¿ o- o o v- ol@ @ 'oc (/rl è, rt N o rlJl.j .; ! N o N Jlô ô 9li5 r_ t- 6 o o -l o_ Jl ó @ tr N o @ o Ol di ci xl e o -.r I (Jlo I .lJl o o çlð È o Glo Èo JlØ @ 5 6 Øla 'Ê fflã ü Él .9 ..::t o olo 9lã o r? t_ o -"1 m ',1 sl :ìt r o 2 dl G ;t < E F t I E ..1 :l Ul€ ø ol co d õ dl I d à õir o ol u) J ! o o (9 a OrO , ol -g E 'Ølâ ß E ì; ørú@¡eñaaiË ñQS3ìË ?l¡ ü FIC E .g FIL E tsl E tr u-luuru E l ut uuru E J ujll 5 ülÊ oooo< o trluf= ooo< o ÞoTAX A572 MXËüTBTT G FISCAL YEAR DOTAX Operating Expenses LOY'lo General Fund IDOTAX 05721

201,5 $24,851,815.81_ 201,4 $zo.g M [DorAX slol 52+,z6s,6so.3z 201,3 s18 M IDOrAX42e] itg,3t3,6tt.6l 2012 Srs.r M [DorAX 3s6] 521.,r84,999.29 20L! $rs.g M [DorAX 3s6] S19,900,952.53

2010 ire.7 M IDOTAX 3s6] 5r7,so6,146.7L 2009 Szs.s M [DorAX 3s6] Si.7,872,858.55 2008 Szs.s M [DorAX 3s6] 5t8,190,394,7r

950755v1 / 12178-1 EXtrTTBTT" Fil ÐEPARTMENT ÛF TAXATITN STATE OF T{AWAII

OF Ft ogoeceec 4 r95s

e e e c I e e e 0 e c e q

0eoeeecoeee N @"KH"

ANN{JAL REPORT 20t6-20t7

ÐOTAX 0004 EXHTETT T LEGISLATION

The Twenty-Fourth Legislature enacted tlie following major tax-related measures during the 2007 Regular and Special Sessions:

REGULAR. SESSION 2()O7

Act Brief Desctiptiolt

04s Emergency Appropriation for Departrnent of Taxation County Surcharge Implementation Costs. Appropriates $5,041,691 to the Departrnent of Taxation for unbudgetcd costs incurred irnplementing atrd administering the county surcharge on the general excise tax for the City and County of Honolulu . Effective April 27, 2007.

084 Conformity of the Harvaii Incorne Tax Law to the Internal Revenue Code. Amends Ilawaii's income tax law to conform with changes to the Internal Revenue Code, with exceptions. Effective May 22,2007, and applies lo taxable ysqvs beginning after December 31, 2006, provided tltat relroactive and prospective effective dates contained in the congressional acts relating lo tlte Internal Ret¡enue Code and enacled during 2006 shall be operatitte.

102 Cigarette Tax. Clarifies the disposition of levenues collected under Chapter 245, HRS, relating to cigarette taxes. Makes clarifying amendments to provide for deposit of cigarette tax revcnues to various special funds on a per-cigarette basis. Allows for interest earned on deposrts to the Hawaii Cancer Research Special Fund to be deposited into the special fund. E/fective May 28, 2007.

103 Energy. Adds a new definition to Chapter 243, HRS, of the term, "Power-generating Facility." Defines power-generating faciliry as any electricity-generating facility requiring a permit under the Federal Clean Air Act (42 USC $ 7401 , et. seq.), the Hawaii Air Pollution Control law, or both. Specif,rcally provides for the taxation of naphtha fuel under Chapter243, I-IRS. Assesses the tax for naphtha fuel sold for use in a power-generating facility at 1 centper gallon. Effecttue May 29, 2007, prot,ided that the antendments adding the de.fi.nirion of "Power-generating Facility" and the I cent rate.for naphtha.fuel are to be repealed on December 31, 2009, and f243-4, 11R,t, is to read in the ntanner it read prior to enacÍmenl; prot,ided.furrher that the 1 cent¡ser gallon tax on naphtha.fuel is elfective relroactively for na¡ththa .fuel sold for use in power-generating facilities. r28 Bthanol Production Facility Tax Credit. Extends the date by whìch an ethanol production facility must be in production to qualifli for the etlianol production facility tax credit by five years to January I, 2017 . Effective July I , 2007.

21 mÕT'AX 0t33 DtrPARTMEI{T OF' TAXATXOI.{ STATE OF HAWAII

AIü{{JAL RE,PORT ztTL-zO 12

April 1 8, 20 I 3 ËxHrgrr I WIT; thìra ish, DATE: l-4- IL SHARON ROSS, CSB, CRB, ffMR

ÐOTAX 03,I7 2.1 OVERALL PERFORM.ANCE

The Department of Taxation eonsists of two divisior:s, fi',¡e staff offices, a public information officer, and a taxpayer advocate. The fwo divisions are the Tax Services and Piocessing Division and Cornpliance Division. The five staff offices are the Administrative Services Office, the Rules Office, the Tax Research and Planning Office, the Infonnation Technology Services Of.fice, and the System Adminístration Ofhce.

The Department's operating budget is a srnall fraction of total tax revenue. In FY 2012, the Department's operating expenses are about 0.3%o ortotaL tax revenue.

ln Millions DOTAX's Operating Expenses in Relation to Tax Revenue ln Millions s7,000.0 s7o.o

s6,008.2 s6,000.0 s6o.o gs,316.G $s'478's 5s,297.I $s,ro1.o Ss,13s.1 $4,944.1 ss,ooo.o Sso.o

s4,000.0 S4o.o

s3,000.0 s30.0

S2,ooo.o I 20.0

S 1,ooo.o s 10.0

s0.0 s0.0 FY 2003 Fy 2004 Fy 2005 ty 2006 Fy 2oo7 Fy 2008 Fy 2009 Fy 2010 Fy 2011 ty 2OL2

¡ew Total Tax Collections -üts- DOTAX's Operatìng Expenses

Beginning with FY 2009, the Depaftment's operating budget and the number of authorized staffing has been reduced from its peak during FY 2008, The reduction in force in Fy 2009, resulted in an 110lo clecrease in the Depaftment's staffing. ln addition, there was a hiri'g freeze. Positions that became vacant wel'e not filled due to the hiring freeze resulted in a vacancy rate of approximately 20%. The Abel'crombie Admìnistration has lifted the hiring freezes. Howwer., due to the lengthy hiring lrrocess, restoring the Department's staffing has beena challenge.

J4 ÐOTAX 0356 DEPAR"TMtrNT OF TAXATIÛN- STATtr OF'FTAV/AII

A}TþTT]AL REPORT 2tL2-2û13

ËXHIBIT wlr 5hì raishí DATE: l-+4È SHARON ROSS, CSB, CRB, BMR

mOTAX 039tr 2.T OVERALL PERFORMÂNCE

The Department of Taxation consists of tlo divisions, four staff offices, a public infonnation officer, a taxpayer advocate, an appeals officer, and the System Administration Section. The two divisions are the Tax Services and Processing Division and the Compliance Division. The four staff offices are the Administrative Services Office, the Rules Offìce, the Tax Research and Plaruring Off,rce, and the lnforrnation Technology Services Office.

The total number of authorized petmanent positions in the Department increased from 373 positions in FY 2012 to 383 positions in FY 2013. The Deparlment's operating budget is a small fraction of total tax revenue. In FY 2013, the Department's operating expenses were $18 million, which continues a downward trend in operating expenses that starled in FY 2009, when they were $25,5 million. The Department collected $6.23 billion in taxes in FY 2013, so the cost of collecting each $100 dollars of taxes was about 29 cents.

The Department has continued to encourage taxpayers to use electronic transmissions rather than paper retutns. Changes in electronic filing by the lnternal Revenue Seruice resulted in electlonic filings of Hawaii's lndividual Income Tax to decline slightly fi'om FY 2072 to FY 2013, but the share of total payments for all taxes from electronic soul'ces grew, ftom 69,5Yo in FY 2012 to 72.3% in FY 2013. The Department will continue in its efforts to modemize its processing of tax returns.

The total number of audit cases completed by the Compliance Division (the Office Audit Branch and Field Audit Branch combined) cleclined from 9,826 cases in FY 2012 to 7,701cases in FY 2013, a decrease of 21.6%. However, total assessments increas edby 12o/o, fron 577 .7 million in FY 2012 to $87.1 million in FY 2013. In addition, our auditors recommended assessments against On-line Travel Companies (OTC) totaling $817.7 million including taxes, penalties and intet'est. The OTCs have appealed the cases to the Tax Appeal Court. The Criminal Investigation section collected a total of $1.0 million in unpaid taxes, interest and penalties in FY 2013, down from the $1.4 million collected in FY 2012,but" since the main function of the Section is to deter tax evasion, its collections are not a good measure of the success of its operations,

2.2'[AX SERVICES .AND T'ROCESSING DIWSION

2"2.1 Overview

The Tax Seruices and Processing (TSP) Division consists of tluee bl'anches: (i) Document Processing, (2)Taxpayer Selices, and (3) Revenue Accounting. The Division perfonns the following functions: 1) centralized plocessing, editing, and controlling of tax information received t'om paper documents or eiectronic data, and receiving, securing, clepositing, and accounting for tax payments; 2) functions relating to account management, licensing, and providing taxpayer selices to the public; and 3) rnaintaining revenue control and reconcíliation

DOTAX O42g DEF,{R.TMtrNT OF TAXATIÛN STATtr OF'HAWAII

ANI{LiAT. RtrFTRT 2tß-20 14

EXHIBIT 7 5hi raisl^t WIT: 'lþ DATË: r-'1 SHARO N 8OSS, CSB, CRB' 8MR

mOTAX 0469 2.1 OVERALL PERTORMANCE

The Department of Taxation consists of fwo divisions, four staff offices, a public information oflìcer, and a taxpayer advocate. The lwo divisions ale the Tax Services and Processing Division and Compliance Division. The four staff offices are the Administrative Selvices Office, the Rules Office, the Tax Research and Planning Off,rce, and the Information Teclmology Selices Office. In addition, there is a System Administration section.

The total number of authodzed petmanent positions in the Department decreased from 383 positions in FY 2013 to 382 positions in FY 2014. The Department's operating budget is a small fraction of total tax revenue. In FY 2014, the Deparlment's operating expenses were $20.9 million, down from $25.5 miliion in FY 2009. The Department collected 96.24 billion in taxes in FY 2014, so the cost of collecting each $100 dollars of taxes was about 33 cents.

The Department has continued to encourage taxpayers to use electronic transmissions rather than filing paper retums. Although there has been a significant inclease in electronic filing of tax reftrns and payments, over 1 million paper checks and over 2 million papel tax returns and other documents were manually processed by the Department in FY 2014.

The total number of audit cases completed by the Compliance Division (the Office Audit Branch and Field Audit Branch combined) l'ose fi'om 1,701 cases in FY 2013 to 9,202 cases in FY 2014, an increase of 19.5%. Total assessments increased by 13.7Vo, from $87.1 million in FY 2013 to $99.0 million in FY 2014. The Criminal Investigation section collected a totai of$1.3 million in unpaid taxes, interest and penalties in FY 2014, up from the S1.0 million collected in FY 2013.

2,2,TAX SERVICES AND PROCESSING DIVISION

2.2.1 Overview

The Tax Seruices and Processing (TSP) Division consists of the following thlee branches: (1) The Document Processing Branch (DPB), which does centralized processing, editing, and conholling of tax information received fiom paper documents or electronic data, and leceives, secures, deposits, and accounts for tax payinents; (2) the Taxpayer Seruices Branch (TPS), which performs functions relating to account management, licensing, and providing taxpayer services to the public; and (3) the Revenue Accounting Branch (RA), which maintains revenue control ancl reconciiiation functions for all State tax revenues collected by the Department of Taxation, including the preparation of the Preliminary Report (which shows revenues collected), the Statement of Tax Operations (STO, which shows revenues collected and allocations of the revenues to various funds), and other revenue-related reports.

The TSP Division's main goal for the upcoming years is to allow taxpayers to choose fi'om a broader array of options for filing their state tax returns and other documents with the Department. Also, the Division aims to increase reliance on electronic filings and financial transactions. Greater use of electronic transactions will allow data to be processed more efficientiy and more effectively with fewer staff. With the Department's Tax System Modemization (TSM) Project

33 ÐOTAX 051 T i;liìiì i {,i,,.i,i.,; i i.i.ri¡ii i

lj l^'ii: iil; ilIr,TJír i I ir iL. L:. ti Of Counsel: AI,S'T'ON I]IJNT FLOYD & ING Zû15 il[t ä PH ?c 02 Attorneys atLaw I '../ A Law Corporation i'i,¡ I ¡rl\"\'. I i .r i l\r I I l ¡, ¡ PAUL ALSTON 1126 TI{OMAS E. BUSH 4734 LORI K. S]'IBB 96]0 1001 Bishop Street, Suite 1800 Flonolulu, Flawai'i 96813 Teleplrone: (808) 524-1 800 Facsirnile: (808) 524-459 I E-mail: [email protected] tbr,[email protected] [email protected]

Attorneys for Plaintiff

IN THE CIRCUIT COURT OF'THE FIRST CIRCUIT

STATE OI.- I{AWAI'I

TAX FOUNDATION OF FIAWAiI, a Hawaii Civil No. 1 5-I-2A20- 10 ECN nonprofit corporation, on behalf of itself and (Other Civil Action) those similarly situated, PLAINTIFFS' AMENDED NOTICE OF Plaintiff, TAKII{G DEPOSITION UPON ORAL EXAMINATION PURSUANT TO RULB VS 30(bx6) oF THE HAWATT RULES OF CIWL PROCEDURE; EXHiBITS "4" - STATE OF HAWAII, "8"; CERTII.'ICATE OF SERVICE

Defendant. (lìe: Designated Representative of Defendant STATE OF FIAWAII)

PLAtrN.IIFFS' AMEÌ{DEÐ I{O'I.trCtr4 OIT- TAKING DEPOSI.I.ION UPON (}RAL EX.{MINATION PU[{.SU,ANT TO RULE, 30(bX6) OF THE H,,\\4/AT'I RULES OF CIVIL PROCEDURE

TO Desi gnatecl lìepresentati ve of Defendant State of Flawaii c/o Department of the Attorney General 425 Queen Street I-lonoluiu, I-lI 96813

9a9a1 Bv1 11217 B-1 EXTTTBIT J PLEASE TAKE NOTICE that on behalf of Plaintiff 'fAX FOLINDATION OF HAWAII, a Hawaii nonprof,it cor'poratior-r, on behalf of itself and those similarly situated ("Plaintiff'), by and tluough its attorneys, and pursuant to the agreement of Plaintiff s counsel and Defendant

State of l-{awaii's counsel, the following deposition will be taken at the law off,ices of Alston

I{unt Floyd & Ing, 1001 Bishop Street, Suite 1800, Honolulu, Hawai'i 96813, on the date and time indicated below or at such date, time ancl place as counsel may agree upon before a notary public duly authorizedfo adrninister oaths.

NAME AND ADDIIESS DATB AND TIME

Desi gnated Representative of Jarruary 4,2016 State of I-lawai'i 9:00 A.M. c/o Departrnent of the Attorney General 425 Queen Street Flonolulu, Ill 96813

Said deposition shall be upon oral examination, pursuant Rule 30 and 30(b)(2) of the

I-lawai'i Rules ol'Civil Procedure. You are invited to attend and cross-examine. The examination will continue from day to day until completed.

DTISIGNATED REPRESENTATIVE of Defendant STATE OF I-IAWAII (hereinafter',

"Deponent") is requiled, under Rule 30(b)(6), Llawai'i Rules of Civil Procedure, to designate one or rnore officials, agents, or other pe1'sons who consent to testify on Deponent's behalf on topics

5,6,7,9, 11 and 12 seÍ, forth in in Exhibit "A" attached hereto.

Deponent rnay specify the matters on which each designated person will testify. The per'son(s) designated shall testify as to matters known or reasonably available to themselves, as well as to the l)eponent.

gasalBv1 l1217BO-1 2 You are invited to attend and cross-examine. The Examination will continue from day to day until completed. 'fhis deposition shall be taken by Ralph Rosenberg Court Repoders, Inc.

(Plrone: 524-2090).

TO DEPONENT: You are hereby notified that you may request a review of the completed transcript ol recording of your deposition. You must make this request before the cornpletion of youl deposition. If you make such a request, aliel being notified by the courl reporter or other officer taking the deposition that the transcript or recording is available, you will have 30 days to: (1) r'eview the transcript or recording; and (2) if there are changes in forrn or substance, to sign a statement reciting such changes and the reasons for making them. Failure to substantially comply with this notice requirement prior to the completion of the deposition shall preclude the use of the transcript or recording until the deponent has been provided 30 days within which to review the transcript or recording, and, if there are changes, to sign a statement reciting them and the reasons tlierefore. Any changes shall be appended to the transcdpt or recording.

DATED: Honolulu, Hawai'i, üHC 2 X 2015

PAUI, AI,STON TI.IOMAS E, BUSI-I LORI K. STIBB Attorneys for Plaintifï

s49418v1 1121780-1 .) EXI{IBIT O'A'' TDENTIFTCATTON OF RULE 30(bX6) DESIGNATED IIEPRIìSBNTATIVE OF STATE OF HAWAI'I

Defendant STATE OF HAWAI'I is directed, pursuant to Rule 30(bX6) of the

Hawai'i Rules of Civil Procedure, to designate orle or more officers, directors, managing agents, or other persons with knowledge concerning the factual basis of the following:

'fhe 1 . amount of the one-hall percerrt City and County of Honolulu surcharge on general excise and use tax ("Stucharge") collected by the State and paid quarterly into tlre state treasury since January 1,2007, as authorized in llawai'i Revised Statute ("HRS")

$2a8-2.6(a).

2. 'l'he arnount of the ten percent portion deductecl fi'om the Surcharge by the

State since January I , 2007 , as authorized in HRS $248-2.6(a) .

3. The amount of the Surcharge that the State has deducted for the costs of assessment, collection and distribution of the Surcharge since January 1,2007.

4. How the State determines the amount of the Surcharge that it deducts for the costs of assessment, collection and distribution of the Sr"rrcharge.

5. Whether the arnount of the Surcharge that the State deducts for the costs of assessment, collection and distribution of the Surcharge reflects the actual cost of the assessment, collection and distribution of the Sr-u'oharge.

6. Bfforts to calculate or determine the State's actual cost of the assesstnent, collection and distributior-r of the Surcharge.

L The State's calculation or determination of its actual costs to assess, collect and clistribute the Surcharge, and how this calculation or detelmination was done.

8. 'fhe amount of the Surcharge the State has distributed to the City and

Courrty of I-Ionolulu on a quarterly or annual basis since January 1,2007.

94941 Bv1 /12178-1 9. The calculation of the projected and/or future costs to be incurred by the

State for assessing, collecting and disposing of the Surcharge for fulure years Llp to alid including

2020, and how those calculation and projections were done,

10. All disbursements by the State of the ten percent porfion deducted from

tlre Surcharge since January I,2007 .

I l. The actual costs to the State on a quartelly or annual basis of administering ail taxes collected by tlte State since January 1,2007.

12. The State's amual budget to administer all taxes collected by the State and how this amount is calculated and/or projected.

13. The State's projections of its costs to administer all taxes collected by the

State for future years up to and, including, 2020, and how those projections were done.

549418v1 112178-1 2 EXHIBIT "B''

DEFINITIONS AND INSTRUCTIONS

1. You will produce the original of all documents when they are available.

When the original is unavailable, the best available copy shall be produced.

2. The term "documents," as defined in Rule 34 of the Flawai'i Rules of Civil

Procedure, includes writings, documents, files, drawings, graphs, charts, photographs, phono- records, and othel data compilations lrom which information can be obtained, translated, if necessary by the responding party through detection devices into reasonably usable form, and computer reports, databases, electronic mail, data, data compilations, schedules, tables, chatts and graphs. "Document," therefore, lneans the oliginal and copies of any and all tangible materials, whether handwritten, typed, printed, printed fi'om computer tnemory, copied, photographed, recorded or produced or reproduced in any manner upon which is recorded any

foun of comrnunication or staternent, íncluding letters of the English alphabet, words, pictures, symbols, colcxs, sounds, or any combination of those. The definition includes but is not limited to, books records, letters, diaries, appointrnent books, calendars, itineraries, telegraphs, wires, melnoranda, interoffice comffturlications, reports, notes, drawirgs, chafts, photograplis, movies, tape recordings, computer disks and/or hardware, microfiche, contracts, agreements, travel reports and vouchel's, expense accounts and vouchers, ledgers, financial statements, reports or worksheets, schedules, progress repolts, bills, orders, receipts, journals, files, investigation reports, proposals, fèasibility studies, estimates and/or projections. The definition of

"I)ocuments" encompasses all l'orms and manifestations of electronically stored and/or retrieved electronic information, in all electlonic media (hard drive, diskette or tape), including but not limited to "e-mail" or electronic mail. Materials of this type rnust be produced CD-ROM optically reaclable Winclows or PC oompatible format, clearly labeled as to the software product

949418v1 112178-1 used to organize and manipulate the underlying data. Any exhibits attached to the original docurnent rnust also be produced,

3. The word "you or "youl'" or "State" refers to Defendant STAT'E OF

I-IAWAII and your agencies, including, but not limited to, the Department of l'axation

("DOTAX") and Department of Budget and Finance ("8&Iì"), along with its agents, employees, attorneys, and representatives, and other persons acting or purporting to act on its behalf.

4, "Complaint" means the Plaintiff s Complainl filed in the Lawsuit concun'ently herein.

5. "Rail" refers to the mass transit rail project ongoing in the City and

County of I-Ionolulu facilitated by tire Ilonolulu Authority for Rapid Transportation ("HART").

6, "Surcharge" refers to the one-halfpercent surcharge on general excised tax imposed upon the residents of the City and Courrty of I-Ionolulu pursuant to Ordinance 05-

021 and fulther defined in HRS ç248-2.6.

7 . "Ten percent portion" refers to the ten percent of the Surcharge collected by B&F and/or director of finauce under HRS $248-2.6.

8, The phrase "to administel'" means to collect, assess and/ol clistribute.

949418v1 /1217 8-1 2 IN THE CIRCUIT COURT OIì TI{E FIIISI'CIRCTJI'I

STATE OIì HAWAI'I

TAX I'ìOUNDATION OF HAWAII, a l-lawaii CivilNo. 15-1 2020-10 ECN nonplofit colporation, on behalf of itself'and (Other Civil Action) those similarly situated, CBIITIF'ICATE OF SERVICB Plaintiff,

VS

STATE OF HAWAII,

Defendant.

CERTIFICATE OF SERVICE

The undersigned hereby certifies that, the foregoing document was duly served upon the following party by hand delivery addressed as follows:

DOUGLAS CHIN, ESQ, Attorney General, State of Hawai'i HUGH R. JONES, ESQ. Deputy Attorney General Department of the Attorney General 425 Queen Street I-lonolulu, Hawai'i 968 I 3 Attorneys for Defendant STATE OF IJAWAII ü[:L; Z tr Ztris DATED: Ilonolulu, Hawai'i,

P ALST'ON THOMAS E. BUSI_I LORI K. STIBB Attorneys for PlaintilT

949418v1 112178-1 1

09:00 1 IN THE CIRCUIT COURT OF THE FIRST CTRCUIT

2 STATE OF HAWA]]

3 TAX FOUNDATION OF HAWAII, C]VIL - - I I -- c : L d nd.wdJ_- l- iìolìIJr ur- r L NO. 15-1-2020-10 ECN 4 corporation, on behalf of IOther Civil Action] itself and those simiÌarly 5 situated,

6 Plaintiff,

1

B STATE OF' HAWA] I,

o De f endant

10

11

T2 DEPOSTTTON OF

13 STATE OF HAï/ûAIï

I4 THROUGH rTS 30 (b) ( 6) DESIGNATEÐ REPRESENT.A,TIVE /

15 TED S. SHÏRAÏSHÏ I6 I1 Taken on behalf of the Plaintiff, Tax Foundation of

1B Hawaií, a Hawaii nonprofit corporation, on behalf of I9 itself and those similarly situated, ât AlsIon Hunt

20 Floyd & Ing/ American Savings Bank Tower, 1001 Bishop

21 5treetôL.^^^l-ô....1r / Sufte 1800, Honolulu, Hawaii, commenc,ing at

22. 9:03 a.m. on Monday, January 4, 201 6, pursuant to

aa LJ Notice.

24

25 BE FORE SHARON L. ROSS, RPR, CRR, RMR, CSR No. 432

Ï{AÏ-PT-ì [dO S ENE EIR G C OURT T{EPO R.TE[TS, ÏN C" Ilonolul-u, Hawaii (B0B ) 524*2090 ffiKHäTBTT K a) ¿J

09..26 1 (Shiraishi Exhibit No. 2 marked.)

09:26 2 a. ( BY MR. BUSH ) Mr . Shiraishi, I 've handed you

09:26 3 what's been marked as Exhlbi-t 2. It's a document with

09:26 4 the Ba t-es stamp number of DO'IAX 0512 .

09:26 5 are \/oujr famillar with this document?

09:26 6 A. I have seen this document before. I'm not

09:26 1 f amiliar with it. I don't know the numbers of f t.his

09:26 B is in regards to the county surcharge col-lections, I

09221 9 guess.

09:21 1 0 A. Yeah. My next quest.ion was going to be: In what

09:2't 1 1 connection did you see did you see this document

09:2'l 12 preparing for your deposition today?

09:21 1 3 A. I -- yes, yes, I did.

09:21 I4 O. Okay. Does this document this document has a

09:21 1 5 lot of numbers on it, but are some of the numbers

09:2'1 1 6 indlcated at the bottom it Ìooks Lo be the total amount

09:21 71 of GET surcharge for Honol-uIu col-lected by the state on

09:21 1 B a -- it lool

09 :21 20 A. That's what i1: seems to saY, yes. 09:2'l 2I a. Okay. So, for example, for fiscal year 20I5, j-t

09:28 22 l-ooks llke the total amount of surcharge colfected is

09:28 23 reported by DOTAX is $248,518,758.12. Do you see 1-hat?

09:28 24 A. Yes.

09:28 25 MR. JONES : Can -L ask you what sub j ect

T(AT,['F{ ROSENBEIIG COIJRT RET'OTdTERS, INC" Honolulu, I{awail (B0B ) 524-2090 24

09:28 1 matter this Exhibit 2 relates to in the deposition

09:28 2 nol-ice?

09: 28 3 MR. BUSH: No. 5

09: 2B 4 MR. JONES: The staters cafcul-ation of the

09: 28 5 determination of its actuaJ- cost to assess / cof l-ect- / and

09:28 6 distribute the surcharge and how the calcul-ation

09:28 7 MR " BUSH: Right

09: 28 B MR. JONES: I 'm sorry. Is that a typo?

09:28 9 MR. BUSH: Oh/ I don 't know.

09:28 1 0 MR. JONES: How this calculation or

09 :2,8 I 1 determination was done? Excuse me.

09:28 72 MR. BUSH: 11-191ìL.ñ I -,1- !

09:28 13 A. (BY MR . BUSH ) So, this is a calcul-ation of the

09:28 74 total, amount done by DOTAX/ I take it?

09 28 1 5 MR. JONES : This is a document that was

09:28 1 6 produced in response to a document

09:28 I1 MR. BUSH: I f I coul,d as k

09:28 1B MR. JONES: But I'd like the record to be

09:28 1 9 clear about what. Exhlbit 2 ts Document2hasaBates

09:28 20 number; and it was produced by the state in response to

09: 28 2f your document production request and does not contain

09 :28 2-? any figure related to the cost of assessment /

09:29 23 coflection/ or distribution of the county sul:charge. It

09:29 24 re-Iates to the amount collected and the amount deposited

09:29 25 in the Generaf I'und

X{AL ['FT RO S E¡{B ERG C O UTTT ITE PORT'EITS, TNC" Honolulu, Hawaii (B0B) 524-2090 25

09t29 1 MR. BUSH: It does refate to the amount

09:29 2 col-lect. which

09:29 3 A. (BY MR. BUSH ) And if I could, Mr. Shiraishi

09:29 4 okay. This document when I look at it, it shows

09:29 5 it Iooks like a brea kdown between the amount of the

09:29 6 surcharge on a quarterly basis thal- gets provided Eo the

09:29 1 county and the amount of the surcharge that gets

09:29 B provided t-o the state. It looks to be that in the first

09:29 9 two sort of rOWS Do you see that.?

09:29 1 0 For example / if we couÌd stick with fiscal year

Q9:29 1 1 endíng or fiscal year 2015, for the first quarter/

09:30 72 September 30th, it looks like it has a $48 million

09:30 13 number which looks to be about the surcharge amount that

09:30 14 goes to the county and t-hen a 5 million number in the

09:30 1 5 second row for that same quarterly. And that.'s the

09: 30 16 amount/ I take it, that goes to the to the count.y; is

09: 30 I1 that correct?

09:30 1B MR" JONtrS: This is a document that was

09:30 79 produced

09:30 20 MR. BUSH: If he if I could ask if you

09: 30 27 could hold on. If you could let the witness answer

09: 30 22 the question, pfease. ft's not yourre not

09: 30 23 testifying. He's testifying.

09: 30 24 MR. JONtrS: Objectj,on/ facks foundation

09: 30 25 MR. BUSH: That ' s fine .

rT,AL P R S E ¡d ts E C TT E O E I TN C F{ O ITG O U RT [' RT K S, " Honolulu, Hawaii ( B0B ) 524^2090 26

09:30 1 MR. JONES cal-ls for speculation

09: 30 2 A. I 'm sorry. Coul-d you repeat your question?

09: 30 3 A. (BY MR. BUSH) Sure. Looking at this document,

09: 30 4 I 'm ¡ ust 1-rying to t-o confirm that in the firsL

09: 30 5 column it has quarter it looks like it has a fiscaf

09: 30 6 year broken out into quarters, right? Do you see that?

09:31 1 A. Right

09:31 B a. okay. And for each quarter, at l-east in the top

09:31 9 row/ it appears to indicate the total amount t-hat's

09:31 10 provided to the counties the county of Ilonolulu, I

09:31 11 take it?

09:31 12 A. Riqht. The label on this part of the table says/

09:31 1 3 "GET surcharge 0. 5 percent less t.han 10 percent to the

ll 09: 31 74 5^L-!^ L.f Le .

09;31 1 5 a. Okay. So, the 10 percent to the state is shown

09: 31 16 in the second row. The 90 percent to the county is

09: 31 71 shown in t.he first rows. Is that fair to say?

09:31 1B A. ln the first tabIe, right

09:31 1 9 A. Ri sht , f irst tabf e. Okay. We' 1l- sây f irst

09: 31 20 t.able; and in the second tab first tabl e is entitled 09:31 2I "GËT surcharge 0.5 percent l-ess 10 percent to state,"

09:31 22 correc b ?

09: 31 23 A. Right.

09:31 24 a" And the second table is labeled "GET surcharge 10

09:31 25 percenL. to state"?

I{AL['F{ ÏTOSENEERG COUT{.T RET'ORTERS, tr}dc. Honof ulu, Iìawaii (B0B ) 524-2090 ?_1

09:.J1 1 A. Correct.

09:32 2 a. Okay. Does this document show any amounts

09:32 3 deducted by the state for the cost of the assessmerìt,

09:32 4 coflection and distribution of the county's surcharge to

09 :32 5 Honolulu?

09 :32 6 A" f don't see that label anywhe re he::e , The second

09 :32 T table does say "GET surcharge / 10 percent to the state. "

09 :32 B So, if you're referring to the same thing, then I

09 32 I woul-d presume that's the second 1-abf e .

09:32 1 0 O. Does the second table indicate the costs of the

09:32 1 1 assessment/ col-l-ection and distribution of the counLy

09:32 12 surcharge?

09:32 1 3 A. t¡ùe don't. know the cost of the dístribution

09:32 14 what did you sây, distribution

09:32 1 5 A. Cost of the assessment/ colfection

09:32 76 A. AssessmenL, coll-ec1-ion, and distribution. We

09t32 11 don't. know the actual cost of 1-hat.

09:32 1 B A. Okay" So, 1-his document wouldn 't show that then,

09:32 19 correct ?

09:32 20 A, Correct. O9:32 2I O. All right. How often are amounts deducted from 09:33 22 the how often are amounts remittecl l_o the County of

09: 33 23 Honolulu from the surcharge collect-ton

09:.13 24 A. know I don ' 1, " 09:33 25 MR. JONtrS: Objection, lac)

R.AT,PÏJ TdO S ENB EITG C O URT TTEP ORT'EITS, trNC" Hono]-u.lu, Hawaii ( B0B ) 524-2090 49

10:09 1 it-, "Department of Taxation Annual Report as Required by

10:09 2 Act 2I3, Session Laws Hawaii 2001, Sêction I2I. " Do you

10:09 3 see that ?

10:09 4 A. Yes. l0:09 5 a. Is this the report you I re referring to you

10:09 6 were just referring to in your testimony?

10:09 1 À Va c

10:09 B A. So, you did revie\^t this ?

10:09 I A Yes

10:09 10 o How did you know about this report?

10:09 11 A I was informed about it from the Department of

10:09 12 the Attorney GeneraI.

10:09 13 O. okay. Let me ask yoLr this: Did you do any lO: 09 74 indep e ndent search youi:self to try and gather

10:09 15 information to answer to prepare yourself to be a

1.0: 09 16 30 (b) ( 6) deponent today? 10:10 L] A. No.

10:10 1B A. I¡lhatever information you have was information

10:10 19 that was provided to you by others, I take it? lO:lO 20 A. Correct.

10 : 10 2,1 A. You didn't in other words, you didn't ask

10:10 22 people at Lhe Department DOTAX " go loc¡k f or this " or

10:10 23 "go lool< for that." You relied on other it sounds

10:10 24 -ljl

1.0: l0 25 General to provj,de you wlth informaLion so you would be

R.ALFF{ RO S ENts EF{. G C OURT XTEPO RT'ETTS, Ï}dC. I'lono-l.ulu, Hawai-i ( B0B ) 52:4-2090 50

I .ì,0:.10 1 able to testify today, UULIULL ^ ^+ J

LO:10 2 A Some of that is t rue, V€S .

10:10 3 a Well, what of it isn't true?

10: lO 4 A Well, like f said earl-ier, I had to get the

10:10 5 annuaf budget amounts and the informatron regarding the

10:10 6 positions from weIl/ I guess/ yeah/ ir wasn I t from

10;10 1 I guess it depends how you fook at it. Yeah, T got all

10:10 B of the information from the Department of the Attorney

10:10 9 General.

LO:10 10 O. You rel-ied on them to provj de you with the

10:10 11 information that woul-d be relevant for you to testify

10:10 12 today, corr ect ?

1O:10 13 A. Yes.

10:10 14 O. Thank you. Looking at deposition Exhibit 9

10:11 15 l-et ' s ¡ us t s kip to the third page

1O:11 16 A. (l^lítness compf ies. )

10:11 11 a. a page Bates stamped DOTAX 0567. The first

10:11 1B paragraph there under Roman numeral fV, "The Approximate 10:11 19 Percentage of Time Each Positjon Spends on the Taskr' -- 10:11 20 that's the heading. Do you see that? 10:11 2I A. Yes.

10:11 22 a. And l-he first sentence there reads, "The

10: l.l 23 Department of Taxation does not have the l:esources or

10:11 24 abllity to perform cost accounting." Do you see that?

10:1 1. 25 A. Yes.

XdAI-X'F{ T(O S E}dts ERG C OURT T{EPOTTTERS, TF{C" Ilonolulu, Hawaii (B0B ) 524-209A 56

10: :l B 1 A. That's what it says ln the report/ yes.

10: l.B 2 o. (BY MR. BUSH) And you have no idea how they

10:1,8 3 arrived at that?

10:18 4 A. f do not.

10:18 5 a. Okay. I f we go b'ack to the t op sent ence, it

10:18 6 says, "The Dep a rtme nt of Taxation does not have the

10:18 1 resoulîces or ability to perform cost accounting."

10: lB B What resources does the Department of Taxation

10:18 9 lack Io perform cost accounting?

10:18 10 MR. JONBS: Obj ection/ as ked and answered.

10:18 11 A. I do not know. f presume that that it is the

10:18 T2 mechanism itseÌf and the money to do it when you say

10:18 13 resources.

10:18 I4 O (BY MR. BUSH) No, I didn't say resources. f'm

10: lB 15 j ust reading the report.

10:18 16 A Oh, yeah, when 1t says " resource s, " that ' s \,vhat I 10:18 L] presume it to mean

10:18 1B O. Resources means what? I'm sorry? 10:18 19 A. The abillty to do or the mechanism to do it

10: 1B 20 and the f guess/ the funds due to perform that

.l 0:19 21 thaL..

10:19 22 O. üt}ell / what mechanrsm would be needed? 10:19 23 A. I don't lcnow. We drd not Iook into a cosL

10:19 24 accoLlnting sys Lem

ì0:1.9 25 a. So, you have no idea \^/hat the ltesources wha t

ÏTAI-PFT T{ O S ET{ B E T{ G C OU}IT TT ET'O}RT'ETd S, TN C. Iìonofulu, Hawaii ( B0B ) 524-2090 57

l.O:19 1 resources are lacking because you never looked into it?

10:19 2 A. hle it's my understanding that r^re did not look

10:19 3 into it, correct .

10:19 4 a. Okay. So, the reason the Department of Taxation

10:19 5 does not have the resources or abllity to perform cost

10:19 6 accounting j-s because they never I ooked into it,

10:19 1 correct ?

10:19 B A. I wouldn't be able to answer that. That's a

10:19 9 conclusion that I cannot make.

10:19 10 A. You don't know why the Department of Taxatron

10:19 11 indicated in this report that it does not have the

10 : 1.9 12 resources or abiJ-ity to perform cost accountÍng,

10:19 13 correct ?

10:19 14 Ä Vac

lO : 20 15 A. If you look at the first page of Exhibit 9 --

IO:20 I6 A. (Witness complies. ) IO:20 I1 a. the opening paragraph indicates thaI accordinq l.O:20 1B to the Depai.tmenl- of Taxation, Act 2I3 states Session

1O:20 1 9 Laws Hawail 2001, Section I29 I2I " requi red the

IO :20 20 Department of Taxation to prepare a report detailing the

IO 20 27 level of staffing and funding necessary to administer

I0 :2-O 22 coun t y surcha r:ge collections. " Do you see that?

1.0:2-I 23 A. T'hat's what j,t says

IO:21 24 A. Okay. And then it indicated four subsections

I0 :21 25 that this report descríbes. Do you see t-hat?

T{ALPH ROSENtsEÏTG COUI{T REPOITTEIdS, TNC. Honof ulu, I-lawai- j (B0B ) 524-2090 64

10:31 1 A. Not that I can think of specifically.

IO:32 2 a. Wefl, generally?

10:32 3 A. No.

LOz32 4 O. Okay. Now, yourve youlve told me that the

10:32 !¡ state has not calculated or determined its actual costs

\O:32 6 to assess, collect/ and distribute the county surcharge/

IO:32 1 so correct? You've told me that previously?

10:32 B A Yes.

10:32 9 O All right. And woufd the reason why it hasn't

10:33 1 0 been ah¡le t.o to your understanding, is that contained

l.O:33 11 1n the one sentence in Exhibit 9 on the third page where

LO:33 12 it says, "The Department of Taxation does not have the

10:33 13 resources or abiJ-ity to perform cost accounting" ?

10:33 14 MR. JONES: Can you read back that question,

10:33 1 5 please?

10:32 16 (The court reporter read the following: LO:32 I1 "And woufd the reason why it hasn't been able to to

.lO:33 1B your understanding, is that contained in the one

10:33 19 sentence in Exhibit 9 on the third page where it says, 10:33 20 'The Department of Taxation does not- have the resources l0:33 2I or abiJity to perform cost accounting'?")

10:33 22 A. So, you ' re asking me wLleLher that's the only 10:33 23 reason that the cost accounting hasn't been done? Is

I0:33 2.4 that your question?

I0:33 2.5 a. (BY MR. BUSH) I'm asì

RO S E}d B ET'{. C O T'TET?O tr{ RALPF{ G {JRT R.TE S, TN C " HonoÌuf u, l]awaii (B 0 B ) 524-?-090 65

10:33 1 basis for your for the for your tes[imony that the I 10:34 2 state hasn t calculated or de t-ermined its actual costs

1,0:34 3 to assess / collect / and distribute the su,rcharge?

lO:.1 4 4 A. I think that's a lot of the reason. I also don'L

10:34 5 know that the department believed ít was necessary to do

10:34 6 these costs -- or this cost accounting âS, you know,

10:34 1 it's phrased here.

10:34 B Whether it was necessary in terms of, you know

10:34 9 1n general/ fike I said earlier, we haven ' 't done it for

10: 34 10 any of our functions. We I don't I think you

10:34 11 know, I don't believe t.hat we f elt it was necessary or

1O:34 12 required to do that.

10 : 34 13 So, in addition to, I guess/ not having the

10:34 14 resources and ability, f'm not certain that we believed

10:34 15 it to be necessary.

l0:34 16 a. Ol

10:34 1B A. Yes.

10:34 19 a. Okay. Well / you I ve already told you I ve 10:34 20 already testified as a 30 (b) (6) representative that you l0:34 2I don't have any understandìng of what resources or

10:34 22 ability the Departrnent of Taxation lacked to perform

10:34 23 cost accountj.ng. So, I don't need to go back into that.

1O:35 24 Any other reason why t-he s Ia Ie has not calculated lO: ll 5 25 or determined the costs to a,ssess / colf ect / or

F{,AÏ-I]F{ Ï{ O S ENffi ER G C O [JT{T T{ EP O RT"EId S, I}d C. I'lono]-ulu, Flawaìi (B0B) 524-2090 66

10:35 1 distribute the surcharge?

10:35 2 A. I don't know of any other reason.

10:35 3 O. Okay. And so, f Ihin]< werve essentially

10:35 4 covered categories 5, 6, and 1 of the deposition notice

10:35 5 Category 9 asks, "The calculation of the

10:35 6 proj ected and/or future costs to be incurred by the

10:36 1 state for assessing/ coll-ecting and disposing of the

10:36 B surcharge for future years up to and including 2020l and

10:36 9 how those calculations and pro j ections \,vere done It

l-O:36 10 Has any cafculation ever been attempted by the

10:36 11 state where the for proj ected or future costs

10:36 12 incurred by the state in assessing/ coi-]ecting or

10:36 13 disposing of the surcharge for future years?

10:36 14 A. No.

lO:36 15 O And why not?

10:36 16 A We dicln't belleve it to be necessary

l0:36 I1 a Okay. Any other reason?

1.0:36 1B A. I quess the reason stated in the report that

10:36 19 didn't have the resources and t-he ability. l0:36 20 O. And when you say the "l:eport / " you mean 10:36 2I Exhibit 9, that one sentence? l0:36 22 A. Correct

LO:36 23 a. Okay. Let me asl< you thís: Wasnrt a fuIure

10:3? 24 proj ecLion made for Departmen't of Taxation j.n coming up

10:37 25 with t-he leve I of s.Laffing and funding necessary to

IT,ALPF{ [d O S EÞdB E[T. G C O UTdT' REPO I(TER S, TN C. Flonolulu, Hawaii (B0B ) 524-2.090 B9

11:14 1 EXAMINATTON

11:14 2 BY MR. JONES

11.:14 3 O. You've been employed with the department since

11:14 4 I think you said February of 2012?

11:14 5 À VacIUJ.

7I:74 6 A. During those approximately almost four years now 11:14 l coming up to next FebruâLy, I guess/ next month/ to you r

11:14 B knowledge, has any employee of the depart.ment been

11:14 9 directed to keep time of what they do

IL:14 10 A. No.

11:14 11 a. time-keeping records? 7I: 14 12 A. No.

11:14 13 A. Inlhen you say that when you testify that you

11:14 74 didn't think -it was necessary f or you to keep

11:14 15 time-keeping records of how much time is spent on 11:15 16 ,specif ic tasks, can you ef aborate on why that is?

À [¡]a l ] 11: 15 I1 I I . VV L I I / I gues s from my from the departmentrs

11:15 1B perspective, the law was clear in that the 10 percent

11:15 19 allocation was a set amount. /' and it wasn ' t based on our 11:1.5 20 need to do some kind of cost accounting or measure of

11:15 21 those functions. And I guess so, we just drd not

11:15 22 A. For exampfe/ the county surcharge is colfect_ed as

11:15 23 part of a state tax lreturn/ is i L not ?

11:1.5 24 A. Correct.

1l:1.5 2-5 a. 'ilhe general excise tax return?

rd,AT,PF{ TT O S ENB ETT C O R EP O RT'E['T TN G UR.T S, C " Honolulu, Hawari (B0B) 524-2090 96

1 I, 'l'ED S. SHIRAISHI, hereby certif y that I have read

2 the foregoJng typewritten pages 1 through 95, inclusive,

3 and corlîectÍons/ if âny, were noted by fle , and the same

4 is now a true and correct transcript of my testimony. r -) DATED: flonolulu, Hawaii,

6

1

B TED S. SHIRAISH] 9

10

11 Signed before me this I2 day of 20 _. 13 I4

15 I6 I1

1B I9

20

21

22. Case: Tax Foundation of Hawaii vs State of Hawaii z3 Civil No.: 15-1-2020-10 ECN Deposition Dated: January 4, 20I6 24 Tal

25

R,qLPH ROSE}dBETTG COUT{T TTEPOT(T'ERS, tr}dc. Hono.l-ulu, I-lawaii (B0B) 5?-4-2090 91

1 CERTIFTCATE

2 STATE Otr IIAWAI I

3 ) SS:

4 cITY AND COUNTY OF I-IONOLULU )

5

6 I, SHARON ROSS, Certified Shorthand Reporter, do hereby certi fy: 1 That on Monday, January 4, 20I6, ât 9:03 â.ffi., B appeared before me TED S. SHIRAISHI/ the witness whose deposition 1s contained herein; that prior to being ô examined he was by me duly sworn;

10 That the deposition was taken down by me in machine shorthand and was thereafter reduced to typewriting; 11 that the foregoing represents, to the best of my ab,lfity, a true and correct transcript of the I2 proceedings had in the foregoing matter.

13 That pursuant to Rule 30(e) of the Hawaii RuIes of Civil Procedure, a request for an opportunity to review I4 and make changes to this transcript:

15 X Was made by the deponent or a party ( and/or their attorney) prior to the completion of the 11 -LU depos-ition. Was noL made by the deponent or a party I1 (andET theír attorney) prior to the completion of the deposition. 1B Inias waived.

19 I further certify that I am not an attorney for any of the parties hereto, nor in any way concerned with the 20 cause. 2I Dated this 4th day of JanuârV, 20I6, in Honolulu, Hawaii. 22

23

?-4

1r LJ SHARON ROSS, CSR NO. 432

RAT.FFT RO S EINB E[dG C OURT' IdEPO RTETIS, I}d C. I'lonolulu, Flawaii (B0B) 524-2.090 IN THE CIRCUIT COURT OF TI.IE FIRST CIRCUIT

STATE OF I{AWAI'I

TAX FOLINDATION OF HAWAII, a Hawarr Civil No. 15-1-2020-10 ECN nonprofit corporation, on behaif of itself and (Other Civil Action) those similarly situated, DECLARATION OF DANIEL D. BOWEN Plaintiff,

VS

STATE OF I-IAWAII,

Defendant.

DECLARATION OF DANIEL D. BOWEN

I, DANIEL D. BOWEN, do hereby declare ancl state under penalty of perjuly that the following facts ale true and correct:

1. I am a director of Bowen Hunsaker Consulting, Inc. and of Bowen Hunsaker &

Cornpany, Certified Public Accountants, A Professional Corporation. My principal practice aleas inclucle forensic accounting, business valuation, accounting and auditing. I am a Certified

Public Accountant and I am accl'edited in business valuation, certifìed in financial forensics and a ccrlified fraud exarniner.

2. I have previously been qualified and testified as an expeft witness in matters involving accounting, forensic accounting, taxation, valuation and darnages.

3. I have been retained by legal counsel for the Tax Foundation of Hawaii, Inc.,

Plaintiff in the above-entitled rnatter, and to assist legal counsel by reading, analyzing and opining on fìnancial and accounting matters in the above-entitled matter.

4. I liave lead the transcript and the exhìbits of the Deposition of the State of Hawaii tlrrough its 30(b) (6) Designated Replesentative, Ted S. Shiraishi, dated January 4,2016.

950836v1 /1 2'1 78-1 1

EXHIETT T, 5. It is reasonablypossible through application ofgenerally accepted cost accounting prìnciples to calculate the costs (if any) to the State of Hawaii to assess, collect and distribute the county surcltarge. These principles would allow the State of Hawaii to cietennine the ievei of staffing and funding necessary to adrninister county surcharge collection, including the total workload related to collection of the county surchalge, the staff that suppotls the collection of the country surcharge, the annual salary fol each position, and the approximate percentage of tirre each position spends on the task.

6. As an example, the United States Defense Contract Audit Agency promulgates cost accounting standards as set forth in the Code of Federal Regulations, Chapter 99,

Subchapter B, Part 9904, which could be applied to the calculation of the cost of administering the county surcharge collection.

7. Attached as Exhibit M is a true and con'ect copy of rny cun'iculum vitae.

I declare under penalty of law that the foregoing is true and conect.

Executed in Honolulu, Hawaii on January 12,2016.

DANIEL D. BOWEN

950836v1/1 21 7B-1 2 DANIEL D. BOWEN Certifi ed Public Accountant Accredited in Business Valuation Certified in Financial Forensics Certified Fraud Examiner

EDUCATION

lndiana University, Bachelor of Science in Business Administration, 1968

Indiana University, Master of Business Administration, 1970.

PROFBSSIONAL EXPERIENCE

Bowen I-Iunsaker Consulting, Inc. and Bowen Hunsaker & Company, CPA's, 1983 to present. Principal practice areas - Financial statement accounting and auditing, financial consulting services fol businesses and individuals, business valuations, and litigation support selices for law firms. Director of the firm's accounting and auditing practice.

Arthur Young & Company (nka Ernst & Young), Certified Public Accountants, 1970 to 1982. Principal practice areas - Financial statement accounting and auditing, and management advisory services.

PROFESSIONAL DESIGNATIONS

Cerlified Public Accountant, Accredited in Business Valuation

Certified in Financial Forensics

Certified Fraud Examiner

ASSOCIATION MBMBBRSHIPS

American Institute of Certif,red Public Accountants

Hawaii Society of Certified Public Accountants

Association of Certified Fraud Examiners

EXFTIBXT M IN THE CIRCUIT COURT OF THE FIRST CIRCUIT

STATE OF HAWAI'I

TAX FOLINDATION OF HAWAII, A Civil No. l5-l-2020-10 ECN Hawaii nonproht corporation, on behalf of (Other Civil Action) itself and those similarly situated, NOTICE OF' HEARING PLAINTIFF'S Plaintiff, CROSS-MOTION AND CERTIF'ICATE OF SERVICE VS

STATE OF HAWAII, I)ate: February 24,2016 Time: 2:00 p.m. Defendant. Judge: Honorable Edwin Nacino

NOTICE OF HEARING OF PLAINTIFF'S CROSS-MOTION

DOUGLAS CHIN, ESQ. Attorney General, State of Hawai'i HUGH R. JONES, ESQ. Deputy Attorney General Department of the Attorney General 425 Queen Street Ilonolulu, Hawai'i 9681 3 Attorneys fbr Defendant STATE OF HAWAII

NOTICE IS HERBY GIVEN that Plaintiff-s Cross-Motion for Summary Judgment

Against Defendant State of Hawai'i shall come on for hearing before the Honorable Edwin

Nacino, Judge of the above-entitled Court, in his courtroom in the KaahumanuHale,TTT

Punchbowl Street, Honolulu, Hawaii on Wednesday, February 24,2016 at 2:00 p.m. or as soon thereafter as counsel may be heard.

DATED: Honolulu, Hawai'i, January 20,2016.

P ALSTO THOMAS E. BUSH LORI K. STIBB Attorneys for Plaintiff

951328v1 112178-1 CERTIFICATE OF SERVICE

The undersigned hereby certifies Lhat a copy of the foregoing Cross-Motion will be served on the above-identified parties at their respective address by hand delivery.

DATED: Honolulu, Hawai'i, January 20,2016.

PAUL ALSTON THOMAS E. BUSH LORI K. STIBB Attorneys for Plaintiff

951328v1 112178-1 2