EXCLUSIVE: Online companies ordered to pay state $150M - Hawaii News Now - KGMB and KHNL

EXCLUSIVE: Online companies ordered to pay state $150M

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State Tax Judge Gary Chang State Tax Judge Gary Chang

A state legal challenge that the Lingle administration turned down several years ago has paid off big-time.

State Tax Judge Gary Chang today ordered online travel companies like Travelocity, Expedia.com and Orbitz to pay the state about $150 million in back taxes and interest, in the largest ever tax award in state history.

Chang ruled that the companies owed $110 million in general excise taxes and nearly $40 million in interest.

"This involves a lot of money," said Special Deputy Attorney General Gary Cruciani.

"It's because they haven't been paying the taxes for 12 years. They have a big I-O-U that's accumulated to the state of Hawaii"

The online companies maintain they aren't subject to the tax because their business comes from outside of Hawaii. They say they plan to appeal.

"The services the (state tax) director seeks to tax are provided outside of Hawaii where GE tax simply does not apply," said attorney Ron Heller.

Even if they appeal, the online companies aren't off the hook. Under state tax law, the companies must pay the full amount within 30 days of the entry of the judge's order.

The money must go immediately into a special state fund and will remain there until the appeals are exhausted. If the state wins the eventual appeal, it can spend the money on any of its programs or to pay for raises for state workers.

The case has huge fiscal implications going forward. If the decision stands, the online companies are now liable for future general excises taxes to the tune of about $20 million a year as a result of this ruling.

Tax Department filings show that Expedia owed the most money  -- about $60 million -- followed by Travelocity, which owed nearly $16 million, and Orbitz, whose tax bill totaled about $12 million.

Court filings also show that 10 of the largest online travel companies have done more than $2.7 billion in hotel bookings and other travel business in Hawaii since 2000.

Today's decision raises questions about why the Lingle administration decided to drop its investigation several years ago.

At the time, the state was laying off or furloughing thousands of state employees due to declining tax revenues.

In a deposition for the tax case, Lingle's Tax Director Kurt Kawafuchi testified that he was ordered to drop the case after Lingle met behind closed doors with representatives of the online companies.

Lingle has denied that she played any role in putting a halt to the tax investigation.

For the online companies, Chang's decision came as a surprise after he ruled in October that the online companies weren't liable for hotel room taxes portion of the tax bill.

That portion of the companies tax bill amounted to more than $300 million and Chang upheld his ruling today that the online companies weren't liable for those assesments.

At the end of today's hearing, Chang left open the amount of penalties that the companies must pay on the general excise portion of the taxes. He's scheduled a further hearing on the matter in April.