SB972 SD1.DOC

SECTION 1. In all tax systems, government administrators are continually working to reduce tax noncompliance known as the "tax gap." In the United States, the tax gap, which is the difference between the amount of tax that is required to be reported and timely paid and the amount of tax that is actually reported and paid, is estimated to be almost $400,000,000,000 per year. Of this tax gap, it is further estimated that about $200,000,000,000, or half of the tax gap, is comprised of what is known as the "cash economy." Hawaii's tax gap is estimated to be about $2,000,000,000 in unreported and unpaid taxes every year with approximately $1,000,000,000 attributed to the cash economy. Focusing resources on shoring up compliance in this area should be a priority.

Cash-based transactions are a fundamental part of any economy. As the oldest form of payment, cash continues to dominate many facets of the local economy. Cash is inherently private, efficient, and predictable for both purchaser and seller. However, cash transactions are also the simplest means of underreporting or non-reporting for tax purposes because no bank, no means of electronic oversight, and no intermediary maintains records of the movement of funds from one pocket to another.

As stated by former Internal Revenue Service Commissioner Mark Everson, "[t]he vast majority of Americans pay their taxes accurately and are shortchanged by those who don't pay their fair share. The magnitude of the tax gap highlights the critical role of enforcement in keeping our system of tax administration healthy." By focusing resources on the cash economy, the department of taxation can ensure fairness in the tax system for those that comply without raising taxes or otherwise substantially burdening Hawaii's economy as a whole.

The purpose of this Act is to identify those cash-based industries and businesses in Hawaii that are susceptible to evading the payment of income, general excise, withholding, and employment taxes. Once identified, the department of taxation shall focus their audit resources on those industries that would likely result in recapturing the most tax revenues that were previously uncollected by the department of taxation. Under this Act, the department of taxation is required to focus on and utilize computer database audit practices and techniques with an industry-wide focus, rather than human resource mechanisms that typically result in time-consuming investigations without a substantial amount of tax revenue recapture or deterrence amongst taxpayers.

SECTION 2. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231- Coordination policies concerning compliance with general excise tax payments. (a) The department shall coordinate with federal agencies to require a general excise tax clearance certificate for all construction projects in Hawaii. Notwithstanding any law to the contrary, the appropriate state agency shall have the authority to stop the construction project if any periodic general excise tax returns with payment are not timely or accurately filed, as appropriate, or if the federal procurement officers do not reasonably assist the department in ensuring that each construction project pays general excise tax in a timely and accurate manner.

(b) The department shall coordinate with unions and federal agencies, such as the United States Immigration and Customs Enforcement Agency, on database and intelligence sharing, along with cooperative auditing of construction work sites for compliance with the general excise tax reporting and income tax withholding requirements. Notwithstanding any law to the contrary, the appropriate state agency shall have the authority to stop the construction project if an owner, developer, employer, or similar entity is not paying income, withholding, general excise, or employment taxes to the State in a timely and accurate manner.

(c) The department shall coordinate with department of commerce and consumer affairs to require a general excise tax clearance certificate prior to license issuance or renewals for regulated industries licensed under chapters 436 through 471, such as those regulated under chapters 439 (beauty culture), 444 (contractors), and 467 (real estate brokers and salespersons)."

SECTION 3. The department of taxation shall utilize their computer database data to analyze taxpayer information across several tax systems and filing statuses. The computer-assisted variables that the department analyzes should focus on are primarily centered around matching the reported amount of taxes paid on the taxpayer's return with other taxes that the taxpayer would be subject to under the tax laws of this State. For example, analysis of the gross income reported on a taxpayer's Internal Revenue Service Schedule C should correlate with that taxpayer's general excise tax return for the same reporting period. Similarly, a taxpayer's Internal Revenue Service Form K-1 should also correlate with an appropriate amount of general excise taxes.

SECTION 4. Notwithstanding any law to the contrary, the

department of taxation shall refer all delinquent taxpayers that have an outstanding tax balance that is greater than five years old to a private collection agency for collection.

SECTION 5. New statutory material is underscored.

SECTION 6. This Act shall take effect on July 1, 2009.

THE SENATE	S.B. NO.	972
TWENTY-FIFTH LEGISLATURE, 2009		S.D. 1
STATE OF HAWAII