Judgments Aren’t Necessarily the End of Litigation

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Several online travel companies engaged in protracted litigation against the Department of Taxation over whether and to what extent they are liable for Hawaii General Excise and Transient Accommodations Taxes on hotel accommodations that they sold to third parties on their respective platforms.  The litigation spanned multiple years, resulted in one exhaustive Hawaii Supreme Court opinion, In re Travelocity.com, Inc., 135 Haw. 88, 346 P.3d 157 (2015), and then resulted in entry of judgment.

Before the ink was dry on those judgments, the Department of Taxation produced additional assessments against the taxpayers, this time on car rental commissions, for the same tax type (General Excise Tax) and for many of the same years as those covered in the judgment.  Can they do that?

The Supreme Court of Hawaii’s answer:  Yes, they can.

The case name is In re Priceline.com, Inc.  The decision was rendered on March 4, 2019.

Normally in civil litigation, if A sues B, both A and B need to include in the lawsuit all the claims that each of them has against the other.  If the lawsuit goes to trial and final judgment is rendered, the controversy between A and B is at an end.  The courts won’t be too happy if either A or B had some other beef, for whatever reason forgot to put it into the suit, and now wants to do another trial.  “Not happening,” they’ll say.

When one of the litigants is the Department of Taxation exercising the government’s sovereign power, however, the rules are a little different.  Basically, they want to make sure that the government’s rights are not lost through a boo-boo made by some random government official.  Such as the ones who agreed to the lower court’s judgment when there were still car rental taxes to be paid.

This decision isn’t as outrageous as it sounds.  First, it only applies when the accused taxpayer has not filed a return.  If a return has been filed, there is a statute of limitations that runs against the State.  Second, if the taxpayer and the State have actually litigated the issue that the taxpayer is complaining about, the State is barred. It won’t get another shot at litigating an issue it has already litigated and lost.  The rule is apparently designed to protect the State if the taxpayer has never filed returns and is not forthcoming with any information, the Department digs up information about income source #1, assesses, litigates, and obtains judgment, and then later digs up information about income source #2.

Still, it’s tough to accept that the second wave of assessments should be allowed here.  When the online travel companies were first audited, their books were exposed to a thorough and searching examination.  If no one was playing “hide the ball” (if some of that went on, that would be actual fraud, with understandably dire consequences to the fraudster), the financial details of both the hotel and the car rental income would have been fully exposed to the Department’s auditors.  If the Department was fully aware of the issue but decided not to pursue it in the assessments and litigation, then they should be made to sleep on the bed that they made for themselves.

Judges and taxpayers alike should take this ruling to heart.  Taxpayers need to understand that filing their annual returns is critical.  Those with disputes must make sure that the case being litigated contains all the Department’s claims.  If the Department is declining to pursue one or more issues that come up in an audit or assessment, this fact must be made clear in the record so the Department cannot later claim to be blindsided and take advantage of this case precedent.

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