The Hawaii Supreme Court recently issued a significant ruling in the case of Booking.com B.V. v. Gary S. Suganuma, SCWC-22-0000441, which addresses the validity of tax administrative rules and the ability of companies to challenge them in court. This decision affects online businesses operating in Hawaii, particularly those involved in travel and accommodation services.
The court's ruling clarifies that interested parties can seek declaratory relief regarding the validity of tax rules, even when tax assessments are involved. This is crucial for companies like Booking.com, which faced a substantial tax bill due to a new rule imposed by the Hawaii Department of Taxation.
Background
The dispute began when the Hawaii Department of Taxation (DoTax) introduced a new administrative rule in 2018, which stated that income from online bookings for transient accommodations is considered "used or consumed" in Hawaii, regardless of where the booking agent is located. This rule subjected Booking.com to general excise taxes (GET) on fees collected for bookings made in Hawaii.
In 2019, Booking.com sought a declaratory judgment in the Circuit Court of the First Circuit to challenge the validity of this rule, arguing that it violated the federal Internet Tax Free Act (ITFA) and the U.S. Constitution. However, in late 2021, DoTax issued a GET assessment of over $19 million to Booking.com for tax years 2010 to 2020, prompting the company to appeal the assessment to the tax appeal court.
In 2022, DoTax filed a motion to dismiss Booking.com's declaratory relief action, claiming that the ongoing tax assessment rendered the case a "controversy with respect to taxes," which was prohibited under Hawaii Revised Statutes (HRS) § 632-1. The circuit court agreed and dismissed the case, a decision that was later upheld by the Intermediate Court of Appeals (ICA).
The Ruling
The Hawaii Supreme Court ultimately ruled in favor of Booking.com, stating that the ICA and circuit court erred in their understanding of the law. The court held that Booking.com does have standing as an "interested person" under HRS § 91-7 and that the prohibition on declaratory judgments regarding tax controversies does not apply to challenges against the validity of tax administrative rules.
The court ruled, "HRS § 632-1’s prohibition on declaratory judgments for controversies with respect to taxes does not prohibit a HRS § 91-7 action for declaratory relief regarding the validity of a tax administrative rule."
This decision effectively overrules a previous case, Hawaii Home Infusion Associates v. Befitel, which had limited the jurisdiction of out-of-state plaintiffs in similar situations. The court clarified that HRS § 91-7 is an optional venue statute that allows any interested person, including out-of-state plaintiffs, to challenge the validity of agency rules.
Impact
The ruling has significant implications for businesses operating in Hawaii, particularly those in the online travel and accommodation sector. It establishes that companies can now challenge the validity of tax rules without fear of being dismissed on jurisdictional grounds, even when facing substantial tax assessments.
This decision also sets a precedent for future cases involving the validity of administrative rules, potentially encouraging more businesses to seek judicial review of tax regulations. The court's interpretation of HRS § 91-7 provides a clearer pathway for companies to protect their interests against potentially burdensome tax rules.
What's Next
Following this ruling, the case has been remanded to the circuit court for further proceedings consistent with the Supreme Court's opinion. It remains to be seen how this will affect the ongoing tax assessment against Booking.com and whether other companies will follow suit in challenging similar tax rules.