In Hawaii, the State Department of Taxation has 15 years to collect outstanding taxes from delinquent taxpayers. They can use means such as levying accounts, garnishing wages, seizing assets, foreclosing homes, and reducing tax liens to a judgment. While you should ultimately turn to a tax attorney if you have concerns about the state taxes you owe, below are a few key answers to common questions about this statute. 

What You Should Know About Hawaii’s Statute of Limitations for State Tax Collection

What is a statute of limitations?

A statute of limitations is a time limit for an entity to file charges against a defendant. After this time limit has passed, your tax attorney can argue in court that the legal right or case is not enforceable. For the State of Hawaii Statute of Limitations on the Collection of Unpaid State Taxes, the limit is 15 years after the assessment date (it used to be unlimited under the old law). The collection statute for IRS taxes is generally 10 years after the assessment date.

Why did Hawaii lawmakers create this statute?

State lawmakers proposed this bill in 2009 because this statute did not exist on the state level up until that point; the final product passed as Act 166. Jessica Swanson, Chair of the Tax Committee of the Hawaii Society of Certified Public Accountants (HSCPA), stated the reasoning for the statute during her testimony in support of a previous version of Act 166—Senate Bill 118—to the State Senate Committee on Judiciary and Government Operations. “Passage of Senate Bill 118 [and later iterations of it] will promote fairness and simplification for the people of Hawaii and enhance administration and collection of tax by the Department of Taxation,” she said. 

While various provisions were added to Senate Bill 118 to create the final Act 166, the core argument for this statute followed through to the final product. The rationale breaks down into two main points:

• It incentivizes the Department of Taxation not to put off collection efforts. This time frame aims to save the State money by not allowing the value of a receivable to diminish and limits money spent on maintaining records.
• It assures taxpayers that they are free from the financial obligation of the outstanding taxes after the allotted time passes. Tax attorneys also argue it protects a client’s right to due process since evidence in their defense will inevitably deteriorate the longer it takes for the legal proceedings surrounding the collection to occur. 

Conference Committee Report No. 5 also notes that Act 166 aims to “deter tax fraud and promote uniformity in the state tax system.”

What taxes are affected by this civil statute?

The statute of limitations covers the following tax provisions:

• Net Income Tax: deductions and taxes factored into one’s gross income
• General Excise Tax: a tax on a business’s gross income
• Transient Accommodations Tax: a tax on gross rental proceeds from a transient accommodation. Transient refers to a person who stays at an accommodation for less than 180 days who has a permanent home elsewhere and does not intend to make said structure a permanent place of residence.
• Use Tax: a tax functionally similar to a sales tax, but applied to goods and services that are sold or bought from a company that is out-of-state
• Fuel Tax: a tax on gasoline and diesel fuel
• Conveyance Tax: a tax on the transfer of property, also known as the real estate transfer tax
• Rental Motor Vehicle and Tour Vehicle Surcharge: a tax per day you rent a motor vehicle or tour vehicle
• Nursing Facility Tax: an industry tax on facilities for elder care
• Insurance Premium Tax: a tax on insurance premiums that varies based on the type of insurance

What is required for the statute of limitations to start?

You must file your taxes for the statute to start, and taxes that require annual returns must be annually submitted. This provision helps to avoid giving this break to those subject to the penalties of tax fraud or tax evasion. From the date of assessment, the Department of Taxation has 15 years to collect the tax by levy or by court proceedings as long as they assess the tax returns within a three-year period also included in Act 166. 

If the Department finds evidence of fraudulent returns, the statute of limitations does not apply, and they can levy or assess the appropriate tax at any time. If you believe you are falsely accused of tax fraud, consult with a tax attorney immediately.

Are there any ways this statute of limitations can extend?

Yes. The Department of Taxation can take action beyond the 15-year limitation period if:

• The taxpayer agrees to suspend the period.
• The taxpayer’s assets are in the control or custody of the court (like during bankruptcy). This provision tacks on the length of this control to the 15-year period plus an additional six months. 
• A period in which an offer in compromise is pending.
• If the taxpayer is out-of-state for a period of more than 180 consecutive days.

Can this statute apply to liabilities assessed before Act 166 was passed?

No, the limitations period is not retroactive. Any liabilities assessed before July 1, 2009, will expire on June 30, 2024, at the earliest. Any taxes assessed after the date the act was passed will expire 15 years from their date of assessment. 

What if the Department of Taxation imposes a levy or a court action that will last beyond the expiration of the statute?

This question was a point of contention during the creation of this bill. Ultimately, state legislators decided that a levy issued before the expiration would still apply after the limitations period ended. The statutory limitations period also does not concern formal legal action to reduce the tax lien to a judgment because the resulting civil action is subject to a new statute of limitations for judgments. Consult your tax attorney if you are subject to either process.

Have any more questions about Hawaii’s Statute of Limitations on State Tax Collection? An experienced tax attorney like Brian Kawamoto can help you understand how your tax problems fit into this legislation. With over 25 years of experience in tax law—including being a civil trial attorney for the IRS, Office of District Counsel in Los Angeles. For more information about how Mr. Kawamoto can help your financial situation, visit his website or call (808) 486-6107.