In the Matter of the Tax Appeal of HAWAIIAN AIRLINES, INC., Petitioner/Plaintiff-Appellant, vs. DEPARTMENT OF TAXATION, Respondent/Defendant-Appellee.

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The above-captioned case has been set for oral argument on the merits at:

Supreme Court Courtroom
Ali‘iōlani Hale, 2nd Floor
417 South King Street
Honolulu, HI 96813

The oral argument will also be livestreamed for public viewing via the Judiciary’s YouTube channel at YouTube.com/hawaiicourts and ʻŌlelo Community Television olelo.org/tv-schedule/.

Attorney for Petitioner/Plaintiff-Appellant HAWAIIAN AIRLINES, INC.:

     Thomas Yamachika of Aloha State Tax

Attorneys for Respondent/Defendant-Appellee DEPARTMENT OF TAXATION:

     Nathan S.C. Chee and Mary Bahng Yokota, Deputy Attorneys General

NOTE:     Order accepting Application for Writ of Certiorari, filed 07/08/24.

COURT:    Recktenwald, C.J., McKenna, Eddins, Ginoza, and Devens,

Brief Description:

This is an appeal from a complaint filed in the Tax Appeal Court for the State of Hawaiʻi (“tax court”).  The case stems from a contract between Hawaiian Airlines (“Hawaiian”) and Boeing.  Hawaiian agreed to indemnify Boeing for any taxes Boeing might incur for maintenance supply parts it sold to Hawaiian.  Boeing apparently did not remit Hawaiʻi use or general excise taxes on sales of maintenance parts to Hawaiian and other entities.  The Department of Taxation (“the Department”) conducted an audit of Boeing for the years 2013-2018.  Boeing claimed the general excise tax (“GET”) Aircraft Maintenance Exemption (“exemption”) of Hawaiʻi Revised Statutes (“HRS”) § 237-24.9 (2017) applied to these sales of maintenance parts.

A January 2020 inter-office memorandum of the Department’s auditor recommended against application of the exemption.  Boeing then shared with the Department a letter it received from Hawaiian explaining why it thought the exemption applied.  In a September 24, 2020 email, the auditor indicated disagreement but welcomed further questions.  On May 21, 2021, the Department sent Boeing a letter indicating the audit had been closed and also sent Boeing a notice of proposed assessment, which included an October 2019 Taxpayer Bill of Rights form.

Boeing then asked to pay GET corresponding to parts it sold to Hawaiian.  On June 9, 2021, Hawaiian remitted payment of $1,624,482.75, along with a letter of protest under HRS § 40-35 (2009).  Hawaiian then filed this lawsuit on June 10, 2021, alleging jurisdiction under HRS § 40-35, and seeking a declaration that GET was not owed due to the exemption and seeking a refund.  The Department issued its final assessment on July 26, 2021.

The Department then filed a motion to dismiss this lawsuit.  The tax court granted dismissal based on this court’s opinion in Grace Business Development Corp. v. Kamikawa, 92 Hawaiʻi 608, 994 P.2d 540 (2000).  In Grace, a company made a payment under protest, citing HRS § 40-35, after receiving notice from the Department that it was commencing an audit.  We ruled HRS § 40-35 requires an “actual dispute” before a taxpayer can make a payment under protest and bring an action for recovery of payments made; we held “that, in the absence of a formal administrative decision by the Director, Grace’s payment under protest did not represent an actual dispute within the meaning of HRS §40-35.”  The Intermediate Court of Appeals affirmed.

In its application for a writ of certiorari, Hawaiian argues that:  (1) the final assessment cannot be the only evidence of a formal administrative decision supporting tax court jurisdiction under HRS § 40-35; (2) Grace allowed lower courts to determine whether an official agency communication is such a decision; (3) the administrative exhaustion requirement cannot be a hard jurisdictional rule because this court’s precedent tolerates some error; and (4) where the Department’s own guidance of payments under protest fails to advise taxpayers of an administrative exhaustion requirement, the Department should not be allowed to argue that lack of exhaustion mandates lower court dismissal.