The State of Hawaii has sued the state’s largest oil refiner, alleging the company relied on a misinterpretation of state tax laws to avoid paying tens of millions of dollars taxes each year for an unknown number of years.
The lawsuit, a whistleblower complaint filed in Honolulu circuit court against Par Hawaii Refining, could have broad implications for companies operating in Hawaii’s foreign trade zones.
“Specific steps, including conspiring with others, have been taken, many of which were carried out knowingly and / or fraudulently with the aim of avoiding and preventing the state from collecting tens of millions of dollars from ‘taxes per year,’ the lawsuit alleges. “Baseless deductions have been claimed and gross misrepresentation made regarding the nature and taxability of refined petroleum products, other tangible goods and services for years.”
The outcome of the lawsuit could also affect the subcontractors. While none of them are named in the 67-page complaint, the document alleges that Par told contractors that state taxes did not apply to services provided to the company’s refinery, which has led entrepreneurs to refrain from paying taxes. As the trial has unfolded in recent months, the Tax Department has issued several statements asking taxpayers who have not paid the required taxes in foreign trade zones to do so, although the statements do not refer At the trial.
The lawsuit was originally filed in May by Theodore Metrose, an employee of Par, under Hawaii’s Misrepresentation Act – a rarely used law that allows those with knowledge of wrongdoing to sue on behalf of l ‘State. In September, after repeatedly asking the court for additional time to consider the case, the Hawaii attorney general stepped in as an intervener, effectively taking over as the lead plaintiff in the case, according to the reports. court records.
Metrose declined to comment. Par Hawaii executives did not respond to calls for comment.
Central to the lawsuit is the question of what taxes apply to businesses operating in Hawaii’s foreign trade zones, which are established and licensed under federal law and governed by state law. Par operates its massive refinery, formerly owned by Tesoro, in a foreign trade zone located in the Campbell Industrial Park.
As described by the International Trade Administration of the United States Department of Commerce, zones are designed to encourage international trade by creating special customs procedures for activities in the zones. For example, according to the administration, items imported into the zones and then re-shipped for export receive duty-free treatment, as if they had never touched US soil.
The question is how far the tax benefits extend. In September, as the state considered whether or not to take over the Metrose v Par Hawaii case, the Department of Taxation issued legal advice, known as a tax information release, “to clarify the tax exemption. state in a foreign trade zone (FTZ).
“Specifically,” the statement said, “this TIR is intended to address Hawaii’s imposition of taxes on certain services and the contracting in a free zone.”
The guidelines cited a legal opinion issued by Hawaii’s attorney general a week earlier. Conclusion: Such tax exemptions are limited and only apply to the sale of specific categories of tangible property or merchandise “which are directed to interstate or foreign commerce through a common carrier”.
Services and contracts are generally not exempt, the ministry said. He then detailed a list of the types of activities that are specifically subject to Hawaii’s general excise tax, even if they take place in a free zone. Activities include the sale of goods delivered to a free zone for consumption in Hawaii; services relating to machinery, vehicles and other equipment used in a free zone, and other services used and consumed in a free zone.
“Taxpayers who have filed returns and paid taxes in a manner inconsistent with the guidelines contained in this TIR are encouraged to enroll in the ministry’s voluntary disclosure program,” the guideline says.
The department reiterated the message the following month in a press release, saying it had issued guidelines clarifying what is subject to Hawaii’s excise and general use tax in the free zone and urging taxpayers who had not paid for property to change their statements or to request disclosure program.
The lawsuit, meanwhile, alleges that Par Hawaii failed to pay taxes related to many of the business activities conducted in the FTZ that fall into categories that the attorney general and the tax department say are not exempt. .
Joshua Mapanao, spokesman for the Department of Taxation, declined to say whether the tax information release and press release were motivated by the lawsuit against Par. Isaac Choy, director of the Tax Department, did not respond to requests for an interview.
A major player in Hawaii’s energy sector, Par distributes refinery products such as ultra-low sulfur diesel for power plants, gasoline, jet fuel and marine fuel across the state, via pipelines on Oahu to the terminals at the Honolulu International Airport and military bases, as well as the Port of Kalaeloa Barbers Point, where they are placed on ships and shipped to neighboring islands, the company’s website says.
It sells gasoline in Hawaii at gas stations under the Hele and 76 brands.