The State of Hawaii has sued the state’s largest oil refiner, alleging the company relied on a flawed interpretation of state tax law to skirt paying tens of millions of dollars in taxes annually 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 firms operating in Hawaii’s foreign trade zones.

Par Hawaii
Par Hawaii, which operates the Hele brand gas stations in Hawaii, has been accused of not paying general excise taxes related to its refinery. Stewart Yerton/Civil Beat/2021

“Specific measures, including conspiring with others, have been taken, many of which were conducted knowingly and/or fraudulently with the intent of avoiding and preventing the State from collecting tens of millions of dollars in taxes per year,” the suit alleges. “Deductions have been claimed without foundation and gross misrepresentations have been made regarding the nature and taxability of refined fuel products, other tangible goods and services for years.”

Update: This article has been updated to add a response from Par Hawaii. 

In an email, Eric Wright, senior vice president and lead executive with Par Hawaii, said the company’s current practices are ones that have been followed for years by it and the refinery’s previous owners.

“The allegations in the complaint about our state tax returns relating to our refining business conducted in the Foreign-Trade Zone are inaccurate,” Wright said. “ Our tax practices were established by the State Attorney General more than 50 years ago — before our company began its refining operations in the Foreign-Trade Zone — and has been confirmed by subsequent guidance and rulings by the Attorney General, Hawai‘i Department of Taxation and Hawai‘i Department of Business, Economic Development & Tourism.”

The suit’s outcome also could affect Par contractors. Although none of them are named in the 67-page complaint, the document alleges Par told the contractors that state taxes did not apply to services provided to the company’s refinery, leading the contractors to refrain from paying the taxes. As the lawsuit has unfolded in recent months, the Department of Taxation has issued statements asking taxpayers that failed to pay required taxes in foreign trade zones to do so, although the statements do not refer to the lawsuit.

Attorney General Clare Connors during COVID19 press conference that Governor Ige announced travelers to Hawaii that had a negative COVID-19 pre-test did not have to quarantine. June 24, 2020
Hawaii Attorney General Clare Connors has stepped in as an intervenor in a whistleblower suit, effectively taking the driver’s seat in a matter brought by a Par Hawaii employee. Cory Lum/Civil Beat/2020

The suit was originally filed in May by Theodore Metrose, a Par employee, under Hawaii’s false claims act — a rarely-used law that lets people with knowledge of wrongdoing sue on the state’s behalf. In September, after repeatedly asking the court for more time to review the matter, the Hawaii Attorney General stepped in as an intervenor, effectively taking over as the lead plaintiff in the case, court records show.

Metrose declined to comment.

At the center of the suit is the question of what taxes apply to companies operating in Hawaii’s foreign trade zones, which are established and licensed under federal law and further regulated under state law. Par operates its massive refinery, formerly owned by Tesoro, in a foreign trade zone located at Campbell Industrial Park.

As described by the U.S. Department of Commerce’s International Trade Administration, the zones are designed to encourage international trade by creating special customs procedures for activity in the zones. For instance, according to the administration, items imported into the zones that are then sent out again for export receive duty-free treatment, as if they had never touched U.S. soil.

The issue is how far the tax advantages extend. In September, as the state was contemplating whether to take up Metrose’s case against Par Hawaii, the Department of Taxation issued legal guidance, known as a tax information release, “to clarify the exemption from state taxes in a Foreign Trade Zone (FTZ).

Director of Taxation Isaac Choy, pictured here when he was a legislator in 2017, made clear in a recent document that numerous activities conducted in Foreign Trade Zones are not exempt from general excise taxes. Nathan Eagle/Civil Beat/2017

“Specifically,” the release explained, “this TIR is intended to address the imposition of Hawaii taxes on certain services and contracting in an FTZ.”

The guidance cited a legal opinion issued by the Hawaii Attorney General a week before. The conclusion: Such tax exemptions are limited and apply only to the sale of specific categories of tangible property or merchandise “that are directed into interstate or foreign commerce through a common carrier.”

Services and contracting generally aren’t exempted, the department said. It then went on to detail a list of the types of activities that are specifically subject to Hawaii’s general excise tax, even though they take place in an FTZ. The activities include the sale of goods delivered in an FTZ for consumption inside Hawaii; services related to machinery, vehicles, and other equipment used in an FTZ, and other services used and consumed in an FTZ.

“Taxpayers who filed returns and paid taxes in a manner not consistent with the guidance contained in this TIR are encouraged to apply to the Department’s Voluntary Disclosure Program,” the guidance says.

The department reiterated the message the next month in a press release, saying it had issued guidance clarifying what is subject to Hawaii’s general excise and use tax within the FTZ and urging taxpayers who hadn’t paid properly to amend their returns or apply to the voluntary disclosure program.

The lawsuit, meanwhile, alleges Par Hawaii failed to pay taxes related to numerous business activities conducted in the FTZ that fall into categories the attorney general and tax department say are not exempt.

Joshua Mapanao, a spokesman for the Department of Taxation, declined to say whether the tax information release and press release were prompted by the lawsuit against Par. Isaac Choy, director of the Department of Taxation, did not respond to requests for an interview.

A major player in Hawaii’s energy sector, Par distributes refinery products like ultra-low sulfur diesel for power plants, gasoline, jet fuel and marine fuel across the state, via pipelines on Oahu to terminals at Honolulu International Airport and military bases, as well as Kalaeloa Barbers Point Harbor, where they are put on vessels and shipped to neighbor islands, the company’s website says.

It sells gasoline in Hawaii at gas stations under the Hele and 76 brands.

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