Hawaii’s top tax official is pushing to make sure actors appearing in movies and television shows produced in Hawaii pay their fair share of state taxes, and two key lawmakers have picked up the cause, setting the stage for an examination of Hawaii’s high-profile motion picture tax incentive during the 2022 legislative session.

Big budget television shows like CBS’s “Hawaii Five-0” and movies like Amblin Entertainment’sJurassic World” spend hundreds of millions of dollars in the local economy each year, renting equipment, booking hotel rooms and employing an army of local film crew and actors.

But the spending comes at a cost to taxpayers. For every dollar spent on a production, Hawaii pays up to 20 cents to 25 cents, with a cumulative cap of $50 million per year. That resulted in $38.9 million paid to productions in 2019, the last year for which the tax department has data.

Television productions like “Magnum P.I.,” shown here in 2018, have a big impact on Hawaii’s economy. But lawmakers wonder if they are paying their fair share of taxes. Flickr: SexyAndHotTv .

Now, Isaac Choy, the director of the Department of Taxation, is seeking to change Hawaii’s tax laws to make sure the state collects all of the revenue due from the productions. That includes general excise taxes that Choy says out-of-state talent and their accountants often simply don’t know they’re supposed to pay.

“We’re giving away $50 million a year, and it’s my job to make sure the giveaway produces the most benefit for the state,” Choy said.

To that end, the proposed legislation would require productions to pay the taxes directly to the department rather than relying on actors and their accountants to do so.

Hawaii Sen. Glenn Wakai, author of the Senate bill, said a main reason for the provision is the way big-name actors and producers often get paid.

Instead of being on the payroll as employees, film industry professionals often set up separate companies – typically limited liability corporations or S corporations – that get paid for providing services to the productions, Wakai said.

That’s typically the professional service of the actor, director or other talent, who is the company’s sole owner. The companies are called “loan-out companies,” Wakai explained, because they lend out the services of the talent.

State Department of Taxation Director Isaac Choy, shown here when he was a legislator in 2017, said out-of-state accountants failing to advise clients on Hawaii’s unique general excise tax requirements is a “huge problem.” Nathan Eagle/Civil Beat/2017

There’s nothing inherently wrong with loan-out companies, which are used by all kinds of entertainers and professional athletes, Choy said.

The problem comes when the companies have their tax returns prepared. Accountants outside of Hawaii often don’t know about Hawaii’s general excise tax – Hawaii is the only state with such a tax  – and thus don’t pay it, Choy said.

“The concept of the GE tax is foreign to, I would say, all mainland accountants,” said Choy, who is a CPA and former state representative. “This is a huge problem.”

State Rep. Sean Quinlan, chairman of the House Economic Development Committee — who is drafting a House version of the measure — said part of the Legislature’s work during the session will be to determine, if possible, how much money is at stake.

“It could be substantial,” Quinlan said. “It could be a material amount of money. But that’s what we need to find out.”

Regardless, Wakai said capturing the lost tax revenue is overdue.

“It’s crazy that we allowed it to go on for so long,” said Wakai, who chairs the Senate Economic Development Committee.

Former Actors’ Guild Chief: Bill Should Be Better Researched

How the industry responds remains to be seen. David Farmer is a Honolulu attorney and actor who served eight years as president of the local chapter of SAG-AFTRA, the union of professional actors.

On its face, Farmer said, the bill doesn’t seem to pose a threat of driving production from Hawaii — an ever-present concern when policymakers seek to change laws affecting the highly mobile and budget-conscious industry. In fact, Farmer said, overall the measure appears likely to have the biggest impact on highly paid actors who have the power to negotiate payment of the tax into their contracts.

“I guess it would catch some of the bigger fish, but in the scheme of things, it’s probably loose change,” he said.

At the same time, Farmer said, the industry certainly will want to study the legislation once it is filed.

“I just think, as with many things the Legislature does, it should be better researched,” Farmer said.

Georja Skinner oversees the Hawaii Film Office as the chief of the Department of Business, Economic Development and Tourism’s Creative Industries Division. She said it’s important to show the value of the industry to the community and economy.

“This is going to be an important session when we become as transparent as possible,” she said.

Trade-offs For Industry Are On The Table

Other proposed changes would alter the way officials certify that productions are eligible for tax credits. DBEDT now handles that function. A proposal would have the tax department take over that job and require reporting on how much in tax credits particular productions receive.

Wakai said such transparency is appropriate, given the unusual support the industry receives from the state. Among industries getting subsidies, only the renewable energy industry, which received $60.3 million in 2019, got more, according to the tax department.

“You look at the tourism industry, and the money goes in the opposite direction,” Wakai said. “We squeeze everything we can from them.”

Still, Wakai and Quinlan both said there could be something for the industry too. For example, Wakai noted his bill would extend the tax credit program to 2032 from 2025, when it is now set to expire.

Quinlan said lawmakers also might be willing to lift the $50 million annual cap on tax credits this session. But Quinlan said lawmakers first need to gather more information from an industry that often wants keep things close to the vest.

“We can’t increase the cap until we have the data,” he said.

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