Tax authorities really have two methods for tax collection. First method is “voluntary”: they send bills, delinquent taxpayer sends in payments. Second method is referred to as “enforced collection” and basically means obtaining assets by power of law. The usual objective of “enforced collection” is to obtain voluntary payments. Sometimes, however, due to circumstances or case history, the goal of enforced collection is simply to obtain as much as possible.
Turning to enforced collection, the easiest form of enforced collection is a bank levy or a wage garnishment. In my opinion, the hardest form of enforced collection is the seizure and sale of personal property. Other measures, including foreclosure of a tax lien upon real property, fit somewhere in between.
Personal property has some inherent problems for seizure. Personal property must be, at a minimum:
You can re-arrange and probably add some additional considerations. For tax authorities, missteps at any stage can lead to legal claims and potential liability.
Professionally, in my view, personal property that is suitable for seizure would be convenient to seize, valuable, and with a ready market for sale at auction. An example would be gold and silver coins. Unsuitable personal property, in my view, is anything voluminous, easily broken or damaged, and with an uncertain market. Most commonly-owned commercial “art” and office equipment would fall into this category.
As discussed in other Insights, in 2009 Hawaii enacted a statute of limitations on collection of delinquent taxes. Since 2009, the State of Hawaii and the Department of Taxation have steadily revised statutory provisions relating to collection of delinquent taxes.
Hawaii Governor Neil Abercrombie signed Senate Bill 1192 into law on April 24, 2013, as Act 44 of 2013. Act 44 amended Hawaii Revised Statutes Section 231-25 to allow the Department of Taxation one hundred and eighty days to sell seized (presumably personal) property. Prior law allowed only 30 days. Furthermore, Act 44 states that if “any person” commences an action relating to the seized property, the “time period set herein shall be tolled during the pendency of any action…until a final order is rendered in that action.”
Act 44 was effective upon its approval, and did not make any other changes to HRS Chapter 231-25. See, Section 3.
The Department of Taxation was a strong supporter of SB 1192 and stated in written testimony that “seizing and selling property is currently not a viable option for the Department.”
There was little to no legislative input into the text of SB 1192, and Committee Reports reflect that the Legislature largely adopted the reasoning (and much of the written testimony) of the Department of Taxation. See, Senate Report 501 and House Report 1462.
The changes to Section 231-25(b)(7)(C) were significant mainly because it demonstrated that the Department of Taxation considers potential property seizures and sales as part of its delinquent tax collection arsenal.
Second, in terms of a potentially elapsing statute of limitations, Act 44 could serve to greatly extend a collection proceeding otherwise subject to the statute of limitations.
The new text of Section 231-25(b)(7)(C) is likely to fall well short of its intended impact as a tool for collection. The authors could have undertaken to modernize the entirety of Section 231-25, or at least of 231-25(b)(7), in a way that would have increased the effectiveness of the Department and enhanced the rights of a delinquent taxpayer. Instead, narrow changes were made. An example of this is in Section 231(b)(7)(B), which has provisions requiring the delinquent taxpayer’s consent to anyone other than a sheriff or police officer assisting in the sale of the seized property and limits the fee for the sheriff (or other person) to 10% of the gross proceeds of sale. Such a provision is likely to be counterproductive in many instances (for example, relatively small value seizures.)
Currently, the Department of Taxation has no administrative rules relating to HRS 231-25. It will be interesting to see whether rules are proposed and adopted, and any move in that direction would be a further sign of an increased interest in property seizures as a delinquent tax enforcement tool.
Persons facing enforced collection should consult with appropriate tax professionals to meaningfully evaluate their situation. This article is only intended as an overview and should not be considered as, or relied upon, as legal advice.