RELATING TO TAXATION.

SB3172

THE SENATE

S.B. NO.

3172

THIRTY-THIRD LEGISLATURE, 2026

STATE OF HAWAII

A BILL FOR AN ACT

relating
to taxation
.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

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SECTION 1.
�
The
legislature finds that the State's cost of living is exacerbated when taxpayers
face avoidable, long-running tax burdens that can unnecessarily strip household
resources and home equity.
�
The
legislature further finds that taxpayers may remain subject to outdated tax
enforcement because tax liens may continue to encumber real property even after
the intended fifteen-year collection limitation, taxpayers may be audited for
non-filed returns over very long periods when records are no longer reasonably
available, and the State's offer in compromise program is underutilized,
leaving financially distressed taxpayers trapped in liabilities that continue
to grow with interest.

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Accordingly, the purpose of this Act is to
improve affordability by aligning tax administration with reasonable limitation
periods, ensuring tax liens do not linger beyond enforceability, limiting
excessively old non-filer audit lookback periods, and requiring meaningful
consideration of offers in compromise so that uncollectible or hardship cases
can be resolved efficiently.

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SECTION 2.
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Section 231-3, Hawaii Revised Statutes, is amended to read as follows:

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"
�231-3
�
Department, general
duties and powers.
�
The department of
taxation shall have the following duties and powers, in addition to any others
prescribed or granted by this chapter:

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(1)
�
Assessment:
�
To make any assessment by law required to be
made by the department;

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(2)
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Collections:
�
To be responsible for the collection of all
taxes imposed under title 14, except those which by law are to be collected by
county treasurers, and for such other duties as are provided by law;

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(3)
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Construction
of revenue laws:
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To construe the tax and
revenue laws, the administration of which is within the scope of the
department's duties, whenever requested by any officer acting under those laws,
or by an interested person;

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(4)
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Enforcement
of penalties:
�
To see that penalties are
enforced when prescribed by any tax or revenue law of the State (the
administration of which is within the scope of the department's duties) for
disobedience or evading of its provisions, and to see that complaint is made
against persons violating any such law; in the execution of these powers and
duties the department may call upon the attorney general or any of the attorney
general's deputies, including the county attorneys or public prosecutors, whose
duties it shall be to assist in the institution and conduct of all proceedings
or prosecutions for penalties and forfeitures, liabilities, and punishments for
violation of the laws administered by the department;

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(5)
�
Forms:
�
To prescribe forms to be used in or in
connection with any assessment, including forms to be used in the making of
returns by taxpayers or in any other proceedings connected with the assessment,
and to change the same from time to time as deemed necessary;

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(6)
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Inspection,
examination of records:
�
To inspect and
examine the records of all public officers without charge, and to examine the
books and papers of account of any person for the purpose of enabling the
department to obtain all information that could in any manner aid the
department in discharging its duties under any tax law;

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(7)
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Recommendations
for legislation:
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To recommend to the
governor any amendments, changes, or modifications of the laws as may seem
proper or necessary to remedy injustice or irregularity in taxation or to
facilitate the assessment of taxes;

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(8)
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Report
to governor:
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To report to the governor
annually, and at such other times and in such manner as the governor may
require, concerning the acts and doings and the administration of the
department, and any other matters of information concerning taxation as may be
deemed of general interest;

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(9)
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Rules:
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To adopt such rules as the department may
deem proper effectually to carry out the purposes for which the department is
constituted and to regulate matters of procedure by or before the department;

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(10)
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Compromises:
�
With the approval of the governor, to
compromise any claim where the tax exceeds $50,000 (exclusive of penalties and
interest) arising under any tax law the administration of which is within the
scope of the department's duties, and to compromise any tax claim where the tax
is $50,000 or less (exclusive of penalties and interest) without seeking the
approval of the governor; provided that the director shall have the discretion
to seek the approval of the governor to compromise any tax claim where the
director deems it appropriate; and in each case the department shall post each
proposed compromise, as set forth in subparagraphs (A) to (D), on the
department's internet website for five calendar days before the director signs
the compromise, and there shall be placed on file in the department's office a
statement of:

���������
(A)
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The
name of the taxpayer and the amount and type of tax assessed, or proposed to be
assessed;

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(B)
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The
amount of penalties and interest imposed or which could have been imposed by
law with respect to the amount of tax assessed, as computed by the department;

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(C)
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The
total amount of liability as determined by the terms of the compromise, and the
actual payments made thereon with the dates thereof; and

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(D)
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The
reasons for the compromise.

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The department shall accept,
evaluate, and make a written determination on an offer in compromise submitted
in accordance with State law without categorically refusing to consider an
offer solely because the tax exceeds $50,000.
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For an offer in compromise requiring the governor's approval, the
department shall transmit the offer and the department's written recommendation
to the governor within thirty calendar days after the offer is deemed complete
by the department.
�
The department shall
provide the taxpayer written notice of acceptance, denial, or other disposition
within one hundred eighty calendar days after the offer is deemed complete by
the department, unless the taxpayer agrees in writing to an extension.

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Notwithstanding the provisions of any
law making unlawful the disclosure of tax returns or return information,
statements on file and included in the department's internet website in respect
of compromises shall be open to public inspection;

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(11)
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Retroactivity
of rulings:
�
To prescribe the extent, if
any, to which any ruling, rule, or construction of the tax laws, of general
application, shall be applied without retroactive effect;

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(12)
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Remission
of delinquency penalties and interest:
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Except in cases of fraud or wilful violation of the laws or wilful
refusal to make a return setting forth the information required by law (but
inclusion in a return of a claim of nonliability for the tax shall not be
deemed a refusal to make a return), the department may remit any amount of
penalties or interest added, under any law administered by the department, to
any tax that is delinquent, in a case of excusable failure to file a return or
pay a tax within the time required by law, or in a case of uncollectibility of
the whole amount due; and in that case there shall be placed on file in the
department's office a statement showing the name of the person receiving the
remission, the principal amount of the tax, and the year or period involved;

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(13)
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Closing
agreements:
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To enter into an agreement
in writing with any taxpayer or other person relating to the liability of the
taxpayer or other person, under any law the administration of which is within
the scope of the department's duties, in respect of any taxable period, or in
respect of one or more separate items affecting the liability for any taxable
period; the agreement, signed by or on behalf of the taxpayer or other person
concerned, and by or on behalf of the department, shall be final and conclusive,
and except upon a showing of fraud or malfeasance, or misrepresentation of a
material fact:

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(A)
�
The
matters agreed upon shall not be reopened, and the agreement shall not be
modified, by any officer or employee of the State; and

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(B)
�
In
any suit, action, or proceeding, the agreement, or any determination,
assessment, collection, payment, refund, or credit made in accordance
therewith, shall not be annulled, modified, set aside, or disregarded;

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(14)
�
Other
powers and duties:
�
In addition to the
powers and duties contained in this chapter, the powers and duties contained in
other chapters of the law under title 14 administered by the department for
levying, assessing, collecting, receiving, and enforcing payments of the tax
imposed thereunder, and otherwise relating thereto, shall be severally and
respectively conferred, granted, practiced, and exercised for levying,
assessing, collecting, receiving, and enforcing payment of the taxes imposed
under the authority of those chapters as far as the provisions are consistent
with the express provisions of those chapters, as fully and effectually to all
intents and purposes as if the same powers and authorities were repeated in
those chapters, with reference to those taxes, and all of the provisions shall
be applied, construed, deemed, and taken to refer to the taxes imposed under
the authority of those chapters, in like manner."

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SECTION 3.
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Section 231-33, Hawaii Revised Statutes, is amended to read as follows:

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"
�231-33
�
Tax debt due the State; lien.
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(a)
�
Within the meaning of this section:

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(1)
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The
terms "mortgagee", "pledgee", and "purchaser" do
not include any person to whom property or an interest in property is conveyed
(A) as security for or in satisfaction of an antecedent or pre-existing debt of
a debtor who is insolvent within the meaning of the Bankruptcy Act, or (B) as
trustee, assignee, or agent for the benefit of one or more creditors, other
than mortgage bondholders.

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(2)
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The term "motor
vehicle" means any self-propelled vehicle to be operated on the public
highways.

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(3)
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The interest of a party,
if required to be recorded or entered of record in any public office in order
to be valid against subsequent purchasers, does not arise prior to the time of
such recording or entry of record.

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(4)
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An employer or other
person who is required by any tax law to withhold tax at the source, or to
collect a tax, and who is made liable for the tax if the employer or other
person does not fulfill the employer's or other person's duties in that regard,
shall be deemed a person liable for the tax.

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(5)
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The term "real property" includes
leasehold or other interest in real property and also any personal property
sold or mortgaged with real property if affixed to the real property and
described in the instrument of sale or mortgage.

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(b)
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Any state tax that is due and unpaid is a
debt due the State and constitutes a lien in favor of the State upon all
property and rights to property, whether real or personal, belonging to any
person liable for the tax.
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The lien for
the tax, including penalties and interest thereon, arises at the time the tax
is assessed, or at the time a return thereof is filed, or at the time of filing
by the department of taxation of the certificate provided for by subsection (f)
whichever first occurs.
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From and after
the time the lien arises it is a paramount lien upon the property and rights to
property against all parties, whether their interest arose before or after that
time, except as otherwise provided in this section.

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(c)
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The lien imposed by
subsection (b) is not valid as against:

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(1)
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A mortgagee or purchaser
of real property, or the lien of a judgment creditor upon real property, whose
interest arose prior to the recording by the department of the certificate
provided for by subsection (f); or

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(2)
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A mortgagee or purchaser
of a motor vehicle who becomes the legal owner or owner at a time when the tax
lien and encumbrance record provided for by section 286-46 does not show the
lien.

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(d)
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As to tangible personal property, possession
of which is held by a person liable for tax for the purpose of sale to the
public in the ordinary course of the person's business, the lien imposed by
subsection (b) is extinguished as to any such property sold in the ordinary
course of the business by or under the direction of the person to any purchaser
for valuable consideration.
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As to
securities, negotiable instruments, and money, the lien imposed by subsection
(b):

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(1)
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Is
extinguished as to such
property upon passage of title to a person without notice or knowledge of the
existence of the lien, for an adequate and full
consideration
in money or money's worth; and

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(2)
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Is not valid as against a mortgagee or pledgee
for an adequate and full consideration in money or money's worth, who is
located outside the State and takes possession of the property, if at the time
of taking possession of the property the mortgagee or pledgee is without notice
or knowledge of the existence of the lien.
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The mere recording or filing of the certificate provided for by
subsection (f) does not constitute notice for the purposes of this subsection.

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(e)
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Subject to the
provisions of this subsection, the lien imposed by subsection (b) is not valid
as against a mortgagee, pledgee, or purchaser who gives notice to the
department on a form prescribed by it of the mortgage, pledge, or purchase made
or about to be made, with a description of the property encumbered or conveyed
or proposed to be encumbered or conveyed thereby, and whose interest in the
property arises prior to the recording or filing by the department of the
certificate provided for by subsection (f) or within ten days after the
filing.
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If the notice is given the lien
imposed by subsection (b) is valid against the party giving the notice, as to
any taxes set forth in a certificate filed as provided in subsection (f) within
the period of fifteen days after the notice.
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The department may waive all or any part of the period herein allowed.

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(f)
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The department may
record in the bureau of conveyances at Honolulu, or in respect of a lien on a
motor vehicle, file with the county director of finance, a certificate setting
forth the amount of taxes due and unpaid, which have been returned, assessed, or
as to which a notice of proposed assessment has issued.
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The certificate shall identify the taxpayer,
the taxpayer's last known address, the tax or taxes involved, and the date on
which the liability for the tax or taxes was assessed.
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The recording or filing of the certificate
has the effect set forth in this section, but nothing in this section shall be
deemed to require that a certificate recorded or filed by the department must
include the amount of any penalty or interest, in order to protect the lien
therefor.
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The certificate, if recorded
or filed with the county director of finance, shall be entered of record as
provided by law.
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Recordation of the
certificate in the bureau of conveyances shall be deemed, at such time, for all
purposes and without any further action, to procure a lien on land registered
in the land court under chapter 501.
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Any
cost incurred in the filing of the certificate shall be a part of the lien for
the tax therein set forth.

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(g)
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The department may issue a certificate of
discharge of any part of the property subject to the lien imposed by this
section, upon payment in partial satisfaction of such lien, of an amount not
less than the value as determined by the department of the lien on the part to
be so discharged, or if the department determines that the lien on the part to
be discharged has no value.
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The
department shall issue a certificate of discharge as to any liability that has
been satisfied or that has become unenforceable under section 235‑111,
237-40, 237D-9, 238-7, 243-14, 247-6.5, or 251-8.
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Any discharge so issued shall be conclusive
evidence of the discharge of the lien as therein provided.

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(h)
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The lien imposed by subsection (b) may be
foreclosed in a court proceeding or by distraint under section 231-25.

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(i)
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This section shall not apply to a tax levied
by a chapter that contains a specific provision for a lien for the tax levied
by the chapter, any provision in this section to the contrary notwithstanding.

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(j)
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If a lien imposed by subsection (b) is
properly recorded as authorized under subsection (f), and three hundred
sixty-five days have elapsed from the date of recording with no response or
action by the taxpayer against whom the lien was recorded, the director may
apply to the circuit court to have the lien converted into a civil
judgment.
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The circuit court shall issue
a civil judgment for an amount equivalent to the value of the lien.
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If a lien is converted to a civil judgment
under this subsection, interest under section 231-39(b)(4) shall cease to
accrue after the period to collect the unpaid amount has expired under the
applicable statute of limitations or agreement.

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(k)
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Notwithstanding any other law to the contrary,
any
lien arising under this section shall not be enforceable after the underlying
tax liability becomes unenforceable by reason of lapse of time under the
applicable statute of limitations for collection.
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Upon the expiration of the period for lawful
collection of the underlying tax liability, the lien shall be deemed released
by operation of law, and the department shall record, as applicable, a
certificate of release of lien no later than thirty days after the expiration
date.
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The department shall ensure that
any notice of state tax lien filed or recorded pursuant to this section
identifies a self-release date that is not later than the last date on which
lawful collection may occur.
"

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SECTION
4
.
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Section 235-111, Hawaii Revised Statutes, is
amended by amending subsection (c) to read as follows:

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"
(c)
�
Exceptions; fraudulent return or no
return.
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In the case of a false or
fraudulent return with intent to evade tax or liability, or of a failure to
file return, the tax or liability may be assessed or levied at any time;
provided that the burden of proof with respect to the issues of falsity or
fraud and intent to evade tax shall be upon the State[
.
]
; provided
further that, except
in the case of a false or fraudulent return
or with intent to evade tax, the tax shall be assessed, or a proceeding in a court
of competent jurisdiction to collect the tax shall be commenced, without
assessment, no later than six years after the date prescribed for filing the
return.
"

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SECTION 5.
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Section 237-40, Hawaii Revised Statutes, is amended by amending
subsection (a) to read as follows:

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"
(a)
�
General rule.
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The amount of excise taxes imposed by this chapter shall be assessed or
levied within three years after the annual return was filed, or within three
years of the due date prescribed for the filing of the return, whichever is
later, and no proceeding in court without assessment for the collection of any
of the taxes shall be begun after the expiration of the period.
�
Where the assessment of the tax imposed by
this chapter has been made within the period of limitation applicable thereto,
the tax may be collected by levy or by a proceeding in court under chapter 231;
provided that the levy is made or the proceeding was [
begun
]
commenced

within fifteen years after the assessment of the tax[
.
]
; provided
further that, in the case of failure to file an annual return, except in the
case of a false or fraudulent return or with intent to evade tax, the tax shall
be assessed or levied, and any proceeding in a court of competent jurisdiction without
assessment for the collection of any of the taxes shall be commenced no later
than six years after the due date prescribed for the filing of the return.
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For any tax that has been assessed before
July 1, 2009, the levy or proceeding shall be barred after June 30, 2024.

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Notwithstanding
any other provision to the contrary in this section, the limitation on
collection after assessment in this section shall be suspended for the period:

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(1)
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The taxpayer agrees to suspend the period;

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(2)
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The assets of the taxpayer are in control or
custody of a court in any proceeding before any court of the United States or
any state, and for six months thereafter;

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(3)
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An offer in compromise under section 231-3(10)
is pending;

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(4)
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During which the taxpayer is outside the State
if the period of absence is for a continuous period of at least six months;
provided that if at the time of the taxpayer
'
s
return to the State the period of limitations on collection after assessment
would expire before the expiration of six months from the date of the taxpayer
'
s
return, the period shall not expire before the expiration of the six months;
and

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(5)
�
An appeal of the assessment is pending before
the taxation board of review or the tax appeal court, beginning on the date the
notice of appeal is filed and concluding on the date a final decision is issued
or the case is withdrawn or dismissed."

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SECTION 6.
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This Act does not affect rights and duties that matured, penalties that
were incurred, and proceedings that were begun before its effective date.

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SECTION 7.
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Statutory material to be repealed is bracketed and stricken.
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New statutory material is underscored.

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SECTION 8.
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This Act shall take effect on January 1, 2027, and shall apply to
taxable years beginning after December 31, 2026.

INTRODUCED BY:

_____________________________

Report Title:

DoTAX;;
Income Tax; General Excise Tax; Offers In Compromise; Liens; Collections;
Proceedings; Statute of Limitations

Description:

Requires
the Department of Taxation to accept, evaluate and make determinations on
offers in compromise under certain conditions, including for offers requiring
the Governor's approval.
�
Amends the income
tax and general excise tax statute of limitation periods for collection or
commencement of proceedings to six years, except in cases of false or
fraudulent returns, or intent to evade tax.
�

Effective 1/1/2027.

The summary description
of legislation appearing on this page is for informational purposes only and is
not legislation or evidence of legislative intent.