103-53 Contracts with the State or counties; tax clearances, assignments. (a) All state and county officers and agents making contracts on behalf of the State or any county shall require, as a prerequisite to entering into these contracts, tax clearances from the director of taxation and the Internal Revenue Service to the effect that all tax returns due have been filed, and all taxes, interest, and penalties levied against the contractor or accrued under title 14 that are administered by the department of taxation and under the Internal Revenue Code have been paid. The director of taxation may waive the Internal Revenue Service tax clearance requirement if the director determines that it is in the best interest of the State.

(b) Notwithstanding the provisions under sections 40-57 and 40-58, if a contractor fails to timely file all tax returns and pay all taxes, interest, and penalties due to the State or Internal Revenue Service during the term of a contract, the state or county contracting officer or agent shall immediately assign any progress payment due to the contractor, if any (provided such payment is not subject to any restriction or encumbrance), to the State payable to the department of taxation or to the Internal Revenue Service to the credit of the contractor, whichever the case may be; provided that the department of taxation may first offset its tax debt against the sum owed to the contractor. The state or county contracting officer or agent shall assign as many progress payments as necessary to cover the amount of the tax delinquency.

(c) All state and county contracting officers or agents shall withhold final payment of a contract until the receipt of tax clearances from the director of taxation and the Internal Revenue Service. Notwithstanding sections 40-57 and 40-58, if a contractor fails to provide the requisite tax clearances within six months of the completion date of the contract, the state or county contracting officer or agent shall first notify the department of taxation which in turn will notify the Internal Revenue Service, of amounts payable to the contractor on completed contracts. The department of taxation and the Internal Revenue Service shall, within thirty days, request the contracting officer or agent to offset the amount of taxes due against any payment due to the contractor until the tax debt is paid in full to the State or the Internal Revenue Service or both. No final bill or invoice from the contractor shall be required as a condition to the offset. Any remaining contract balance shall revert to the appropriation under which it was encumbered.

(d) Any assignment of a contract shall require the assignee, as a condition precedent to the assignment, to first obtain a bulk sales certificate if required under section 237-43, and present the certificate, or tax clearance as provided under subsection (a) if a bulk sales certificate is not required, to the state or county contracting officer or agent.

(e) This section shall not apply to:

(1) Any procurement of less than $25,000 or that is considered a small purchase under section 103D-305 and any state or county department contract of less than $25,000;

(2) Emergency purchases for the procurement of goods, services, or construction under section 103D-307 or an emergency or disaster under chapter 127A;

(3) Grants disbursed by a state agency pursuant to chapter 42F or in accordance with standards provided by law as required by article VII, section 4, of the state constitution, or made by the counties pursuant to their respective charters or ordinances;

(4) Contracts or agreements between government agencies;

(5) Contracts or agreements to disburse funds:

(A) To make payments to or on behalf of public officials, officers, and employees for salaries, fringe benefits, professional fees, and reimbursements;

(B) To satisfy obligations required to be paid by law, including fees, judgments, settlements, and other payments for resolving claims;

(C) To make refunds or return funds held by the State or county as trustee, custodian, or bailee;

(D) For entitlement programs, including public assistance, unemployment, and workers' compensation programs, established by state or federal law;

(E) For deposit, investment, or safekeeping, including sums to pay expenses related to their deposit investment, or safekeeping;

(F) For loans under government-administered loan programs; or

(G) To make periodic, recurring payments for utility services;

(6) Rent for the use or occupation of the premises and facilities at Aloha Stadium, the convention center, or any other state or county large spectator events facility; and

(7) Contracts or agreements of the Hawaii health systems corporation and its regional system boards.

(f) This section shall not apply to a contractor if the department of taxation certifies that the contractor is in good standing under a plan in which delinquent taxes, interest, and penalties are being paid to the department of taxation (and the Internal Revenue Service, if applicable) in installments.

(g) Any officer or employee of any governmental agency who intentionally or knowingly violates any provision under this section shall be fined not more than $1,000 or imprisoned not more than one year, or both.

(h) The provisions of subsections (a), (b), (c) and (d) shall not apply to the extent and during the period that the validity of the taxes, penalties, or interest is being contested in an administrative or judicial appeal with the department of taxation or Internal Revenue Service. [L 1939, c 213, 2; RL 1945, 354; RL 1955, 9-46; am L Sp 1959 2d, c 1, 16; HRS 103-53; gen ch 1985; am L 1996, c 314, 1; am L 1997, c 352, 3; am L 2004, c 216, 16; am L 2007, c 290, 15; am L 2014, c 96, 12 and c 111, 5]

 

Attorney General Opinions

 

Tax clearance required even in cases of personal service contracts not admitting of competition. Att. Gen. Op. 62-14.

"Political subdivision" does not include redevelopment agencies created under chapter 53. Att. Gen. Op. 62-14.

 

Case Notes

 

Claims owing to assignee are recognized. 39 H. 308.

 

 

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