THE ERROR: Hawaii paid the federal levy
for years, unaware the state is exempt
THE RESULT: The state filed for refund, but
could go back only three years, $600,000By Rob Perez
Star-BulletinThe state has squandered possibly millions of dollars because it paid a federal gasoline tax for years even though it didn't have to.
Once the oversight was discovered near the end of 1996, the state sought refunds for three past years -- the most it could seek under federal guidelines -- and is getting back roughly $600,000, according to Harold Sonomura, the Department of Accounting and General Services administrator who discovered the oversight.
But the refunds covered only the 18-cents-a-gallon federal tax paid on the state's bulk gas purchases from 1994-96, not the amounts paid on thousands of gallons it bought at retail stations, Sonomura said. Those transactions also would have qualified for the exemption available to state and local government entities.
The refunds likewise didn't cover gas purchases during the unknown number of years before 1994 that the state failed to claim the exemption, agency officials said. One possible scenario: the state has paid the tax for nearly 40 years.
Asked how much the tax oversight cost taxpayers, Sonomura said, "I'm afraid to think about it. I think we lost millions."
The tax blunder is particularly disturbing because it went undetected as the state several years ago was entering its worst fiscal crisis ever, a crisis that continues today and has resulted in service cuts and scores of public-worker layoffs.
Sonomura said he didn't know why the state had failed to claim the exemptions. During the boom years when state coffers were flush, no one probably paid close attention to the purchases, he said.
Lloyd Unebasami, the executive branch's chief procurement officer, also was unsure why the exemptions weren't claimed or how long the state failed to do so.
"The only thing I can think of was no one (within the department) knew about it," Unebasami said.
He guessed that the oversight probably dated to when the federal law was created authorizing the exemptions, but he didn't know when that was.
An Internal Revenue Service spokesman in Seattle said the law dates to at least 1956 -- three years before Hawaii became a state.
Sonomura said he discovered the costly oversight in December 1996 after the department, looking for ways to save money, asked him to review the state's system for buying gas. DAGS handles the contracting for most state agencies needing gas.
Sonomura, an administrator who oversees a large fleet of government vehicles, said he previously had not been involved with developing the state's bulk-buying gasoline contracts.
The oversight was just one sign suggesting that the state was asleep at the wheel when buying gas in years past.
And at least one critic claims the state still isn't getting the best deals for taxpayers.
"They just don't know what they're doing," mainland petroleum consultant Tim Hamilton said of state officials. "This lack of knowledge about buying gasoline has resulted not only in taxpayers paying a heck of a lot more than they should be, but in the federal government profiting greatly."
Until the state, at Sonomura's direction, implemented a new purchasing system last year, it didn't have a supply contract to cover the many instances when eligible state workers buy gasoline at retail service stations instead of filling up at state-owned pumps.
Those workers until last summer purchased gas at any station, paying the same price as any consumer, Sonomura and Unebasami said.
The old system was so decentralized that each agency had its own policy for getting gas, which meant workers from departments without pumps sometimes paid the much-higher street prices instead of going to other departments that had pumps, Unebasami said.
In July, however, the state awarded a contract to BHP Hawaii that enables the workers to purchase discounted gas with special credit cards at BHP's Gas Express stations. Now workers must get gas at the state pumps or Gas Express, Unebasami said.
Including the federal tax exemption, the state is saving about 50 cents a gallon, or $150,000 a year, on its retail gas purchases, based on a buying rate of roughly 300,000 gallons annually, Sonomura said.
The changes made last summer also included new contract requirements for the state's supplier of bulk-purchased gas.
Before the changes, Sonomura said, the state didn't have an independent benchmarking system for double-checking the per-gallon price the supplier was charging.
Now it uses a Honolulu index published by Lundberg Survey, an independent price-tracking publication popular in the industry.
But the way the state benchmarks its prices -- a method different from what is used by federal agencies in Hawaii and most government agencies on the mainland -- has come under fire by Hamilton.
The state issues its contract in the summer, when prices nationally are highest, uses a base price that is artificially high and pegs any changes to a Honolulu index that likewise is artificially high, Hamilton said. "This is absolutely ridiculous," he said. "You pick the worst time to start the contract and tie it to the worst imaginable price you could find."
But Sonomura defended the pricing method, saying Hamilton wasn't familiar with the unique circumstances in Hawaii's market.
If the state were to structure its contract the way Hamilton suggests, for instance, it wouldn't get bidders for the neighbor islands because the smaller suppliers there couldn't meet the contract requirements, Sonomura said.
The state's new contract method, he added, provides a good price for this market.
But in the wake of recent Star-Bulletin articles questioning the methods used by the state and county, the two governments are considering buying gas jointly as a way to get even better deals, Sonomura said. "We're trying hard to save money for the state."
