Some Hawai'i residents are having to wait two months or longer to get state tax refunds this year because of a change in the way the Department of Taxation processes returns.

The department had processed 47,500 fewer returns than a year earlier, or 8.9 percent less, as of June 17, meaning taxpayers are not getting their refunds as quickly as they did in 2005.

The state needs to clear the backlog by July 21. After that, it must start paying 8 percent annual interest to residents on unissued refunds. Any interest received by residents will be considered taxable income when they file their 2006 returns.

"The state is very well aware of the cutoff date," said Titin Liem, special assistant to state Tax Director Kurt Kawafuchi. "We plan to have all of the refunds mailed out by that time."

Several taxpayers and tax preparers told The Advertiser the state took longer than normal with tax refunds and that the department had been slow to cash payment checks they sent in.

Kaimuki resident Bobbie Ma-tsumoto, 50, said she called the tax department last week to inquire about a return filed on April 15 and was told processing was taking 10 to 12 weeks. She said that compares poorly to her federal return, which was processed in two weeks.

"This is the first time that has ever happened to us," said Matsumoto. She explained she usually uses the state refund to make a midyear car insurance payment. The delay means she'll have to juggle her budget and probably use credit cards more than she planned during an upcoming vacation.

Liem said the department took about eight to 10 weeks to process April returns last year, when it put a higher priority on reviewing refund returns first and a lower priority on processing returns with payments. The department processed 647,900 individual income tax returns last year.

This year the department is balancing the processing of returns that have refunds and those with payments, she said. Tax refunds are no longer a priority and workers are just processing the returns as they come in. The department can't say exactly how many more returns it needs to process, but it is running behind last year's numbers.

The department also faces a growing workload because the number of income tax returns filed increased due to the state's low unemployment rate. Employees also process general excise tax filings, and the number of general excise licenses issued is growing by 30,000 a year because of Hawai'i's healthy economy, Liem said.

Stan Howard, a Kailua-based tax preparer, said the delays in refunds were noticeable during the tax season and he couldn't rely on the state to acknowledge receipt in a timely manner of tax returns filed electronically, especially as the April 20 state income tax deadline neared.

He said there were other problems, including errors in overpayment and underpayment of returns, which left him wondering if the state was having computer software problems, lacked sufficient staff or wasn't able to give proper training.

"Clients were calling because they hadn't gotten their refund," he said. "It's very frustrating."

Marie Grant, who prepares taxes as office manager of Tax Relief Services on Beretania Street, said she waited two months to get a direct-deposit refund for her own return that was electronically filed in February.

"I was getting worried," Grant said. "Usually e-file takes two weeks to process."

The same complaints were heard at Waianae Coast Tax Service. "It seems like it's a little bit slower," said firm owner Margaret Figueroa.

On the other end of the spectrum, Lowell Kalapa, president of the Tax Foundation of Hawaii, said he was surprised that a general excise tax payment he mailed on April 28 wasn't cashed until June 16, or about seven weeks later. He said the state lost out earning interest on his payment.

"I was worried the check got lost in the mail," Kalapa said.

Liem said the department is confident it will finish processing returns in the next several weeks. The unprocessed returns are now either being prepared for entry into the state's computers or are being typed in, she said.

Things could improve next year after the state completes its transition to technology allowing it to scan most returns it receives in the mail. But the department also faces potential delays, since it will need to sort out issues related to implementing a 4.5 percent excise tax on O'ahu next year to pay for a planned transit system.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.