A new tax enforcement squad armed with new powers is being organized to generate millions in needed revenues for depleted state coffers.

The initiative allows the state Department of Taxation to crack down on those who may be operating so-called "cash-economy" businesses, such as many lunch wagons, some mom-and-pop operations, at swap meets and farmers markets or even the Girl Scouts.

Tax officials capable of going undercover will be able to levy fines for a variety of newly created offenses ranging from failure to use a cash register and providing receipts to offering cash discounts.

Act 134, which took effect during the summer, also authorizes tax officials to get warrants and examine business records without notice. The tax department is now trying to fill several positions in its new Special Enforcement Section.

State officials say the crackdown could generate nearly $100 million in general excise tax revenue during the next three years. However, it's unclear whether the initiative will bring in what has been projected, and there are concerns the new powers could lead to abuse.

"I think the laws we passed were a little draconian and will probably have to be scaled back after the first incident of abuse," said state Rep. Isaac Choy, D-24th (Mänoa).

Hawaii businesses and nonprofits are subject to the state's excise tax. However, one-time events such as a garage sale or transactions like the individual sale of a used car are exempt.

The goal of the new tax program is to close an estimated $2 billion "tax gap," the amount of unreported and unpaid taxes annually statewide. About half that amount is attributed to the cash economy, said state tax Director Kurt Kawafuchi. Getting cash-based businesses to pay taxes also is a fairness issue, Kawafuchi said.

"It's unfair for all the businesses that are paying their fair share to have people competing who are not paying their fair share and can charge a lower price because they're not paying their fair share," he said.

WHO IS TARGETED

Under the law, a cash-based business is defined as a person who operates a for-profit or not-for-profit business that meets one or more of these qualifications:

• Doesn't accept checks or use electronic payment devices for business transactions.

• Has no fixed and permanent main place of business.

• Fails to have a license or permit as required by law.

• Or substantially under-reports tax liability on a tax return.

The new laws targeting cash-economy businesses include one that makes it illegal to conduct more than 10 transactions a day without a cash register or without issuing a receipt. That likely means many lunch wagons, farmers markets and Aloha Stadium Swap Meet vendors, and certain small businesses that aren't complying with the law.

Others that may be found in violation are fundraising groups, such as the Girl Scouts of America and others that solicit sales at shopping centers or door to door, said Choy, a partner at Manoa Consulting Group CPAs.

Choy's question for the Tax Department: "How many Girl Scouts are you going to arrest this year? Because when you're there for the first one, I want to be there. Ten transactions and you need a register."

The Tax Department plans to focus on major violators, including potential swap meet and Waikíkí vendors rather than groups such as the Girl Scouts, Kawafuchi said.

"It's not going to be the cases we're going to really pursue," he said. "Generally, it's going to be your normal businesses or it could be also other activities where there's money or a lot of cash and they're not reporting it.

"We're going to be looking for the egregious cases, and we plan to be smart about how we find them."

Girl Scouts spokeswoman Tammy Sumida Yamanoha said the group will follow the intent and spirit of the law.

PRACTICALITY ISSUE

Ashley Harding, owner of organic bath product maker Bubble Shack, said he supports efforts to get businesses to pay their fair share of taxes. However, rules such as requiring cash registers aren't practical at venues such as the swap meet.

"There's no electricity provided or there's no option to purchase electricity, so you would have to supply your own generator," said Harding, whose company generates about 5 percent of its sales from the swap meet. "How are they going to enforce that? There's no way they can enforce that."

STIFF PENALTIES

The penalty for failing to record transactions with a register or to issue receipts is capped at $2,000, as is the fine for failing to keep adequate books and records. Businesses and individuals also must be able to produce a tax license on demand or face a penalty of up to $1,000. Possessing currency for tax avoidance purposes could be subject to a $3,000 fine.

Business determined to be cash-based will be subject to higher fines and penalties, Kawafuchi said.

The Tax Department's initial efforts include educational outreach with tax professionals and various industries. The department plans to staff a new Special Enforcement Section with nine people. According to the department's Web site, there are openings for a civil investigator, a supervisor investigator and administrative rules specialists.

It is anticipated that much of the special section's duties will be undercover or surveillance work.

The Tax Foundation of Hawaii expressed concern that the Tax Department's new powers could wrongly be used against innocent taxpayers.

"The Tax Department should have a legitimate concern that taxes are being evaded before they do something like this — just out and grab somebody's books (and) go through them," said Lowell Kalapa, president of the foundation. "They need to have more substantiation first.

"You're innocent until proven guilty — that's our whole judicial system in the United States, and this isn't reflective of that."

Those testifying at the Legislature in support of the program included the Subcontractors Association of Hawaii. The Hawaii Association of Mortgage Brokers opposed the bill and the attorney general's office asked that the bill be deferred because of concerns the measure directs the Department of Taxation to share confidential tax information with other state and federal agencies.

Also among those testifying against the measure was former state tax Director Ray Kamikawa, who said the initiative was an inefficient use of limited state resources.

"It calls for hirings and expenditures and resources that may not be justified by the collections," Kamikawa said. "The target group is probably smaller mom-and-pop operations where collection yields tend to to be smaller and would not support the outlay of resources and hiring that will be necessary to make the program meaningful.

"The only guys that have money — big money — are these drug dealers, but they've got guns they're going to shoot back."