Category Archives: General Excise (HRS 237)

HB 1982 SD 1

SUBJECT:  INCOME, GENERAL EXCISE, ADMINISTRATION, Withholding of Tax by Persons Claiming Film Credit

BILL NUMBER:  HB 1982 SD 1

INTRODUCED BY: Senate Committee on Energy, Economic Development, and Tourism

EXECUTIVE SUMMARY:   Requires every person making payment to a loan-out company and claiming the film tax credit to withhold payments to loan-out companies. Removes the requirement for productions to submit a verification review by a qualified certified public accountant using procedures prescribed by the Department of Business, Economic Development, And Tourism (DBEDT) when applying for the film tax credit. Requires the report by DBEDT to include the dollar amount claimed, name of the company, and name of the qualified production of the taxpayer. Extends the period during which excess income tax credits may be claimed to 12/31/2032. Requires qualified taxpayers to withhold a certain amount and remit that amount. Amends the use of the tax administration special fund. Authorizes the Department of Taxation to establish four full-time equivalent tax auditor positions. Continue reading HB 1982 SD 1

HB 1971 SD 1

SUBJECT:  RENTAL MOTOR VEHICLE, GENERAL EXCISE, Peer-to-Peer Car-sharing Surcharge Tax

BILL NUMBER:  HB 1971 SD 1

INTRODUCED BY: Senate Committees on Transportation and Commerce and Consumer Protection

EXECUTIVE SUMMARY:   Authorizes peer-to-peer car-sharing and establishes regulations thereof. Imposes the general excise tax and rental motor vehicle surcharge tax on peer-to-peer car-sharing programs, including car-sharing program requirements. Requires those persons engaging or continuing in a peer-to-peer car-sharing program to register with the Department of Taxation. Effective 7/1/2050. Continue reading HB 1971 SD 1

SB 2475 SD 2

SUBJECT:  GET, Exemptions; Shipping Activities; Stevedoring; Wharfage; Demurrage

BILL NUMBER:  SB 2475 SD2

INTRODUCED BY: Senate Committee on Transportation

EXECUTIVE SUMMARY:  Clarifies that amounts received or accrued for wharfage and demurrage services are exempt under the general excise tax law. Clarifies that amounts received for the transportation or storage of cargo are not exempt under the general excise tax law. Effective 1/1/2050. Continue reading SB 2475 SD 2

SB 3201 HD 1

SUBJECT:  GENERAL EXCISE, Conform Fundraising Income to Federal UBIT Definition

BILL NUMBER:  SB 3201 HD 1

INTRODUCED BY: House Committee on Economic Development

EXECUTIVE SUMMARY: Aligns the general excise tax law and net income tax law with respect to gross income derived from unrelated trade or business activities of nonprofit organizations, and allows fundraising activity of nonprofit organizations that is not unrelated trade or business to be exempted from the general excise tax. Continue reading SB 3201 HD 1

SB 2020 SD 1

SUBJECT:  GENERAL EXCISE, Change Requirements for Wholesale Rate Sales

BILL NUMBER: SB 2020 SD 1

INTRODUCED BY: Senate Committee on Ways & Means

EXECUTIVE SUMMARY:   Clarifies that, under the general excise tax law, sales to a licensed retail merchant, jobber, or other licensed seller for resale are only eligible for the wholesale tax rate if the resale is subject to the highest general excise tax rate. Adds a similar requirement for sales of tangible personal property to a service provider or for the purpose of providing transient accommodations.  Our view is that this legislation is not necessary and may cause harm.  If consistency is needed within the prongs of section 237-4, HRS, we recommend that the inconsistency be resolved in favor of the older provisions.

SYNOPSIS:  Amends section 237-4(a)(1), HRS, to add a requirement that if tangible personal property is resold, the resale must be subject to the tax imposed at the highest tax rate.

Amends section 237-4(a)(8), HRS, to add a requirement that if a service provider resells services or tangible personal property, the resale must be subject to the tax imposed at the highest tax rate.

EFFECTIVE DATE:  Upon Approval

STAFF COMMENTS:  This bill deals with the definition of wholesaling, and therefore which transactions qualify for the 0.5% wholesale tax rate, under the general excise tax law.  The bill attempts to conform paragraphs 237-4(a)(1) and (8) with paragraphs (10) and (13), both of which have a requirement similar to the one this bill proposes to add.

Taxpayers are often, understandably, confused about when they are entitled to claim the wholesale GET rate.  Consider taxpayer T making a sale to retailer R.  T is entitled to the wholesale rate only if R is reselling the product or service sold.  This fact, however, typically is not something that T knows.  To fill in the information gap, T is supposed to take a resale certificate from R certifying that R will indeed resell the product or service.  That resale certificate would allow T to claim the wholesale rate in good faith.  Not all taxpayers, however, know how to use resale certificates.

The existing system, in theory, separates non-retail from retail transactions by requiring that T’s customer have a general excise tax license.  This is a requirement in existing law, and it can be enforced relatively easily.

Adding a requirement that the resale be at the highest rate can and will add to the confusion, and also will lead to anomalous results, more than under current law.  An audit of T in this example and a survey of T’s customers may reveal whether the customer has a GET license, but will not reveal whether tax has been paid at the highest rate.  Consider the following scenarios:

  1. T, a manufacturer of aloha shirts, sells a shirt to R. R resells the shirt to X by way of Internet sale, and R ships the shirt to X out of state.  Under current law, T qualifies for the wholesale rate even though R is exempt from tax on the retail sale (export sale, exempt under section 237-29.5, HRS).  Under the bill, T would be taxable at the retail rate even though T is entirely unaware that R has exported the shirt.
  1. T, a manufacturer of medicines, sells medicines to D, a drug store. T’s doctor prescribes some of T’s medicine to patient X, and X buys some from D.  Under current law, T qualifies for the wholesale rate even though R is exempt from tax on the retail sale (prescription drugs, exempt under section 237-24.3(6), HRS).  (Note that the result changes if D is a GET-exempt hospital.  In that case, existing case law does not consider D to be a licensed seller, and T would need to pay retail rate GET on sales to the hospital.)  Under the bill, T would be taxable at the retail rate whether or not D is an exempt entity.
  1. T, a supplier of feed and other materials relating to farming, sells feed to distributor D. D resells the feed to farmer F, who feeds cattle with it.  The farmer sells the meat to grocery store R, who sells the meat to X for consumption.  Under current law, the sales by T, D, and F all qualify as wholesale sales.  Under the bill, the sale from D to F will be taxed at 4%, meaning that 4% would be imposed twice in the economic chain (on D and R).  This would be expected to hurt farmers and drive up the price of food.

For these reasons, we believe the bill is ill-advised.  Consideration should be given to repealing subparagraphs 237-4(a)(10)(F) and 237-4(a)(13)(F) for these reasons.  A substitute draft to accomplish this goal is attached.

Digested:  3/14/2022

SB 2020 Substitute Drafted by Tax Foundation of Hawaii

SECTION 1. The legislature finds that, under the general excise tax law, wholesalers who sell goods for resale are not taxed at the typical four per cent rate. Instead, they are taxed at a lower rate of one—half per cent. Wholesalers can qualify for this lower rate even though their customer is not taxed at the four per cent rate, such as if the wholesaler sells to another licensed wholesaler, where both wholesalers will qualify for the one-half per cent rate; or if the wholesaler sells to a licensed retailer and the retailer then sells it to an out-of-state customer so that the retail sale qualifies for the exemption for export sales.

Accordingly, the purpose of this Act is to remove confusing language that purports to require in some situations that the resale be taxed at the highest rate under the general excise tax law.

SECTION 2.  Section 237-4, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

“(a)  “Wholesaler” or “jobber” applies only to a person making sales at wholesale.  Only the following are sales at wholesale:

(1)      Sales to a licensed retail merchant, jobber, or other licensed seller for purposes of resale;

(2)      Sales to a licensed manufacturer of materials or commodities that are to be incorporated by the manufacturer into a finished or saleable product (including the container or package in which the product is contained) during the course of its preservation, manufacture, or processing, including preparation for market, and that will remain in such finished or saleable product in such form as to be perceptible to the senses, which finished or saleable product is to be sold and not otherwise used by the manufacturer;

(3)      Sales to a licensed producer or cooperative association of materials or commodities that are to be incorporated by the producer or by the cooperative association into a finished or saleable product that is to be sold and not otherwise used by the producer or cooperative association, including specifically materials or commodities expended as essential to the planting, growth, nurturing, and production of commodities that are sold by the producer or by the cooperative association;

(4)      Sales to a licensed contractor, of materials or commodities that are to be incorporated by the contractor into the finished work or project required by the contract and that will remain in such finished work or project in such form as to be perceptible to the senses;

(5)      Sales to a licensed producer, or to a cooperative association described in section [[]237-23(a)(8)[]] for sale to a licensed producer, or to a licensed person operating a feed lot, of poultry or animal feed, hatching eggs, semen, replacement stock, breeding services for the purpose of raising or producing animal or poultry products for disposition as described in section 237-5 or for incorporation into a manufactured product as described in paragraph (2) or for the purpose of breeding, hatching, milking, or egg laying other than for the customer’s own consumption of the meat, poultry, eggs, or milk so produced; provided that in the case of a feed lot operator, only the segregated cost of the feed furnished by the feed lot operator as part of the feed lot operator’s service to a licensed producer of poultry or animals to be butchered or to a cooperative association described in section [[]237-23(a)(8)[]] of such licensed producers shall be deemed to be a sale at wholesale; and provided further that any amount derived from the furnishing of feed lot services, other than the segregated cost of feed, shall be deemed taxable at the service business rate.  This paragraph shall not apply to the sale of feed for poultry or animals to be used for hauling, transportation, or sports purposes;

(6)      Sales to a licensed producer, or to a cooperative association described in section [[]237-23(a)(8)[]] for sale to the producer, of seed or seedstock for producing agricultural and aquacultural products, or bait for catching fish (including the catching of bait for catching fish), which agricultural and aquacultural products or fish are to be disposed of as described in section 237-5 or to be incorporated in a manufactured product as described in paragraph (2);

(7)      Sales to a licensed producer, or to a cooperative association described in section [[]237-23(a)(8)[]] for sale to such producer; of polypropylene shade cloth; of polyfilm; of polyethylene film; of cartons and such other containers, wrappers, and sacks, and binders to be used for packaging eggs, vegetables, fruits, and other agricultural and aquacultural products; of seedlings and cuttings for producing nursery plants or aquacultural products; or of chick containers; which cartons and such other containers, wrappers, and sacks, binders, seedlings, cuttings, and containers are to be used as described in section 237‑5, or to be incorporated in a manufactured product as described in paragraph (2);

(8)      Sales of tangible personal property where:

(A)      Tangible personal property is sold upon the order or request of a licensed seller for the purpose of rendering a service in the course of the person’s service business or calling, or upon the order or request of a person subject to tax under section 237D-2 for the purpose of furnishing transient accommodations;

(B)      The tangible personal property becomes or is used as an identifiable element of the service rendered; and

(C)      The cost of the tangible personal property does not constitute overhead to the licensed seller;

(9)      Sales to a licensed leasing company of capital goods that have a depreciable life, are purchased by the leasing company for lease to its customers, and are thereafter leased as a service to others;

(10)    Sales of services to a licensed seller engaging in a business or calling whenever:

(A)      Either:

(i)       In the context of a service-to-service transaction, a service is rendered upon the order or request of a licensed seller for the purpose of rendering another service in the course of the seller’s service business or calling, including a dealer’s furnishing of goods or services to the purchaser of tangible personal property to fulfill a warranty obligation of the manufacturer of the property;

(ii)      In the context of a service-to-tangible personal property transaction, a service is rendered upon the order or request of a licensed seller for the purpose of manufacturing, producing, or preparing tangible personal property to be sold;

(iii)  In the context of a services-to-contracting transaction, a service is rendered upon the order or request of a licensed contractor as defined in section 237-6 for the purpose of assisting that licensed contractor; or

(iv)     In the context of a services-to-transient accommodations rental transaction, a service is rendered upon the order or request of a person subject to tax under section 237D-2 for the purpose of furnishing transient accommodations;

(B)      The benefit of the service passes to the customer of the licensed seller, licensed contractor, or person furnishing transient accommodations as an identifiable element of the other service or property to be sold, the contracting, or the furnishing of transient accommodations;

(C)      The cost of the service does not constitute overhead to the licensed seller, licensed contractor, or person furnishing transient accommodations;

(D)      The gross income of the licensed seller is not divided between the licensed seller and another licensed seller, contractor, or person furnishing transient accommodations for imposition of the tax under this chapter; and

(E)      The gross income of the licensed seller is not subject to a deduction under this chapter or chapter 237D[; and

(F)      The resale of the service, tangible personal property, contracting, or transient accommodations is subject to the tax imposed under this chapter at the highest tax rate].

(11)    Sales to a licensed retail merchant, jobber, or other licensed seller of bulk condiments or prepackaged single-serving packets of condiments that are provided to customers by the licensed retail merchant, jobber, or other licensed seller;

(12)    Sales to a licensed retail merchant, jobber, or other licensed seller of tangible personal property that will be incorporated or processed by the licensed retail merchant, jobber, or other licensed seller into a finished or saleable product during the course of its preparation for market (including disposable, nonreturnable containers, packages, or wrappers, in which the product is contained and that are generally known and most commonly used to contain food or beverage for transfer or delivery), and which finished or saleable product is to be sold and not otherwise used by the licensed retail merchant, jobber, or other licensed seller;

(13)    Sales of amusements subject to taxation under section 237-13(4) to a licensed seller engaging in a business or calling whenever:

(A)      Either:

(i)       In the context of an amusement-to-service transaction, an amusement is rendered upon the order or request of a licensed seller for the purpose of rendering another service in the course of the seller’s service business or calling;

(ii)      In the context of an amusement-to-tangible personal property transaction, an amusement is rendered upon the order or request of a licensed seller for the purpose of selling tangible personal property; or

(iii)  In the context of an amusement-to-amusement transaction, an amusement is rendered upon the order or request of a licensed seller for the purpose of rendering another amusement in the course of the person’s amusement business;

(B)      The benefit of the amusement passes to the customer of the licensed seller as an identifiable element of the other service, tangible personal property to be sold, or amusement;

(C)      The cost of the amusement does not constitute overhead to the licensed seller;

(D)      The gross income of the licensed seller is not divided between the licensed seller and another licensed seller, person furnishing transient accommodations, or person rendering an amusement for imposition of the tax under chapter 237; and

(E)      The gross income of the licensed seller is not subject to a deduction under this chapter[; and

(F)      The resale of the service, tangible personal property, or amusement is subject to the tax imposed under this chapter at the highest rate].

As used in this paragraph, “amusement” means entertainment provided as part of a show for which there is an admission charge; and

(14)    Sales by a printer to a publisher of magazines or similar printed materials containing advertisements, when the publisher is under contract with the advertisers to distribute a minimum number of magazines or similar printed materials to the public or defined segment of the public, whether or not there is a charge to the persons who actually receive the magazines or similar printed materials.”

SECTION 3.  Any agreement that purports to define “wholesaler” or “jobber” for purposes of chapter 237 otherwise than as provided in this Act shall be to that extent void as against public policy from the effective date of this Act.

SECTION 4.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

SECTION 5.  This Act shall take effect on July 1, 2022.

SB 2863 SD 2

SUBJECT:  GENERAL EXCISE, Exemption for Feminine Hygiene Products

BILL NUMBER:  SB 2863 SD 2

INTRODUCED BY: Senate Committee on Ways & Means

EXECUTIVE SUMMARY:   Exempts the sale of feminine hygiene products from the general excise tax.  We observe that the current system taxes all over-the-counter hygiene products regardless of sex and wonder whether the proposed exemption will create inequality. Continue reading SB 2863 SD 2

HB 1982 HD 2

SUBJECT:  INCOME, GENERAL EXCISE, ADMINISTRATION, Withholding of Tax by Persons Claiming Film Credit, Elimination of Reasonable Basis Defense for Overclaiming Credits

BILL NUMBER:  HB 1982 HD 2

INTRODUCED BY: House Committee on Finance

EXECUTIVE SUMMARY:   Requires every person making payment to a loan-out company and claiming the film tax credit to withhold payments to loan-out companies. Prohibits the defense of erroneous claim for a refund or credit if the claim for refund was generated by a tax credit and sets the penalty for such case to ten per cent. Requires the report by DBEDT to include the dollar amount claimed, name of the company, and name of the qualified production of the taxpayer. Requires qualified taxpayers to withhold a certain amount and remit that amount. Amends the use of the tax administration special fund. Authorizes the department of taxation to establish four full-time equivalent tax auditor positions.  We do not recommend passage of the penalty enhancements, which would apply to other credits as well.  We also have suggested technical amendments.

SYNOPSIS:  Adds a new section to chapter 235, HRS, requiring every person claiming a credit under section 235-17, HRS, to withhold 10% of all payments to loan-out companies for services performed in Hawaii and to remit the withholding to the Department of Taxation within 30 days from the date of payment.

Amends section 231-36.8, HRS, to impose a penalty at a reduced rate of 10% for erroneous claims for refund or credit that are generated by a tax credit, and to provide that the penalty is applied whether or not the taxpayer had a reasonable basis in law for making the claim.

Amends section 235-1, HRS, by adding a new definition of “loan-out company” as a wholly-owned entity formed on behalf of a person that serves as a separate entity that constitutes the person’s means of entering a contact with a third party for the purpose of providing services to the third party.

Amends section 235-17, HRS, to add a provision requiring each qualified production to withhold an amount equal to 4.5% of qualified production costs; provided that the amount withheld shall be remitted to the department of taxation to the credit of the general excise tax account of the loan-out company to whom the qualified production costs were paid or will be paid.  The amount withheld shall be remitted no later than thirty calendar days after the qualified production costs are paid or incurred.  Taxpayers who fail to comply with this subsection shall be subject to the applicable interest and penalties pursuant to chapter 231 and section 235-104.

Makes additional technical and conforming amendments.

EFFECTIVE DATE:  July 1, 2050

STAFF COMMENTS:

Withholding Income Tax for Payments to Loan-Out Companies: Apparently, this provision is meant to collect tax at the source because employees of loan-out companies have not been following the requirement to file an income tax return.

Elimination of Reasonable Basis Defense to Penalty for Erroneous Credit Claim:  Because the tax laws are complex and often subject to interpretation, we do not believe a “strict liability” penalty of this type is appropriate.  Such a penalty would penalize “innocent mistakes where the excessive amount is the result of inadvertence, mathematical error, or where otherwise defined as innocent.”  It also should be kept in mind that this penalty enhancement applies to claims for all tax credits, not just the motion picture, digital media, and film production income tax credit pursuant to section 235-17, HRS,  This could be particularly harsh as applied to lower-income families who attempted to but made mistakes in claiming welfare-type credits like the Earned Income Tax Credit (section 235-55.75, HRS), the Food/Excise Tax Credit (section 235-55.85, HRS), the credit for household and dependent care services (section 235-55.6, HRS), or the credit for low-income household renters (section 235-55.7, HRS).

General Excise Tax Withholding:  We do not recommend that withholding of general excise tax be contained in an income tax section; it would be difficult or impossible for practitioners to find.  Instead, we recommend amendment of section 237-44, HRS, which now requires withholding of general excise tax in the “entertainment business,” and which contains the necessary trust fund and derivative liability language.  For example:

SECTION __.  Section 237-44, Hawaii Revised Statutes, \is amended to read as follows:

§237-44  Entertainment business; loan-out companies.  (a)  As used in this section:

“Admission” means the amount paid for admission to any place, including admission by season ticket or subscription, and also includes the amount paid for seats and tables, reserved or otherwise, and other similar accommodations.

“Cabaret” means any roof garden, cabaret, or other similar place furnishing a public performance, by or for any patron or guest who is entitled to be present during any portion of the performance, including any room in any hotel, restaurant, hall, or other public place where music and dancing privileges or any other entertainment are afforded the patrons in connection with the serving or selling of food, refreshment, or merchandise.

“Loan-out company” means the same as in section 235-1.

“Transient taxpayer” refers to any person subject to the tax imposed by this chapter who has no permanent place of business in the State.

(b)  Every person receiving admissions for any circus, carnival, or any other place whatsoever at which a transient taxpayer is engaged in business (whether or not further admissions are charged inside the place, such further admissions, if any, being also subject to this section), shall set aside from the admissions and hold in trust for the State five per cent of the admissions, or such lesser amount as the department of taxation shall approve as sufficient, to guarantee payment of the tax levied by this chapter on the transient taxpayer.  The amount so required to be set aside from the admissions shall be deposited with the department promptly upon collection thereof, from time to time, for deposit by it in a special trust fund in the treasury of the State, there to remain until refunded upon voucher of the department, or until applied to the payment of the taxes guaranteed thereby with the consent of the person making the deposit, or until deposited in court pursuant to chapter 655 or the rules of court.  The department may bring an action to obtain an adjudication of its right to apply the guarantee fund in payment of taxes and may deposit the fund in court to await the results of the adjudication, or may be sued by an interested person seeking to obtain the adjudication and may be ordered to make such deposit in court, notwithstanding that the department asserts a claim against the fund.

(c)  If any person fails to deposit promptly the guarantee fund required by this section, the department may distrain upon the admissions or any bank account or other asset in which the same can be found, for the purpose of obtaining and depositing in the treasury the required guarantee fund.

(d)  Whenever a transient taxpayer is engaged in business at any place for which admissions are charged, or at any cabaret whether or not admissions are charged, or whenever a loan-out company is engaged for services performed or to be performed within the State, the person engaging the transient taxpayer or loan-out company shall collect from the transient taxpayer, by withholding or otherwise, the tax levied by this chapter on the transient taxpayer, shall hold the tax in trust for the State, and shall return and pay over the tax to the proper collecting officer of the State in the manner and at the time required by this chapter, for the account of the transient taxpayer.  If the person fails to do so, the person shall be liable to pay to the State the amount of the tax levied by this chapter on the transient taxpayer, together with penalties and interest as provided by law.  The amount of the liability may be collected from the guarantee fund, if any, or may be assessed against and collected from the person so becoming liable in the same manner as if the tax had been levied upon the person.

Digested:  3/11/2022