REPORT TITLE:
Tax; Lessee Deductions


DESCRIPTION:
Changes deductions taken by lessee for gross proceeds from
subleased real property, to the amount of monetary gross proceeds
or gross income paid for the property or space by the lessee or
the amount of monetary gross proceeds received from sublessee for
GET.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           2476
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT

RELATING TO TAXATION. 


BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that section 237-16.5,
 
 2 Hawaii Revised Statutes, attempted to reduce the impact of
 
 3 pyramiding general excise taxes where a lessor rented property to
 
 4 a lessee, and the lessee subleased the same property to a
 
 5 sublessee.  General excise taxes of four per cent were assessed
 
 6 at every level and therefore resulted in the pyramiding of these
 
 7 taxes.  However, in enacting this change, this statute added a
 
 8 great deal of complexity by requiring that a fair rental value
 
 9 must be determined for the different spaces within the property
 
10 and that one-hundred per cent of the spaces must be subleased in
 
11 order to receive the full deduction allowed under section
 
12 237-16.5, Hawaii Revised Statutes.
 
13      The legislature further finds this statute should have
 
14 simply limited the deduction to the lessee by the lower of the
 
15 amount of rental income paid to the lessor on the same property
 
16 or the rental income collected from the sublessee, whether the
 
17 lessee improved the property or not and no matter what percentage
 
18 was subleased.  The allocated market values for each area and the
 
19 fact that the area is not one-hundred per cent rented have no
 

 
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 1 relevance on the pyramiding costs that are passed down to each
 
 2 level of leases and subleases.  Removing these two complexities
 
 3 from the current statute will surely eliminate unproductive costs
 
 4 relating to the calculation of the sublease deduction such as
 
 5 hiring appraisers; using accountants for time consuming and
 
 6 costly calculations and manipulations; incurring costly tax
 
 7 appeal procedures and expensive litigation costs; and absorbing
 
 8 the continuing bookkeeping costs of property managers, lessors,
 
 9 lessees, and sublessees.
 
10      It is imperative that section 237-16.5, Hawaii Revised
 
11 Statutes, be amended in accordance with the suggestions by the
 
12 Tax Committee of the Hawaii Society of CPA's.  In its present
 
13 form, the statute will only add much unnecessary complexity to a
 
14 very simple problem requiring a simple solution.
 
15      The purpose of this Act is to eliminate the pyramiding
 
16 effects of the general excise taxes on rents received on the same
 
17 property, including leases, subleases, and sub-subleases, and to
 
18 reduce the cost of doing business in Hawaii.
 
19      SECTION 2.  Section 237-16.5, Hawaii Revised Statutes, is
 
20 amended to read as follows:
 
21      "[[]§237-16.5[]]  Tax on written real property leases;
 
22 deduction allowed.(a)  This section relates to the leasing of
 
23 real property by a lessor to a lessee.  There is hereby levied,
 

 
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 1 and shall be assessed and collected annually, a privilege tax
 
 2 against persons engaging or continuing within the State in the
 
 3 business of leasing real property to another, equal to four per
 
 4 cent of the gross proceeds or gross income received or derived
 
 5 from the leasing; provided that where real property is subleased
 
 6 by a lessee to a sublessee, the lessee, as provided in this
 
 7 section, shall be allowed a deduction from the amount of gross
 
 8 proceeds or gross income received from its sublease of the real
 
 9 property.  The deduction shall be [in the amount allowed under
 
10 this section.] limited to the lower of the amount of monetary
 
11 gross proceeds or gross income paid by the lessee to the lessor
 
12 for the real property or space, or the amount of monetary gross
 
13 proceeds received from the sublessee on the same real property or
 
14 space.
 
15      All deductions under this section and the name and general
 
16 excise tax number of the lessee's lessor shall be reported on the
 
17 general excise tax return.  Any deduction allowed under this
 
18 section shall only be allowed with respect to leases and
 
19 subleases in writing and relating to the same real property.
 
20      (b)  The lessee shall obtain from its lessor a certificate,
 
21 in the form as the department shall prescribe, certifying that
 
22 the lessor is subject to tax under this chapter on the gross
 
23 proceeds or gross income received from the lessee.  The absence
 

 
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 1 of the certificate in itself shall give rise to the presumption
 
 2 that the lessee is not allowed the deduction under this section.
 
 3      [(c)  If various real property or space leased to the lessee
 
 4 have different rental values, then the total monetary gross
 
 5 proceeds or gross income paid to a lessor for all real property
 
 6 or space shall first be allocated to the fair rental value for
 
 7 each real property or space.  If the lessee leases less than one
 
 8 hundred per cent of real property or space that was leased from
 
 9 the lessor to a sublessee, then the total monetary gross proceeds
 
10 or gross income paid by the lessee for that real property or
 
11 space to its lessor shall be allocated.  The percentage of real
 
12 property or space subleased shall be multiplied by the monetary
 
13 gross proceeds or gross income paid for the real property or
 
14 space by the lessee to its lessor.  The product of the preceding
 
15 multiplication shall be deducted from the monetary gross proceeds
 
16 or gross income received for real property or space by the
 
17 lessee.
 
18      Once the allocations are made, the appropriate deduction
 
19 under subsection (g) shall be made.
 
20      (d)  The lessor shall make allocations under this section at
 
21 the time the sublease is entered into and the allocations shall
 
22 not be changed during the term of the sublease.  There shall be a
 
23 reasonable basis for the allocations, taking into consideration
 

 
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                                     S.B. NO.           2476
                                                        
                                                        

 
 1 the size, quality, and location of the real property or space
 
 2 subleased.  In no event shall the total amount allocated to all
 
 3 subleases exceed the total monetary gross proceeds paid by the
 
 4 lessee to its lessor.  The director may redetermine the amount of
 
 5 the deduction under this section if the director finds that the
 
 6 basis for allocation is not reasonable or that redetermination is
 
 7 necessary to prevent the avoidance of taxes.
 
 8      (e)] (c)  As used in this section:
 
 9      "Lease" means the rental of real property under an
 
10 instrument in writing by which one conveys real property for a
 
11 specified term and for a specified consideration, and includes
 
12 the written extension or renegotiation of a lease, and any
 
13 holdover tenancy.
 
14      "Lessee" means one who holds real property under lease, and
 
15 includes a sublessee.
 
16      "Lessor" means one who conveys real property by lease, and
 
17 includes a sublessor.
 
18      "Real property or space" means the area actually rented and
 
19 used by the lessee, and includes common elements as defined in
 
20 section 514A-3.
 
21      "Sublease" includes the rental of real property which is
 
22 held under a lease and is made in a written document by which one
 
23 conveys real property for a specified term and for a specified
 

 
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                                     S.B. NO.           2476
                                                        
                                                        

 
 1 consideration.  Sublease includes the written extension or
 
 2 renegotiation of a sublease and any holdover tenancy under the
 
 3 written sublease.
 
 4      "Sublessee" means one who holds real property under a
 
 5 sublease.
 
 6      "Sublessor" means one who conveys real property by sublease.
 
 7      [(f)] (d)  This section shall not cause the tax upon a
 
 8 lessor, with respect to any item of the lessor's gross proceeds
 
 9 or gross income, to exceed four per cent.
 
10      [(g)  After allocation under subsection (c), if] (e)  If
 
11 necessary, the deduction under this section shall be allowed from
 
12 the gross proceeds or gross income of the lessee received from
 
13 its sublease in an amount calculated by multiplying the gross
 
14 proceeds or gross income paid by the lessee to its lessor for the
 
15 lease of the real property by the following amount:
 
16      (1)  In calendar year 1998, .125;
 
17      (2)  In calendar year 1999, .25;
 
18      (3)  In calendar year 2000, .375;
 
19      (4)  In calendar year 2001, .50;
 
20      (5)  In calendar year 2002, .625;
 
21      (6)  In calendar year 2003, .75; and
 
22      (7)  In calendar year 2004, and thereafter, .875.
 
23      The amount calculated under paragraphs (1) to (7) shall be
 

 
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                                     S.B. NO.           2476
                                                        
                                                        

 
 1 deducted by the lessee from the lessee's total reported gross
 
 2 proceeds or gross income.  The deduction allowed by this
 
 3 subsection may be taken by the fiscal and calendar year lessees."
 
 4      SECTION 3.  Statutory material to be repealed is bracketed.
 
 5 New statutory material is underscored.
 
 6      SECTION 4.  This Act shall take effect upon its approval.
 
 7 
 
 8                       INTRODUCED BY:  ___________________________