REPORT TITLE:
GET/Use taxes; Aircraft Leases


DESCRIPTION:
Establishes that amounts received from leasing aircraft for
commercial usage are not subject to general excise tax; clarifies
existing use tax exemption. (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2706
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   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 the general excise
 
 2 tax casts a wide and tight net and some taxpayers are surprised
 
 3 to find that the general excise tax applies to them.  This is
 
 4 particularly true of taxpayers on the mainland who do not carry
 
 5 on a business in Hawaii itself but have sufficient contacts to
 
 6 fall within the general excise tax net.
 
 7      Recently, the department of taxation has been auditing the
 
 8 leasing of aircraft to local airlines.  As in a prior court case,
 
 9 the department appears to have found that the lease rent in this
 
10 instance paid by the local airlines to mainland lessors is
 
11 subject to the general excise tax.  The legislature notes that
 
12 since the mainland lessors have not filed general excise tax
 
13 returns, rent paid for the last fifteen to twenty years may be
 
14 subject to the general excise tax.  Complicating the retroactive
 
15 assessment for such a long period of time is the fact that
 
16 records may have been destroyed or lost, many of these lessors
 
17 are out of business, have merged with others, or no longer rent
 
18 aircraft to local airlines.  The legislature finds that under an
 
19 indemnity clause in the lease documents, the local airlines must
 
20 reimburse the airline lessors for any taxes assessed.  The local
 

 
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 1 airlines indirectly and without intentionally failing to
 
 2 reimburse the lessor for taxes as they accrued may be subject to
 
 3 a substantial assessment of general excise taxes.
 
 4      The general excise tax is paid through voluntary self
 
 5 assessment.  Consequently, the department of taxation did not
 
 6 become aware of the nonpayment of the tax until recently.  Upon
 
 7 finding that the tax had not been paid, the department entered
 
 8 into audits of the nonpaying lessors and thereby also involved
 
 9 the leasing local airlines.  While the airlines have assisted in
 
10 the audit, even though they are not the taxpayer, they do not
 
11 agree that the tax should be imposed.
 
12      The legislature finds that the department of taxation is
 
13 correct in its interpretations of the general excise tax law and
 
14 that the aircraft lessors should have paid the general excise
 
15 tax.  Nevertheless, the legislature recognizes that retroactive
 
16 assessments would impose a substantial burden on our local
 
17 airlines at a time in which operating costs, such as fuel, are
 
18 increasing.
 
19      Additionally, the legislature notes that imposition of this
 
20 tax on local airlines may mean that national and international
 
21 airlines will be the next subject of audit by the department of
 
22 taxation.  Unlike local airlines, the national and international
 
23 airlines do not have to fly into Hawaii and such an audit and
 

 
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 1 imposition of tax on these airlines might cause the flight of
 
 2 these airlines from Hawaii.
 
 3      The legislature finds that interisland, national, and
 
 4 international travel is necessary to an island state both for
 
 5 residents and for visitors.  It is necessary to encourage travel
 
 6 between the islands and outside the islands.  The imposition of
 
 7 the general excise tax on this industry in the manner discussed
 
 8 in this Act does not help Hawaii and would greatly hinder our
 
 9 economy.  The legislature notes that a similar situation which
 
10 involved a retroactive imposition of the general excise tax on
 
11 the maintenance fees of time share owners associations was
 
12 alleviated by enacting relief from such assessments in Act 181,
 
13 Session Laws of Hawaii 1990.
 
14      The purpose of this Act is to alleviate this unique
 
15 situation by:
 
16      (1)  Preventing the retroactive assessment and collection of
 
17           the general excise tax on aircraft rentals;
 
18      (2)  Providing an exemption from the imposition of the
 
19           general excise tax on future rentals of aircraft; and
 
20      (3)  Clarifying the use tax exemption for the importation of
 
21           aircraft into Hawaii. 
 
22      SECTION 2.  The department of taxation shall not levy,
 
23 assess, or collect any general excise tax imposed by chapter 237,
 

 
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 1 Hawaii Revised Statutes, on rental payments and other amounts
 
 2 received prior to the effective date of this Act for the renting
 
 3 or leasing of aircraft used or held for use by persons for
 
 4 commercial transportation for compensation or hire of passengers
 
 5 or goods or other tangible personal property between points in
 
 6 this State or between a point in this State and a point outside
 
 7 this State.  For purposes of this section:
 
 8      (1)  "Renting or leasing" includes operating leases, true
 
 9           leases, financing leases, capital leases, and all other
 
10           lease agreements and rental agreements; and
 
11      (2)  "Aircraft" means any craft or artificial contrivance
 
12           used for navigation through the air, all related
 
13           components, including without limitation, engines,
 
14           hydraulic and electrical systems, and all other
 
15           components which are or are designed to be an integral
 
16           part of an aircraft.
 
17      SECTION 3.  Section 237-24.3, Hawaii Revised Statutes, is
 
18 amended to read as follows:
 
19      "§237-24.3  Additional amounts not taxable.  In addition to
 
20 the amounts not taxable under section 237-24, this chapter shall
 
21 not apply to:
 
22      (1)  Amounts received from the loading, transportation, and
 
23           unloading of agricultural commodities shipped for a
 

 
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 1           producer or produce dealer on one island of this State
 
 2           to a person, firm, or organization on another island of
 
 3           this State.  The terms "agricultural commodity",
 
 4           "producer", and "produce dealer" shall be defined in
 
 5           the same manner as they are defined in section 147-1;
 
 6           provided that agricultural commodities need not have
 
 7           been produced in the State;
 
 8      (2)  Amounts received from sales of:
 
 9           (A)  Intoxicating liquor as the term "liquor" is
 
10                defined in chapter 244D;
 
11           (B)  Cigarettes and tobacco products as defined in
 
12                chapter 245; and
 
13           (C)  Agricultural, meat, or fish products grown,
 
14                raised, or caught in Hawaii, to any person or
 
15                common carrier in interstate or foreign commerce,
 
16                or both, whether ocean-going or air, for
 
17                consumption out-of-state on the shipper's vessels
 
18                or airplanes;
 
19      (3)  Amounts received by the manager or board of directors
 
20           of:
 
21           (A)  An association of apartment owners of a
 
22                condominium property regime established in
 
23                accordance with chapter 514A; or
 

 
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 1           (B)  A nonprofit homeowners or community association
 
 2                incorporated in accordance with chapter 415B or
 
 3                any predecessor thereto and existing pursuant to
 
 4                covenants running with the land,
 
 5           in reimbursement of sums paid for common expenses;
 
 6      (4)  Amounts received or accrued from:
 
 7           (A)  The loading or unloading of cargo from ships,
 
 8                barges, vessels, or aircraft, whether or not the
 
 9                ships, barges, vessels, or aircraft travel between
 
10                the State and other states or countries or between
 
11                the islands of the State;
 
12           (B)  Tugboat services including pilotage fees performed
 
13                within the State, and the towage of ships, barges,
 
14                or vessels in and out of state harbors, or from
 
15                one pier to another; and
 
16           (C)  The transportation of pilots or governmental
 
17                officials to ships, barges, or vessels offshore;
 
18                rigging gear; checking freight and similar
 
19                services; standby charges; and use of moorings and
 
20                running mooring lines;
 
21      (5)  Amounts received by an employee benefit plan by way of
 
22           contributions, dividends, interest, and other income;
 
23           and amounts received by a nonprofit organization or
 

 
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 1           office, as payments for costs and expenses incurred for
 
 2           the administration of an employee benefit plan;
 
 3           provided that this exemption shall not apply to any
 
 4           gross rental income or gross rental proceeds received
 
 5           after June 30, 1994, as income from investments in real
 
 6           property in this State; and provided further that gross
 
 7           rental income or gross rental proceeds from investments
 
 8           in real property received by an employee benefit plan
 
 9           after June 30, 1994, under written contracts executed
 
10           prior to July 1, 1994, shall not be taxed until the
 
11           contracts are renegotiated, renewed, or extended, or
 
12           until after December 31, 1998, whichever is earlier.
 
13           For the purposes of this paragraph, "employee benefit
 
14           plan" means any plan as defined in section 1002(3) of
 
15           title 29 of the United States Code, as amended;
 
16      (6)  Amounts received for purchases made with United States
 
17           Department of Agriculture food coupons under the
 
18           federal food stamp program, and amounts received for
 
19           purchases made with United States Department of
 
20           Agriculture food vouchers under the Special
 
21           Supplemental Foods Program for Women, Infants and
 
22           Children;
 
23      (7)  Amounts received by a hospital, infirmary, medical
 

 
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 1           clinic, health care facility, pharmacy, or a
 
 2           practitioner licensed to administer the drug to an
 
 3           individual for selling prescription drugs or prosthetic
 
 4           devices to an individual; provided that this paragraph
 
 5           shall not apply to any amounts received for services
 
 6           provided in selling prescription drugs or prosthetic
 
 7           devices.  As used in this paragraph:
 
 8           (A)  "Prescription drugs" are those drugs defined under
 
 9                section [[]328-1[]] and dispensed by filling or
 
10                refilling a written or oral prescription by a
 
11                practitioner licensed under law to administer the
 
12                drug and sold by a licensed pharmacist under
 
13                section 328-16 or practitioners licensed to
 
14                administer drugs; and
 
15           (B)  "Prosthetic device" means any artificial device or
 
16                appliance, instrument, apparatus, or contrivance,
 
17                including their components, parts, accessories,
 
18                and replacements thereof, used to replace a
 
19                missing or surgically removed part of the human
 
20                body, which is prescribed by a licensed
 
21                practitioner of medicine, osteopathy, or podiatry
 
22                and which is sold by the practitioner or which is
 
23                dispensed and sold by a dealer of prosthetic
 

 
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 1                devices; provided that "prosthetic device" shall
 
 2                not mean any auditory, ophthalmic, dental, or
 
 3                ocular device or appliance, instrument, apparatus,
 
 4                or contrivance;
 
 5      (8)  Taxes on transient accommodations imposed by chapter
 
 6           237D and passed on and collected by operators holding
 
 7           certificates of registration under that chapter;
 
 8      (9)  Amounts received as dues by an unincorporated merchants
 
 9           association from its membership for advertising media,
 
10           promotional, and advertising costs for the promotion of
 
11           the association for the benefit of its members as a
 
12           whole and not for the benefit of an individual member
 
13           or group of members less than the entire membership;
 
14           [and]
 
15     (10)  Amounts received by a labor organization for real
 
16           property leased to:
 
17           (A)  A labor organization; or
 
18           (B)  A trust fund established by a labor organization
 
19                for the benefit of its members, families, and
 
20                dependents for medical or hospital care, pensions
 
21                on retirement or death of employees,
 
22                apprenticeship and training, and other membership
 
23                service programs.
 

 
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 1           As used in this paragraph, "labor organization" means a
 
 2           labor organization exempt from federal income tax under
 
 3           section 501(c)(5) of the Internal Revenue Code, as
 
 4           amended[.]; and
 
 5     (11)  Rental payments and other amounts received for the
 
 6           renting or leasing of aircraft used or held for use by
 
 7           persons for commercial transportation for compensation
 
 8           or hire of passengers or goods or other tangible
 
 9           personal property between points in this State or
 
10           between a point in this State and a point outside this
 
11           State.  For purposes of this section:
 
12           (A)  "Renting or leasing" includes operating leases,
 
13                true leases, financing leases, capital leases, and
 
14                all other lease agreements and rental agreements;
 
15                and
 
16           (B)  "Aircraft" means any craft or artificial
 
17                contrivance used for navigation through the air,
 
18                all related components, including without
 
19                limitation, engines, hydraulic and electrical
 
20                systems, and all other components which are or are
 
21                designed to be an integral part of an aircraft."
 
22      SECTION 4.  Section 238-1, Hawaii Revised Statutes, is
 
23 amended by amending the definition of "use": to read as follows:
 

 
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 1      ""Use" (and any nounal, verbal, adjectival, adverbial, and
 
 2 other equivalent form of the term) herein used interchangeably
 
 3 means any use, whether the use is of such nature as to cause the
 
 4 property or services to be appreciably consumed or not, or the
 
 5 keeping of the property or services for such use or for sale, and
 
 6 shall include the exercise of any right or power over tangible or
 
 7 intangible personal property incident to the ownership of that
 
 8 property, but the term "use" shall not include:
 
 9      (1)  Temporary use of property, not of a perishable or
 
10           quickly consumable nature, where the property is
 
11           imported into the State for temporary use (not sale)
 
12           therein by the person importing the same and is not
 
13           intended to be, and is not, kept permanently in the
 
14           State (as for example without limiting the generality
 
15           of the foregoing language:
 
16           (A)  In the case of a contractor importing permanent
 
17                equipment for the performance of a construction
 
18                contract, with intent to remove, and who does
 
19                remove, the equipment out of the State upon
 
20                completing the contract;
 
21           (B)  In the case of moving picture films imported for
 
22                use in theaters in the State with intent or under
 
23                contract to transport the same out of the State
 

 
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 1                after completion of such use; and
 
 2           (C)  In the case of a transient visitor importing an
 
 3                automobile or other belongings into the State to
 
 4                be used by the transient visitor while therein but
 
 5                which are to be used and are removed upon the
 
 6                transient visitor's departure from the State);
 
 7      (2)  Use by the taxpayer of property acquired by the
 
 8           taxpayer solely by way of gift;
 
 9      (3)  Use which is limited to the receipt of articles and the
 
10           return thereof, to the person from whom acquired,
 
11           immediately or within a reasonable time either after
 
12           temporary trial or without trial;
 
13      (4)  Use of goods imported into the State by the owner of a
 
14           vessel or vessels engaged in interstate or foreign
 
15           commerce and held for and used only as ship stores for
 
16           the vessels;
 
17      (5)  The use or keeping for use of household goods, personal
 
18           effects, and private automobiles imported into the
 
19           State for nonbusiness use by a person who:
 
20           (A)  Acquired them in another state, territory,
 
21                district, or country;
 
22           (B)  At the time of the acquisition was a bona fide
 
23                resident of another state, territory, district, or
 

 
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 1                country;
 
 2           (C)  Acquired the property for use outside the State;
 
 3                and
 
 4           (D)  Made actual and substantial use thereof outside
 
 5                this State;
 
 6           provided that as to an article acquired less than three
 
 7           months prior to the time of its importation into the
 
 8           State it shall be presumed, until and unless clearly
 
 9           proved to the contrary, that it was acquired for use in
 
10           the State and that its use outside the State was not
 
11           actual and substantial;
 
12      (6)  [The leasing or renting of any aircraft or the keeping
 
13           of any aircraft solely for leasing or renting to
 
14           lessees or renters using the aircraft for commercial
 
15           transportation of passengers and goods;] The use of
 
16           aircraft engaged in, or imported, purchased, leased,
 
17           rented, or otherwise acquired for, commercial
 
18           transportation for compensation or hire of passengers
 
19           or goods or other tangible personal property between
 
20           points in this State or between a point in this State
 
21           and a point outside this State.  For purposes of this
 
22           section:
 
23           (A)  "Leased" and "rented" includes operating leases,
 

 
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 1                true leases, financing leases, capital leases, and
 
 2                all other lease agreements and rental agreements;
 
 3                and
 
 4           (B)  "Aircraft" means any craft or artificial
 
 5                contrivance used for navigation through the air,
 
 6                all related components, including without
 
 7                limitation, engines, hydraulic and electrical
 
 8                systems, and all other components which are or are
 
 9                designed to be an integral part of an aircraft.
 
10      (7)  The use of oceangoing vehicles for passenger or
 
11           passenger and goods transportation from one point to
 
12           another within the State as a public utility as defined
 
13           in chapter 269;
 
14      (8)  The use of material, parts, or tools imported or
 
15           purchased by a person licensed under chapter 237 which
 
16           are used for aircraft service and maintenance, or the
 
17           construction of an aircraft service and maintenance
 
18           facility as those terms are defined in section
 
19           237-24.9; and
 
20      (9)  The use of services imported for resale to a foreign
 
21           customer located outside the State to the extent the
 
22           services are resold, consumed, or used by that foreign
 
23           customer outside the State pursuant to section
 

 
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 1           237-29.53(a).
 
 2      With regard to purchases made and distributed under the
 
 3 authority of chapter 421, a cooperative association shall be
 
 4 deemed the user thereof."
 
 5      SECTION 5.  Statutory material to be repealed is bracketed.
 
 6 New statutory material is underscored.
 
 7      SECTION 6.  This Act shall take effect on July 1, 2000; and
 
 8 shall apply to the gross income or gross proceeds received or
 
 9 taxes accruing on value after June 30, 2000.