STAND. COM. REP. NO. 1563

                                   Honolulu, Hawaii
                                                     , 1999

                                   RE:  H.B. No. 232
                                        H.D. 2
                                        S.D. 1




Honorable Norman Mizuguchi
President of the Senate
Twentieth State Legislature
Regular Session of 1999
State of Hawaii

Sir:

     Your Committee on Ways and Means, to which was referred H.B.
No. 232, H.D. 2, entitled: 

     "A BILL FOR AN ACT RELATING TO TAXATION,"

begs leave to report as follows:

     The purpose of this measure is to encourage the economy by
reducing the general excise tax on services purchased by a
taxpayer that are then resold by the taxpayer to another.

     Specifically, this measure reduces the general excise tax on
services that are resold from four per cent to one-half per cent.
The reduction to one-half per cent is phased in over six years.

     Testimony in support of this measure was submitted by the
Department of Taxation, Hawaii Farm Bureau, Honolulu Japanese
Chamber of Commerce, The Hawaii Business League, Hawaii Business
Roundtable, Hawaii Association of Realtors, Retail Merchants of
Hawaii, National Federation of Independent Business, Small
Business Economic Revival Force, Plumbers and Fitters Local 675,
Native Hawaiian Chamber of Commerce, Tax Committee of the Hawaii
Society of Certified Public Accountants, and Tax Section of the
Hawaii Bar Association.  Testimony discussing the measure was
submitted by the Tax Foundation of Hawaii.

     Your Committee finds that this measure addresses the
pyramiding of the general excise tax in the service area.  The
general excise tax pyramids on services because they seldom are

 
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taxed at one-half per cent in a manner similar to the wholesale
sale of goods.  Additionally, when goods are involved, businesses
can integrate in a manner that avoids several steps of taxation.
For example, a manufacturer may also be a wholesaler and a
retailer and thus avoid the general excise tax at each of those
separate business steps.  Service providers are generally unable
to take advantage of integrating businesses.

     Your Committee finds that the pyramiding of the general
excise tax was first studied by Arthur D. Little, Inc. in a 1968
report entitled "Hawaii's General Excise Tax -- Prospects,
Problems, and Prescriptions".  That report suggested addressing
the pyramiding of the general excise tax and the attempt to
address the service problem resulted in the creation of
intermediary services that are taxed at one-half per cent.
Unfortunately, this area is not well understood and has been
narrowly interpreted by the courts.  In addition to the Little
report, Tax Review Commissions over the years have suggested that
pyramiding in this area be addressed.

     This measure addresses pyramiding of the general excise tax
in the service area in a well thought out manner.  Now that
services are sixty per cent or more of our economy, this area
must be addressed in a manner similar to the one-half per cent
allowed the wholesale sale of goods.

     Upon review of this measure, your Committee has deleted its
contents and inserted the contents of Senate Bill No. 638,
S.D. 1, and Senate Bill No. 44, S.D. 1, with modifications.  The
contents of Senate Bill No. 638, S.D. 1, which amends the general
excise tax law to address pyramiding on services, was modified as
follows:

     (1)  The new section to phase in the reduction of tax by
          allowing a deduction from gross income representing a
          reduction in tax rate (the concept which was contained
          in House Bill No. 232, H.D. 1) instead of a deduction
          now reduces the tax rate by one-half per cent a year
          until 2006.  This approach will address both the new
          wholesale treatment of goods used in services and the
          resale of services.  The new section further allows the
          department of taxation to establish the manner in which
          the tax is reported by deduction, allocation, or other
          representative method.  This will allow implementation
          of the change in rates without requiring the department
          to make major changes in its computer system.  Your
          Committee notes that cash registers in the private
          sector will have no trouble addressing the change in
          rates;

 
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     (2)  The definition of overhead has been substantially
          amended to specifically reflect the items included;

     (3)  The amendments to section 237-4(a)(8), Hawaii Revised
          Statutes (HRS), have been modified to clearly reflect
          the sale of tangible personal property for the purpose
          of rendering a service or for the purpose of furnishing
          transient accommodations, and to provide clearer
          transition between the current language in that
          provision and the new language;

     (4)  The resale of services provision in section
          237-4(a)(10), HRS, has been clarified and for a matter
          of consistency the sale of services to transient
          accommodations rental transactions has been added;

     (5)  Transition provisions to the new tax rate for the new
          provisions for the sale of tangible personal property
          under section 237-4(a)(8), HRS, have been added to
          section 237-13(2)(A), HRS, which levies the tax on the
          sale of tangible personal property;

     (6)  The choice between the intermediary sales tax rate and
          the new resale of services provisions in section
          237-13(6)(C), HRS, has been clarified to limit the
          choice to the intermediary services provision for the
          life of that provision.  Since this is currently a more
          beneficial tax rate for those who qualify, this is the
          appropriate choice;

     (7)  The exemption from section 237-16, HRS, has been
          clarified to apply to all transactions subject to
          section 237-4(a)(8)(B) and (10), HRS;

     (8)  The amendment to section 238-2, HRS, taxing certain
          transactions at one-half per cent has been amended to
          include all transactions subject to section
          237-4(a)(8)(B), HRS, to reflect the changes to that
          section by your Committee; and

     (9)  A yearly reporting requirement for the department of
          taxation regarding the implementation of the reduction
          and the yearly revenue loss has been added.

     In inserting language based on the contents of Senate Bill
No. 44, S.D. 1, your Committee intends this measure to address
another problem area and to level the playing field between
Hawaii service providers and service providers in other
jurisdictions.  This measure exempts the sale of services out of

 
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State and levies the use tax on services imported into the State.
Thus, Hawaii will provide the same treatment to services that it
provides for goods.  This measure will encourage Hawaii service
providers and will improve the economy.  The language from Senate
Bill No. 44, S.D. 1, was modified by your Committee as follows:

     (1)  A definition of service business or calling, including
          professional services, was added to section 237-B, HRS,
          and to chapter 238, HRS, to clarify the application of
          the new provisions added by the measure;

     (2)  A provision was added for a zero tax rate for certain
          importations and uses of services in a manner similar
          to that now accorded tangible personal property;

     (3)  A provision was added for treating certain importations
          of services by contractors as one-half per cent
          transactions in a manner similar to tangible personal
          property;

     (4)  The definition of identifiable element was deleted.

     Other technical amendments were made by your Committee to
both Senate Bills inserted into this measure.

     Your Committee believes that this major piece of tax
legislation completes the legislature's attempts to provide tax
incentives to the business community which in turn will improve
the economy.

     As affirmed by the record of votes of the members of your
Committee on Ways and Means that is attached to this report, your
Committee is in accord with the intent and purpose of H.B.
No. 232, H.D. 2, as amended herein, and recommends that it pass
Second Reading in the form attached hereto as H.B. No. 232,
H.D. 2, S.D. 1, and be placed on the calendar for Third Reading.


 
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                                 Respectfully submitted on behalf
                                 of the members of the Committee
                                 on Ways and Means,



                                 ________________________________
                                 CAROL FUKUNAGA, Co-Chair



                                 ________________________________
                                 ANDREW LEVIN, Co-Chair

 
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