STAND. COM. REP. NO. 2680

                                   Honolulu, Hawaii
                                                     , 2000

                                   RE:  S.B. No. 2706
                                        S.D. 1




Honorable Norman Mizuguchi
President of the Senate
Twentieth State Legislature
Regular Session of 2000
State of Hawaii

Sir:

     Your Committees on Transportation and Intergovernmental
Affairs and Ways and Means, to which was referred S.B. No. 2706
entitled: 

     "A BILL FOR AN ACT RELATING TO TAXATION,"

beg leave to report as follows:

     The purpose of this measure is to provide an exemption from
the general excise tax for amounts received as rent for the lease
of aircraft or aircraft engines used by lessees for interstate
air transportation of passengers and goods.

     In addition the measure provides an exemption from the use
tax for aircraft or aircraft engines imported by any lessee
engaged in interstate air transportation.  The measure is
effective on July 1, 2000.

     Your Committees received testimony in favor of this measure
from Aloha Airlines, Hawaiian Airlines Master Executive Council-
-Air Line Pilots Association International, and Hawaiian
Airlines.  Testimony in opposition was received from the
Department of Taxation.  Comments were submitted by the Tax
Foundation of Hawaii.

     Your Committees find that this measure addresses a tax audit
by the Department of Taxation of lessors of aircraft and aircraft
engines to local airlines.  Your Committees find that the general
excise tax is a voluntarily self-assessed tax, however, the
general excise tax in particular is little understood by persons

 
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doing business in Hawaii from the mainland.  Through no fault of
their own, none of the mainland lessors filed general excise
taxes on the rental collected from aircraft leased to local
airlines.

     The result is that no statute of limitation applies and the
Department of Taxation is properly interested in collecting taxes
for as long as twenty years in the past.  While the Department of
Taxation is correct, collection, however, is complicated due to
the fact that over the years records may have been destroyed or
lost, many of the lessors are out of business, have merged with
others, or no longer lease aircraft to the local airlines.

     Your Committees also find that although the tax may be on
mainland taxpayers, the lease contracts contain an indemnity
clause which make the lessee local airlines responsible for the
tax.  The imposition of a tax of this magnitude on our local
airlines at this time would be a substantial burden on them and
our economy.  It would make the local airlines less competitive
with other carriers to the detriment of the State.  Moreover, the
problem does not stop with the local airlines.  The airlines must
pass the tax on to their customers--all of us in the State who
must commute--and perhaps more importantly local agricultural
producers on the neighbor islands would pay increased shipping
prices.  This would make them even less competitive in local and
world markets.

     As the Governor said in an article in the Honolulu
Advertiser on February 8, 2000, "We must do everything possible
to keep the cost of air travel reasonable--for kamaainas and
visitors alike."

     Your Committees find that the Department of Taxation is
correct in its position, but the current and future impact of
assessing these taxes leads your Committees to believe that the
situation must be addressed.  The Department of Taxation will
next audit national and international airlines and concomitant
bad results as revealed in the audit of the local airlines can be
expected.  National and international airlines can take their
business elsewhere, but Hawaii cannot follow them.

     Your Committees have amended the measure as follows:

     (1)  The purpose section was rewritten to set forth the
          problems that led to this measure and which are faced
          in the area of taxing the lease rent from leasing
          aircraft and aircraft parts;


 
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     (2)  A new section was added to prevent the retroactive
          levy, assessment, or collection of taxes.  While
          unusual, your Committees find that preventing the
          retroactive assessment of taxes was done in Act 181,
          Session Laws of Hawaii 1990;

     (3)  The general excise and use tax exemptions have been
          rewritten to be more inclusive in order to provide full
          coverage of the problems in this area.  In addition,
          definitions of renting and leasing and aircraft have
          been added for clarity; and

     (4)  Provisions of section 238-1, Hawaii Revised Statutes,
          unnecessary to the amendments in this bill were deleted
          and technical, nonsubstantive amendments, as necessary,
          were made.

     As affirmed by the records of votes of the members of your
Committees on Transportation and Intergovernmental Affairs and
Ways and Means that are attached to this report, your Committees
are in accord with the intent and purpose of S.B. No. 2706, as
amended herein, and recommend that it pass Second Reading in the
form attached hereto as S.B. No. 2706, S.D. 1, and be placed on
the calendar for Third Reading.

                                   Respectfully submitted on
                                   behalf of the members of the
                                   Committees on Transportation
                                   and Intergovernmental Affairs
                                   and Ways and Means,



____________________________       ______________________________
CAROL FUKUNAGA, Co-Chair           CAL KAWAMOTO, Chair



____________________________
ANDREW LEVIN, Co-Chair

 
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