Honorable Robert Bunda

President of the Senate

Twenty-First State Legislature

Regular Session of 2002

State of Hawaii

Sir:

Your Committee on Commerce, Consumer Protection and Housing, to which was referred S.B. No. 2885 entitled:

begs leave to report as follows:

The purpose of this measure is to establish that a segregation of taxable income by a land-based telecommunications services provider is valid if the method of segregation utilized is not in conflict with administrative rules.

Sprint testified in support of this measure. The Department of Taxation (Department) opposed the measure and the Tax Foundation of Hawaii submitted comments thereon.

Wireline telecommunications services providers who "bundle" their services by offering interstate, intrastate, and international telecommunication services for one rate, are subject to different taxes, depending on the source of the taxable revenue. Income derived from interstate and international services is subject to the general excise tax (GET), while income derived from intrastate service is subject to the public service company (PSC) tax.

Currently, a wireline provider may segregate in its business records and on its tax returns income taxable under one GET rate from income taxable under another GET rate, and income subject to GET from income subject to the PSC tax. However, if a subsequent audit by the Department concludes that the revenue was incorrectly segregated and additional taxes are due, the wireline provider cannot recoup these additional taxes from a subscriber. This measure would provide greater certainty in the taxation process by deeming a segregation valid so long as the segregation method utilized does not conflict with rules adopted by the Department.

Your Committee understands that the Department and industry representatives are engaged in discussions in an effort to address the concerns underlying this measure. Therefore, to facilitate these discussions, your Committee has amended this measure by delaying its effective date until July 1, 2050. Additionally, your Committee made a technical, nonsubstantive change for clarification.

As affirmed by the record of votes of the members of your Committee on Commerce, Consumer Protection and Housing that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2885, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 2885, S.D. 1, and be referred to the Committee on Ways and Means.