Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Consumer Protection & Commerce, to which was referred S.B. No. 1453, S.D. 2, entitled:

begs leave to report as follows:

The purpose of this bill is to overrule a Tax Appeal Court decision finding private sewage treatment plants are not subject to the public service company (PSC) tax, by amending the definition of "gross income" in section 239-2, Hawaii Revised Statutes (HRS), to include income generated by these businesses.

Testimony in support of this measure was received from the Department of Taxation and the Hawaii State Association of Counties. The Tax Foundation of Hawaii submitted comments.

Your Committee finds that sewage companies are classified as public utilities under chapter 269, HRS. Public utilities are taxed under the PSC law in lieu of the general excise (GET) and real property taxes, and therefore are taxed at a 5.885 percent tax rate, and not the 4 percent GET rate, plus property tax.

However, the state Tax Appeal Court recently held that because sewage companies' gross income is not listed in the definition of PSC "gross income," their income is not subject to the PSC tax. This decision primarily affects the counties, because the State receives revenues attributable to a 4 percent tax on their income, and the counties receive the remaining 1.885 percent in excess of the State's portion. This allocation of PSC revenues was enacted into law because the counties asserted that they lose real property tax revenues when public utilities pay the PSC tax in lieu of property taxes.

Your Committee finds that this bill overrules a decision that would distort the structure and upset the balance of laws pertaining to the PSC tax.

As affirmed by the record of votes of the members of your Committee on Consumer Protection & Commerce that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1453, S.D. 2, and recommends that it be referred to the Committee on Finance.