Report Title:
General Excise Tax; Identifiable Element
Description:
Expands the treatment of wholesale sales of services by eliminating the requirement that the cost of services provided does not constitute overhead and provides a definition of "identifiable element" to provide consistent and fair administration of the general excise tax.
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HOUSE OF REPRESENTATIVES |
H.B. NO. |
2817 |
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TWENTY-THIRD LEGISLATURE, 2006 |
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STATE OF HAWAII |
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A BILL FOR AN ACT
relating to taxation.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that, despite recent laws to address the problems associated with the general excise tax, many unresolved issues remain that adversely affect the business community, especially small businesses.
A major concern involves the administration of wholesale sales of services under the general excise tax. Presently, the law is unclear as to the distinction between what is consumed as overhead and what is an "identifiable element" benefiting a customer. This distinction is important for two reasons.
First, the distinction determines whether additional general excise tax assessments are added onto a service before it reaches the consumer. Since most small businesses are not vertically integrated (part of a larger corporate structure) and therefore contract-out many services, the general excise tax assessed on these services raises the overall cost of doing business.
Second, the lack of a distinction has led to confusion in the business community because of arbitrary interpretations of the law, as well as enforcement and tax compliance problems.
The purpose of this Act is to clarify the general excise tax law by expanding the treatment of wholesale sales of services, by eliminating the requirement that the cost of services does not constitute overhead and by providing a definition of "identifiable element".
SECTION 2. Section 237-1, Hawaii Revised Statutes, is amended by adding a new definition to be appropriately inserted and to read as follows:
""Identifiable element" means direct and indirect costs of tangible personal property that must be capitalized with respect to property that is produced, manufactured, or acquired for resale. Direct costs of tangible personal property include costs that become an integral part of the subject matter that is produced, manufactured, or acquired for resale and are not consumed as overhead. Indirect costs of tangible personal property include all costs of tangible personal property other than direct costs and include parts, supplies, office supplies, fuel, and other indirect costs subject to the uniform capitalization rules of section 263A (with respect to capitalization and inclusion in inventory costs of certain expenses) of the Internal Revenue Code of 1986, as amended."
SECTION 3. Section 237-4, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:
"(a) "Wholesaler" or "jobber" applies only to a person making sales at wholesale. Only the following are sales at wholesale:
(1) Sales to a licensed retail merchant, jobber, or other licensed seller for purposes of resale;
(2) Sales to a licensed manufacturer of materials or commodities that are to be incorporated by the manufacturer into a finished or saleable product (including the container or package in which the product is contained) during the course of its preservation, manufacture, or processing, including preparation for market, and that will remain in such finished or saleable product in such form as to be perceptible to the senses, which finished or saleable product is to be sold and not otherwise used by the manufacturer;
(3) Sales to a licensed producer or cooperative association of materials or commodities that are to be incorporated by the producer or by the cooperative association into a finished or saleable product that is to be sold and not otherwise used by the producer or cooperative association, including specifically materials or commodities expended as essential to the planting, growth, nurturing, and production of commodities that are sold by the producer or by the cooperative association;
(4) Sales to a licensed contractor, of materials or commodities that are to be incorporated by the contractor into the finished work or project required by the contract and that will remain in such finished work or project in such form as to be perceptible to the senses;
(5) Sales to a licensed producer, or to a cooperative association described in section 237-23(a)(7) for sale to a licensed producer, or to a licensed person operating a feed lot, of poultry or animal feed, hatching eggs, semen, replacement stock, breeding services for the purpose of raising or producing animal or poultry products for disposition as described in section 237-5 or for incorporation into a manufactured product as described in paragraph (2) or for the purpose of breeding, hatching, milking, or egg laying other than for the customer's own consumption of the meat, poultry, eggs, or milk so produced; provided that in the case of a feed lot operator, only the segregated cost of the feed furnished by the feed lot operator as part of the feed lot operator's service to a licensed producer of poultry or animals to be butchered or to a cooperative association described in section 237-23(a)(7) of such licensed producers shall be deemed to be a sale at wholesale; and provided further that any amount derived from the furnishing of feed lot services, other than the segregated cost of feed, shall be deemed taxable at the service business rate. This paragraph shall not apply to the sale of feed for poultry or animals to be used for hauling, transportation, or sports purposes;
(6) Sales to a licensed producer, or to a cooperative association described in section 237-23(a)(7) for sale to the producer, of seed or seedstock for producing agricultural and aquacultural products, or bait for catching fish (including the catching of bait for catching fish), which agricultural and aquacultural products or fish are to be disposed of as described in section 237-5 or to be incorporated in a manufactured product as described in paragraph (2);
(7) Sales to a licensed producer, or to a cooperative association described in section 237-23(a)(7) for sale to such producer; of polypropylene shade cloth; of polyfilm; of polyethylene film; of cartons and such other containers, wrappers, and sacks, and binders to be used for packaging eggs, vegetables, fruits, and other agricultural and aquacultural products; of seedlings and cuttings for producing nursery plants or aquacultural products; or of chick containers; which cartons and such other containers, wrappers, and sacks, binders, seedlings, cuttings, and containers are to be used as described in section 237-5, or to be incorporated in a manufactured product as described in paragraph (2);
(8) Sales of tangible personal property:
(A) To a licensed seller engaged in a service business or calling; provided that:
(i) The property is not consumed or incidental to the performance of the services;
(ii) There is a resale of the article at the retail rate of four per cent; and
(iii) The resale of the article is separately charged or billed by the person rendering the services;
(B) Where:
(i) Tangible personal property is sold upon the order or request of a licensed seller for the purpose of rendering a service in the course of the person's service business or calling, or upon the order or request of a person subject to tax under section 237D-2 for the purpose of furnishing transient accommodations;
(ii) The tangible personal property becomes or is used as an identifiable element of the service rendered; and
(iii) The cost of the tangible personal property does not constitute overhead to the licensed seller;
the sale shall be subject to section 237-13.3; or
(C) Where the taxpayer is subject to both subparagraphs (A) and (B), then the taxpayer shall be taxed under subparagraph (A). Subparagraphs (A) and (C) shall be repealed on January 1, 2006;
(9) Sales to a licensed leasing company of capital goods that have a depreciable life, are purchased by the leasing company for lease to its customers, and are thereafter leased as a service to others;
(10) Sales of services to a licensed seller engaging in a business or calling whenever:
(A) [Either:] Any of the following is the case:
(i) In the context of a service-to-service transaction, a service is rendered upon the order or request of a licensed seller for the purpose of rendering another service in the course of the seller's service business or calling;
(ii) In the context of a service-to-tangible personal property transaction, a service is rendered upon the order or request of a licensed seller for the purpose of manufacturing, producing, or preparing tangible personal property to be sold;
(iii) In the context of a services-to-contracting transaction, a service is rendered upon the order or request of a licensed contractor as defined in section 237-6 for the purpose of assisting that licensed contractor; or
(iv) In the context of a services-to-transient accommodations rental transaction, a service is rendered upon the order or request of a person subject to tax under section 237D-2 for the purpose of furnishing transient accommodations;
(B) The benefit of the service passes directly or indirectly to the customer of the licensed seller, licensed contractor, or person furnishing transient accommodations [as an identifiable element of the other service or property to be sold, the contracting, or the furnishing of transient accommodations;
(C) The cost of the service does not constitute]; or the benefit of the service is consumed as overhead to the licensed seller, licensed contractor, or person furnishing transient accommodations;
[(D)] (C) The gross income of the licensed seller is not divided between the licensed seller and another licensed seller, contractor, or person furnishing transient accommodations for imposition of the tax under this chapter;
[(E)] (D) The gross income of the licensed seller is not subject to a deduction under this chapter or chapter 237D; and
[(F)] (E) The resale of the service, tangible personal property, contracting, or transient accommodations is subject to the tax imposed under this chapter at the highest tax rate.
Sales subject to this paragraph shall be subject to section 237-13.3;
(11) Sales to a licensed retail merchant, jobber, or other licensed seller of bulk condiments or prepackaged single-serving packets of condiments that are provided to customers by the licensed retail merchant, jobber, or other licensed seller;
(12) Sales to a licensed retail merchant, jobber, or other licensed seller of tangible personal property that will be incorporated or processed by the licensed retail merchant, jobber, or other licensed seller into a finished or saleable product during the course of its preparation for market (including disposable, nonreturnable containers, packages, or wrappers, in which the product is contained and that are generally known and most commonly used to contain food or beverage for transfer or delivery), and which finished or saleable product is to be sold and not otherwise used by the licensed retail merchant, jobber, or other licensed seller;
(13) Sales of amusements subject to taxation under section 237-13(4) to a licensed seller engaging in a business or calling whenever:
(A) [Either:] Any of the following is the case:
(i) In the context of an amusement-to-service transaction, an amusement is rendered upon the order or request of a licensed seller for the purpose of rendering another service in the course of the seller's service business or calling;
(ii) In the context of an amusement-to-tangible personal property transaction, an amusement is rendered upon the order or request of a licensed seller for the purpose of selling tangible personal property; or
(iii) In the context of an amusement-to-amusement transaction, an amusement is rendered upon the order or request of a licensed seller for the purpose of rendering another amusement in the course of the person's amusement business;
(B) The benefit of the amusement passes to the customer of the licensed seller as an identifiable element of the other service, tangible personal property to be sold, or amusement;
(C) The cost of the amusement does not constitute overhead to the licensed seller;
(D) The gross income of the licensed seller is not divided between the licensed seller and another licensed seller, person furnishing transient accommodations, or person rendering an amusement for imposition of the tax under chapter 237;
(E) The gross income of the licensed seller is not subject to a deduction under this chapter; and
(F) The resale of the service, tangible personal property, or amusement is subject to the tax imposed under this chapter at the highest rate.
As used in this paragraph, "amusement" means entertainment provided as part of a show for which there is an admission charge. Sales subject to this paragraph shall be subject to section 237-13.3; and
(14) Sales by a printer to a publisher of magazines or similar printed materials containing advertisements, when the publisher is under contract with the advertisers to distribute a minimum number of magazines or similar printed materials to the public or defined segment of the public, whether or not there is a charge to the persons who actually receive the magazines or similar printed materials."
SECTION 4. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.
SECTION 5. This Act shall take effect upon its approval and shall apply to taxable years beginning after December 31, 2005.
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INTRODUCED BY: |
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