HB1034 SD1

PART I

SECTION 1. The purpose of this Act is to improve the department of taxation's collection capabilities through the efficient allocation of resources, simplified taxpayer filings, and a more user friendly interface with the public.

The legislature finds that in 2006, the department of taxation collected $4,400,000,000. Of that amount, almost $2,500,000,000 was generated through the general excise tax, $1,600,000,000 from individual income taxes, $216,000,000 through the transient accommodations tax, and the balance is collected from miscellaneous taxes.

In 2006, only twenty seven per cent of all individual income tax returns were filed electronically, leaving seventy‑three per cent as paper forms and payments to be processed manually. During tax season, it is not unusual for the department of taxation to receive one ton of mail a day.

The legislature further finds that in 2006, only four per cent (or 60,000) of all business returns processed were filed electronically, with an astounding ninety-six per cent requiring manual processing of paper forms and payments. Business returns may also require further monthly income tax withholding and general excise and transient accommodations tax payments, resulting in over 1,500,000 filings by businesses in Hawaii, again ninety-six per cent being processed manually.

Overall, only fifteen per cent of Hawaii tax returns are filed electronically, and the $2.50 convenience fee imposed by the eHawaii.gov portal is perceived as a barrier for many people who might consider filing electronically.

The legislature finds that in other states, electronic filing grew by roughly twenty-five to thirty per cent from 2000‑2004, and those states with electronic filing mandates have experienced higher growth rates than those without mandates. As a result, many states have used electronic filing applications as an opportunity to improve taxpayer services and reduce their operating costs (e.g., electronic payments, online account access, electronic forms and instructions), as well as increasing their collections without undue burdens to taxpayers.

PART II

The purpose of this part is to provide revenue generating initiatives that will be benefits-funded, meaning the vendor will be paid when measurable increases in revenues resulting from the initiatives are collected by the State. The revenues will be used by the department of taxation to enhance its computer system, called the integrated tax services and management system, and to streamline related operational procedures.

SECTION 2. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231- Integrated tax services and management special fund. (a) There is established in the state treasury the integrated tax services and management special fund to improve customer services, improve taxpayer fairness, and increase cost savings, with an emphasis on electronic filings.

(b) Notwithstanding any other law to the contrary, the source of funding of any appropriations to the integrated tax services and management special fund for the purposes of funding initiatives under subsection (c) shall come from the tax revenues collected pursuant to chapters 235, 237, and 238.

(c) Moneys in the special fund may be expended upon legislative appropriation by the department to pay for the integrated tax services and management systems performance-based contracts and administrative and operating expenses related to the integrated tax services and management systems post-implementation revenue-generating initiatives."

SECTION 3. Section 36-27, Hawaii Revised Statutes, is amended to read as follows:

"§36-27 Transfers from special funds for central service expenses. Except as provided in this section, and notwithstanding any other law to the contrary, from time to time, the director of finance, for the purpose of defraying the prorated estimate of central service expenses of government in relation to all special funds, except the:

(1) Special out-of-school time instructional program fund under section 302A-1310;

(2) School cafeteria special funds of the department of education;

(3) Special funds of the University of Hawaii;

(4) State educational facilities improvement special fund;

(5) Convention center enterprise special fund under section 201B-8;

(6) Special funds established by section 206E-6;

(7) Housing loan program revenue bond special fund;

(8) Housing project bond special fund;

(9) Aloha Tower fund created by section 206J-17;

(10) Funds of the employees' retirement system created by section 88-109;

(11) Unemployment compensation fund established under section 383-121;

(12) Hawaii hurricane relief fund established under chapter 431P;

(13) Hawaii health systems corporation special funds;

(14) Tourism special fund established under section 201B‑11;

(15) Universal service fund established under chapter 269;

(16) Emergency and budget reserve fund under section 328L‑3;

(17) Public schools special fees and charges fund under section 302A-1130(f);

(18) Sport fish special fund under section 187A-9.5;

(19) Neurotrauma special fund under section 321H-4;

(20) Deposit beverage container deposit special fund under section 342G-104;

(21) Glass advance disposal fee special fund established by section 342G-82;

(22) Center for nursing special fund under section 304A‑2163;

(23) Passenger facility charge special fund established by section 261-5.5;

(24) Solicitation of funds for charitable purposes special fund established by section 467B-15;

(25) Land conservation fund established by section 173A-5;

(26) Court interpreting services revolving fund under section 607-1.5;

(27) Trauma system special fund under section 321-22.5;

(28) Hawaii cancer research special fund;

(29) Community health centers special fund; [~~and~~]

(30) Emergency medical services special fund; and

(31) Integrated tax services and management special fund under section 231‑ ;

shall deduct five per cent of all receipts of all other special funds, which deduction shall be transferred to the general fund of the State and become general realizations of the State. All officers of the State and other persons having power to allocate or disburse any special funds shall cooperate with the director in effecting these transfers. To determine the proper revenue base upon which the central service assessment is to be calculated, the director shall adopt rules pursuant to chapter 91 for the purpose of suspending or limiting the application of the central service assessment of any fund. No later than twenty days prior to the convening of each regular session of the legislature, the director shall report all central service assessments made during the preceding fiscal year."

SECTION 4. Section 36-30, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) Each special fund, except the:

(1) Transportation use special fund established by section 261D-1;

(2) Special out-of-school time instructional program fund under section 302A-1310;

(3) School cafeteria special funds of the department of education;

(4) Special funds of the University of Hawaii;

(5) State educational facilities improvement special fund;

(6) Special funds established by section 206E-6;

(7) Aloha Tower fund created by section 206J-17;

(8) Funds of the employees' retirement system created by section 88-109;

(9) Unemployment compensation fund established under section 383-121;

(10) Hawaii hurricane relief fund established under chapter 431P;

(11) Convention center enterprise special fund established under section 201B-8;

(12) Hawaii health systems corporation special funds;

(13) Tourism special fund established under section 201B‑11;

(14) Universal service fund established under chapter 269;

(15) Emergency and budget reserve fund under section 328L‑3;

(16) Public schools special fees and charges fund under section 302A-1130(f);

(17) Sport fish special fund under section 187A-9.5;

(18) Neurotrauma special fund under section 321H-4;

(19) Center for nursing special fund under section 304A‑2163;

(20) Passenger facility charge special fund established by section 261-5.5;

(21) Court interpreting services revolving fund under section 607-1.5;

(22) Trauma system special fund under section 321-22.5;

(23) Hawaii cancer research special fund;

(24) Community health centers special fund; [~~and~~]

(25) Emergency medical services special fund; and

(26) Integrated tax services and management special fund under section 231‑ ;

shall be responsible for its pro rata share of the administrative expenses incurred by the department responsible for the operations supported by the special fund concerned."

SECTION 5. Section 235-119, Hawaii Revised Statutes, is amended to read as follows:

"§235-119 Taxes, state realizations. [~~All~~] (a) Except as provided in subsection (b), all income taxes shall be for the use of the State and shall be paid into the state treasury at such times as the director of finance shall direct.

(b) The director of taxation shall pay the income taxes into the state treasury as a state realization; provided that a sum, not to exceed the amount necessary to meet the obligations of integrated tax services and management systems performance‑based contracts, may be retained and deposited into the state treasury to the credit of the integrated tax services and management special fund. The sum retained by the director of taxation for deposit into the integrated tax services and management special fund shall be limited to amounts appropriated by the legislature."

SECTION 6. Section 237-31, Hawaii Revised Statutes, is amended to read as follows:

"§237‑31 Remittances. All remittances of taxes imposed by this chapter shall be made by money, bank draft, check, cashier's check, money order, or certificate of deposit to the office of the department of taxation to which the return was transmitted. The department shall issue its receipts therefor to the taxpayer and shall pay the moneys into the state treasury as a state realization, to be kept and accounted for as provided by law; provided that:

(1) The sum from all general excise tax revenues realized by the State that represents the difference between $90,000,000 and the proceeds from the sale of any general obligation bonds authorized for that fiscal year for the purposes of the state educational facilities improvement special fund shall be deposited in the state treasury in each fiscal year to the credit of the state educational facilities improvement special fund for public school capital improvement program needs; [~~and~~]

(2) A sum, not to exceed $5,000,000, from all general excise tax revenues realized by the State shall be deposited in the state treasury in each fiscal year to the credit of the compound interest bond reserve fund[.]; and

(3) A sum, not to exceed the amount necessary to meet the obligations of integrated tax services and management systems performance-based contracts, may be retained and deposited into the state treasury to the credit of the integrated tax services and management special fund. The sum retained by the director of taxation for deposit into the integrated tax services and management special fund shall be limited to amounts appropriated by the legislature."

SECTION 7. Section 238-14, Hawaii Revised Statutes, is amended to read as follows:

"§238-14 Taxes state realizations. [~~All~~] (a) Except as provided in subsection (b), all taxes collected under this chapter shall be state realizations.

(b) The director of taxation shall pay the use taxes into the state treasury as a state realization; provided that a sum, not to exceed the amount necessary to meet the obligations of integrated tax services and management systems performance-based contracts, may be retained and deposited into the state treasury to the credit of the integrated tax services and management special fund. The sum retained by the director of taxation for deposit into the integrated tax services and management special fund shall be limited to amounts appropriated by the legislature."

SECTION 8. Section 231-3.2, Hawaii Revised Statutes, is repealed.

["~~§231-3.2 Integrated tax information management systems special fund.~~ (a) There is established in the state treasury the integrated tax information management systems special fund into which shall be deposited general excise tax revenues as provided by section 237-31. The director of taxation may retain and deposit the amounts necessary to meet the obligations of the integrated tax information management systems performance-based contract. The amounts transferred by the director of taxation to the integrated tax information management systems special fund for a fiscal year shall be limited to the amounts appropriated by the legislature.

(b) Moneys in the fund shall be expended by the department to pay for the integrated tax information management systems performance-based contracts authorized by Act 273, Session Laws of Hawaii 1996.

(c) The department shall submit an annual report to the legislature no later than twenty days prior to the convening of each regular session, providing an accounting of the receipts of, and expenditures from, the fund.

~~(d) This section shall be repealed on July 1, 2005.~~"]

SECTION 9. The department of taxation shall execute the performance-based contracts and work assignments authorized under this part in a timely manner; provided that the integrated tax services and management systems enhancements and related services shall be executed no later than September 1, 2007.

PART III

SECTION 10. (a) Notwithstanding any other law to the contrary, including any law requiring oversight of an executive department's decisions relating to on-line portals or Internet‑based access, the department of taxation shall enter into performance-based contracts to enhance or acquire automated tax systems, or both, including computer hardware and software, for the implementation and administration of the taxes under title 14, Hawaii Revised Statutes, including the city and county of Honolulu surcharge authorized under section 46-16.8, Hawaii Revised Statutes, and adopted by ordinance.

(b) For the purposes of this Act:

"Performance-based contract" means a contract under which compensation to the vendor shall be computed according to performance standards established by the department of taxation. Any performance-based contract entered into by the department of taxation for the purposes established under subsection (a) shall provide for the payment of fees:

(1) Based on a contractually specified amount of the increase in the amount of taxes, interest, and penalties collected and attributable to the implementation of the integrated tax services and management system post-implementation revenue-generating initiatives; or

(2) On a fixed-fee contract basis to be paid from the increase in the amount of taxes, interest, and penalties collected and attributable to the implementation of integrated tax services and management system post-implementation revenue-generating initiatives.

(c) The State shall receive a permanent license to use the enhanced or automated tax systems upon full payment to the vendor.

(d) Notwithstanding any other law to the contrary, the department of taxation shall award the performance-based contract pursuant to the requirements of chapter 103D, Hawaii Revised Statutes.

SECTION 11. The director of taxation shall report to the legislature, no later than twenty days prior to the convening of every regular session, beginning with the 2008 regular session, with respect to the status of the performance-based contract and shall provide an accounting of all moneys appropriated. The report shall include:

(1) Detailed information on the costs, benefits, and features of implementing the integrated tax services and management system post-implementation revenue‑generating initiatives;

(2) The amount of increased tax, interest, and penalties collected that is attributable to the integrated tax services and management system post-implementation revenue-generating initiatives; and

(3) The amount paid to the vendor or vendors contracted under section 9 of this Act.

The report shall also include any other information from the preceding fiscal year that may assist the legislature in determining the efficacy of a contract executed under this Act, beginning with the fiscal year immediately preceding the fiscal year commencing on the effective date of this Act and continuing until two complete fiscal years have elapsed following the full implementation of the integrated tax services and management system post-implementation revenue-generating initiatives.

SECTION 12. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2007-2008 to be deposited into the integrated tax services and management special fund.

SECTION 13. There is appropriated out of the integrated tax services and management special fund the sum of $ or so much thereof as may be necessary for fiscal year 2007-2008 for the purposes of the integrated tax services and management special fund established pursuant to section 231- , Hawaii Revised Statutes.

The sum appropriated shall be expended by the department of taxation; provided that the department of taxation shall repay the general fund for the general fund appropriation for fiscal year 2007-2008 to section 231- , Hawaii Revised Statutes, no later than June 30, 2008.

PART IV

SECTION 14. The increased use of computers for personal purposes and in daily business operations has led to an increase in electronic and computer-based interactions with government. The department of taxation interacts with nearly every person in Hawaii on a regular basis. The department of taxation also regularly interacts with nonresident taxpayers and mainland-based businesses that routinely file tax information.

In response to the increase in interactions with out‑of‑state taxpayers and the increase in electronic tax filings, the legislature, in 1997, made electronic filing an acceptable means of carrying out a taxpayer's obligations under the law. Since this law was enacted, the ability to interact electronically has grown considerably, especially for businesses, nearly all of which have a computer and access to the Internet.

Within the next decade, a majority, if not all, of tax filings are predicted to be filed electronically. This will result in greater efficiencies for both the taxpayer and the State. In addition, the legislature, which is charged with the responsibility of overseeing the effectiveness of tax incentives and the efficacy of the tax system as a whole, will have access to more specific data on Hawaii taxes if the tax data is captured electronically.

The proposed amendments in this part will also ensure that taxpayers will be provided with sufficient notice and an opportunity to comment by requiring compliance with chapter 91, Hawaii Revised Statutes.

The purpose of this part is to increase electronic filing by requiring that the department of taxation, by rule, require electronic filing. It is the intent of the legislature, that within this broader mandate, the department of taxation shall:

(1) Focus its initial rulemaking on those taxes paid by businesses that the Internal Revenue Service requires to be filed electronically; and

(2) Address increased voluntary electronic filing through the integrated tax services and management software upgrades.

SECTION 15. Section 231-8.5, Hawaii Revised Statutes, is amended to read as follows:

"[[]§231-8.5[]] Electronic filing of tax returns. (a) The department [~~may allow filing~~], by rule, adopted pursuant to chapter 91, shall require taxpayers who must file their taxes electronically with the Internal Revenue Service to file by electronic, telephonic, or optical means [of] any tax return, application, report, or other document required under [~~the provisions of~~] title 14 administered by the department[.]; provided that a service fee shall not be required. The date of filing shall be the date the tax return, application, report, or other document is transmitted to the department in a form and manner prescribed by departmental rules adopted pursuant to chapter 91.

(b) The department [~~may~~] shall determine alternative methods for the signing, subscribing, or verifying [of] a tax return, application, report, or other document that shall have the same validity and consequences as the actual signing by the taxpayer. The department shall increase voluntary electronic filing through integrated tax services and management, free software, and software upgrades; provided that a service fee shall not be required; provided further that the emphasis of voluntary electronic filing shall be on withholding taxes, general excise taxes, and transient accommodations taxes.

(c) A filing under this section shall be treated in the same manner as a filing subject to the penalties under section 231-39."

SECTION 16. There is appropriated out of the integrated tax services and management special fund the sum of $ or so much thereof as may be necessary for fiscal year 2007-2008 to pay the eHawaii.gov vendor for the costs of electronic filing that were previously paid by the taxpayer pursuant to section 231-8.5, Hawaii Revised Statutes.

The sum appropriated shall be expended by the department of taxation for the purposes of this Act.

PART V

SECTION 17. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 18. This Act shall take effect on July 1, 2007; provided that the amendments to section 237-31, Hawaii Revised Statutes, made in section 6 of this Act, shall not be repealed upon the repeal of section 2, Act 304, Session Laws of Hawaii 2006.

HOUSE OF REPRESENTATIVES	H.B. NO.	1034
TWENTY-FOURTH LEGISLATURE, 2007		S.D. 1
STATE OF HAWAII