HB1921 HD2.DOC

SECTION 1. The legislature finds that there are numerous complex transactions occurring in Hawaii that involve the purchase, transfer, or exchange of real property located in Hawaii through the sale or exchange of ownership interests in legal entities. Under the State's current tax laws, many of these complex transactions involving the transfer of real property located in Hawaii are taking place without any tax considerations, including the payment of conveyance taxes.

The purpose of this Act is to create a new tax separate from the conveyance tax that is imposed on an entity with a controlling interest of the entity that transfers ownership of real property owned by the entity through the sale of the entity. It is the intent of this Act that the newly created tax would capture taxes on transactions designed to avoid liability under the conveyance tax.

SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

CONTROLLING INTEREST TRANSFER TAX

§ -1 Definitions. As used in this chapter:

"Controlling interest" means:

(1) In the case of a corporation, more than fifty per cent of the total combined voting power of all classes of stock of the corporation; and

(2) In the case of a partnership, association, trust, or other entity, more than fifty per cent of the capital, profits, or beneficial interest in the partnership, association, trust, or other entity.

"Department" means the department of taxation.

"Director" means the director of taxation.

"Entity" means a natural person or any other legal business organization used in the state pursuant to law, including a corporation, partnership, and sole proprietor.

"True and actual value" means the fair market value as of the time of the transfer of a controlling interest, not including the amount of any mortgage, lien, or other encumbrance.

§ -2 Administration by director; rules. (a) This chapter shall be administered by the director. All forms necessary to enforce this chapter shall be prescribed, printed, and furnished by the director. The director may adopt and shall enforce rules pursuant to chapter 91 to administer and enforce this chapter.

(b) In addition to any other rules necessary to administer and enforce this chapter, the director shall adopt rules:

(1) Establishing a system to notify the department of changes in the controlling interest of any entity subject to this chapter;

(2) Establishing requirements as to the responsibility for filing returns if there is no single person who conveys the controlling interest in any entity subject to this chapter; and

(3) Providing for the filing of any liens necessary to enforce the payment of taxes, and any penalties or interest required by this chapter.

§ -3 Tax on transfer of controlling interest in entity possessing real property; rate of tax applied to the value of the real property. (a) There is imposed a tax on the sale or transfer for consideration of a controlling interest in any entity which possesses, directly or indirectly, an interest in real property in this state when the present true and actual value of the interest in real property equals or exceeds $2,000, and when:

(1) The transfer of a controlling interest is made by a seller or transferor or by a group of sellers or transferors acting in concert; provided that sellers or transferors who are related to each other by blood or marriage are presumed, unless shown to the contrary, to be acting in concert; and

(2) The controlling interest in an entity transfers real property to a transferee or to a group of transferees acting in concert; provided that:

(A) Where transferees are related and one influences or controls the actions of another (such as parent and subsidiary corporations, parents and children, and husbands and wives.), the transferees shall be presumed to be acting in concert; and

(B) Where transferees have negotiated and will consummate their purchase of ownership interests in unity (such as transfers that are closely related in time, transferees that are few in number, or purchase contracts that contain mutual terms, and agreements among transferees binding them to a course of action with respect to the transfers.), the transferees shall be presumed to be acting in concert.

The tax shall be imposed on the present true and actual value of the interest in real property transferred at the rate set forth in section 247-2. The tax shall be payable by the entity or entities selling or transferring the controlling interest, or as designated by the director pursuant to rule. If the entity owns less than a one hundred per cent interest in the real estate, the tax shall be based on the actual percentage of ownership, with no further discounts on account of minority ownership.

(b) A taxable sale or transfer of a controlling interest may occur in one transaction or in a series of transactions. Transactions that occur within six months of each other are presumed, unless shown to the contrary, to be a series of transactions.

(1) Any sale or transfer of a controlling interest in any entity to the extent that the entity possesses, directly or indirectly, an interest in real property located in an area of any county designated as an enterprise zone in accordance with section 209E-4, but shall apply to the extent the entity possesses, directly or indirectly, an interest in real property in this state located outside the area designated as an enterprise zone; and

(2) Any sale or transfer of real property, however effected, if it consists of a mere change in identity or form of ownership of an entity where there is no change in the beneficial ownership, including transfers to a corporation or partnership that is wholly owned by the transferor.

§ -4 Filing return and payment of tax. On or before the last day of the month following the month in which the sale or transfer of a controlling interest in an entity that is subject to the tax imposed by section -3 occurs, a return shall be filed with the director by the entity or entities conveying the controlling interest, as designated by and in a form as the director may prescribe pursuant to rules adopted under chapter 91.

§ -5 Penalties. Any person in violation of this chapter shall be subject to penalties provided under title 14 and shall be guilty of a misdemeanor.

§ -6 Records maintenance. Any entity with respect to which there is a sale or transfer of a controlling interest in the entity, which sale or transfer is subject to the tax imposed by section -3, shall maintain a record of the seller or transferor, and report every transfer of a controlling interest in its stock or in its capital, profits, or beneficial interests, and other information as the director may require. The report shall be filed at least annually or more frequently as may be required at a location pursuant to rules adopted by the director."

SECTION 3. Section 247-2, Hawaii Revised Statutes, is amended to read as follows:

"§247-2 Basis and rate of tax. The tax imposed by section 247-1 and section -3 shall be based on the actual and full consideration (whether cash or otherwise, including any promise, act, forbearance, property interest, value, gain, advantage, benefit, or profit), paid or to be paid for all transfers or conveyance of realty or any interest therein, that shall include any liens or encumbrances thereon at the time of sale, lease, sublease, assignment, transfer, or conveyance, and shall be at the following rates:

(1) Except as provided in paragraph (2):

(A) Ten cents per $100 for properties with a value of less than $600,000;

(B) Twenty cents per $100 for properties with a value of at least $600,000, but less than $1,000,000;

(D) Fifty cents per $100 for properties with a value of at least $2,000,000, but less than $4,000,000;

(E) Seventy cents per $100 for properties with a value of at least $4,000,000, but less than $6,000,000;

(F) Ninety cents per $100 for properties with a value of at least $6,000,000, but less than $10,000,000; and

(G) One dollar per $100 for properties with a value of $10,000,000 or greater; and

(2) For the sale of a condominium or single family residence for which the purchaser is ineligible for a county homeowner's exemption on property tax:

(A) Fifteen cents per $100 for properties with a value of less than $600,000;

(B) Twenty-five cents per $100 for properties with a value of at least $600,000, but less than $1,000,000;

(D) Sixty cents per $100 for properties with a value of at least $2,000,000, but less than $4,000,000;

(E) Eighty-five cents per $100 for properties with a value of at least $4,000,000, but less than $6,000,000;

(F) One dollar and ten cents per $100 for properties with a value of at least $6,000,000, but less than $10,000,000; and

(G) One dollar and twenty-five cents per $100 for properties with a value of $10,000,000 or greater,

of such actual and full consideration; provided that in the case of a lease or sublease, this chapter shall apply only to a lease or sublease whose full unexpired term is for a period of five years or more, and in those cases, including (where appropriate) those cases where the lease has been extended or amended, the tax in this chapter shall be based on the cash value of the lease rentals discounted to present day value and capitalized at the rate of six per cent, plus the actual and full consideration paid or to be paid for any and all improvements, if any, that shall include on-site as well as off-site improvements, applicable to the leased premises; and provided further that the tax imposed for each transaction shall be not less than $1."

SECTION 4. Section 247-3, Hawaii Revised Statutes, is amended to read as follows:

"§247-3 Exemptions. The tax imposed by section 247-1 and section -3 shall not apply to:

(1) Any document or instrument that is executed prior to January 1, 1967;

(2) Any document or instrument that is given to secure a debt or obligation;

(3) Any document or instrument that only confirms or corrects a deed, lease, sublease, assignment, transfer, or conveyance previously recorded or filed;

(4) Any document or instrument between husband and wife, reciprocal beneficiaries, or parent and child, in which only a nominal consideration is paid;

(5) Any document or instrument in which there is a consideration of $100 or less paid or to be paid;

(6) Any document or instrument conveying real property that is executed pursuant to an agreement of sale, and where applicable, any assignment of the agreement of sale, or assignments thereof; provided that the taxes under this chapter have been fully paid upon the agreement of sale, and where applicable, upon such assignment or assignments of agreements of sale;

(7) Any deed, lease, sublease, assignment of lease, agreement of sale, assignment of agreement of sale, instrument or writing in which the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof are the only parties thereto;

(8) Any document or instrument executed pursuant to a tax sale conducted by the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof for delinquent taxes or assessments;

(9) Any document or instrument conveying real property to the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof pursuant to the threat of the exercise or the exercise of the power of eminent domain;

(10) Any document or instrument that solely conveys or grants an easement or easements;

(11) Any document or instrument whereby owners partition their property, whether by mutual agreement or judicial action; provided that the value of each owner's interest in the property after partition is equal in value to that owner's interest before partition;

(12) Any document or instrument between marital partners or reciprocal beneficiaries who are parties to a divorce action or termination of reciprocal beneficiary relationship that is executed pursuant to an order of the court in the divorce action or termination of reciprocal beneficiary relationship;

(13) Any document or instrument conveying real property from a testamentary trust to a beneficiary under the trust;

(14) Any document or instrument conveying real property from a grantor to the grantor's revocable living trust, or from a grantor's revocable living trust to the grantor as beneficiary of the trust;

(15) Any document or instrument conveying real property, or any interest therein, from an entity that is a party to a merger or consolidation under chapter 414, 414D, 415A, 421, 421C, 425, 425E, or 428 to the surviving or new entity;

(16) Any document or instrument conveying real property, or any interest therein, from a dissolving limited partnership to its corporate general partner that owns, directly or indirectly, at least a ninety per cent interest in the partnership, determined by applying section 318 (with respect to constructive ownership of stock) of the federal Internal Revenue Code of 1986, as amended, to the constructive ownership of interests in the partnership; and

(17) Any document or instrument conveying real property to any nonprofit or for-profit organization that has been certified by the Hawaii housing finance and development corporation for low-income housing development."

SECTION 5. This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun before its effective date.

SECTION 6. New statutory material is underscored.

SECTION 7. This Act shall take effect upon its approval and shall apply to taxable years beginning after December 31, 2009.

HOUSE OF REPRESENTATIVES	H.B. NO.	1921
TWENTY-FIFTH LEGISLATURE, 2010		H.D. 2
STATE OF HAWAII