SB1230 SD1.DOC

SECTION 1. The State's primary source of revenue is taxes paid by residents and nonresidents. During these tough economic times it is especially important for the State to protect and improve upon the collection of its various taxes in order to provide widespread financial support to social programs, infrastructure projects, and public education. The State should improve its collection of tax revenues with respect to the withholding requirements of the Hawaii Real Property Tax Act, income tax, transient accommodations tax, and general excise tax imposed on vacation rental owners. The State should also improve its collection policies to encompass the complex transactions that are often undertaken to avoid paying state taxes under the current tax laws.

The purpose of this Act is to strengthen the Hawaii Real Property Tax Act. This Act accomplishes its purpose by imposing the withholding requirement on foreign entities that, upon disposing of Hawaii real property, no longer have any connection to the State of Hawaii and by ensuring that nonresident vacation rental owners pay their proper share of general excise, transient accommodation, and income taxes by requiring that, upon disposition of the vacation rental, the foreign owners provide a tax clearance certificate to the Bureau of Conveyances as a condition of recording.

The legislature also finds that there are numerous complex transactions occurring in Hawaii that involve the purchase, transfer, or exchange of real property through the sale or exchange of ownership interests in legal entities. Under the State's current tax laws, many of these complex transactions take place without any tax consequences, including the payment of conveyance taxes. Thus, this Act imposes a conveyance tax on sale transactions by an entity that holds real property located in Hawaii and that sells any ownership interest in the entity to another party that acquires an interest in the real property through purchasing an interest in the entity. This Act enables the State to levy, assess, and collect the proper taxes on such transactions.

SECTION 2. Chapter 247, Hawaii Revised Statutes, is amended by adding two new sections to be appropriately designated and to read as follows:

"§247- Definitions. As used in this section:

"Fair market value" means, for purposes of this chapter but not for the purpose of calculating the gain or loss from the disposition of realty or interest therein, the price on the date of a transfer or conveyance at which the asset would change hands between an unrelated willing buyer and willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of all relevant facts; reduced by the outstanding balance of any mortgage or other security interest in the asset that was incurred to acquire the asset or otherwise incurred in direct connection with the asset, such as a real property tax lien or debt incurred to improve or maintain the property.

"Real property holding company" means any corporation, partnership, limited liability company, trust, estate, or other entity for which the fair market value of all of its real property interests equals or exceeds fifty per cent of the fair market value of all of its assets.

"Realty" means "property" or "real property" as those terms are defined in section 231-1 and, for purposes of this chapter, includes any intangible ownership, capital, or profits interest in a real property holding company.

"Terminated partnership" means a partnership for which no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership or for which fifty per cent or more of the total interest in partnership capital and profits is sold or exchanged within a twelve month period.

§247- Partnership not terminated. Two or more merged, consolidated, or divided partnerships are not terminated partnerships, and the resulting partnerships shall be considered a continuation of the prior partnership when:

(1) In the case of the merger or consolidation of two or more partnerships, the members of any merging or consolidating partnership own an interest of more than fifty per cent in the capital and profits of the resulting partnership; and

(2) In the case of the division of a partnership into two or more partnerships, the members of the resulting partnerships held an interest of more than fifty per cent in the prior partnership."

SECTION 3. Section 235-68, Hawaii Revised Statutes, is amended to read as follows:

"(a) As used in this section:

"Escrow agent" means any person who holds documents and is responsible for receiving and disbursing funds with respect to the transfer of Hawaii real property.

"Nonresident person" means every person other than a resident person.

"Property" or "real property" has the meaning as [~~the same term is~~] defined in section 231-1[.] and includes any intangible ownership, capital, or profits interest in a real property holding company.

"Real property holding company" has the same meaning as defined in section 247- .

"Resident person" means any:

(1) Individual included in the definition of resident in section 235-1;

(2) Corporation incorporated or granted a certificate of authority under chapter 414, 414D, or 415A;

(3) Partnership formed or registered under chapter 425 or 425E;

(4) Foreign partnership qualified to transact business pursuant to chapter 425 or 425E;

(5) Limited liability company formed under chapter 428 or any foreign limited liability company registered under chapter 428; provided that if a single member limited liability company has not elected to be taxed as a corporation, the single member limited liability company shall be disregarded for purposes of this section and this section shall be applied as if the sole member is the transferor;

(6) Limited liability partnership formed under chapter 425;

(7) Foreign limited liability partnership qualified to transact business under chapter 425;

(8) Trust included in the definition of resident trust in section 235-1; or

(9) Estate included in the definition of resident estate in section 235-1[.]

but does not include any transferor that is a corporation, partnership, limited liability company, trust, estate, or other entity if, immediately after such transferor's disposition of Hawaii real property, the transferor has no permanent place of business in Hawaii.

"Terminated partnership" has the same meaning as defined by section 247- .

"Transferee" means any person, the State and the counties and their respective subdivisions, agencies, authorities, and boards, acquiring real property which is located in Hawaii.

"Transferee's agent" means the escrow agent or any person licensed under chapter 467 who provides closing and settlement services on behalf of the transferee with respect to the transfer or conveyance of Hawaii real property.

"Transferor" means any person disposing real property that is located in Hawaii.

(b) Unless otherwise provided in this section, every transferee or the transferee's agent shall deduct and withhold a tax equal to five per cent of the amount realized on the disposition of Hawaii real property. Every person required to withhold a tax under this section is made jointly and severally liable for the tax and is relieved of liability for or upon the claim or demand of any other person for the amount of any payments to the department made in accordance with this section. With respect to transfers of any intangible ownership, capital, or profits interest in a real property holding company, the five per cent withholding tax shall be applied to the portion of the amount realized on the transfer of the intangible interest in a company that is attributable to the real estate owned by the real property holding company that is located in Hawaii. The amount realized that is attributable to Hawaii real estate shall be computed in the same manner as provided by section 247-2(b).

(c) Every transferee or the transferee's agent required by this section to withhold tax under subsection (b) shall make a return of the amount withheld to the department of taxation not more than twenty days following the transfer date[.] and shall remit the amount to the department by means of electronic funds transfer as specified by the department.

(d) No person shall be required to deduct and withhold any amount under subsection (b)[,] if [~~the~~] any one of the following apply:

(1) The disposition of Hawaii real property is a transfer of an interest in a real property holding company that constitutes a bona fide pledge of such interest as collateral on a loan;

(2) The disposition of Hawaii real property is a transfer of an ownership, capital or profits interest in a real property holding company that is regularly traded on an established securities market;

(3) The disposition of Hawaii real property is a transfer of an ownership, capital or profits interest in a real property holding company that is taxed as a partnership and, for tax purposes, the partnership is not a terminated partnership immediately after the transfer; or

(4) The transferor furnishes to the transferee an affidavit by the transferor stating the transferor's taxpayer identification number and:

[~~(1)~~] (A) The transferor is a resident person; or

[~~(2)~~] (B) That by reason of a nonrecognition provision of the Internal Revenue Code as operative under this chapter or the provisions of any United States treaty, the transferor is not required to recognize any gain or loss with respect to the transfer;

[~~(3)~~] (C) A brief description of the transfer; and

[~~(4)~~] (D) A brief summary of the law and facts supporting the claim that recognition of gain or loss is not required with respect to the transfer.

This [~~subsection~~] paragraph shall not apply if the transferee has actual knowledge that the affidavit referred to in this [~~subsection~~] paragraph is false[;].

(e) An application for a withholding certificate may be submitted by the transferor to the department setting forth:

(1) The name, address, and taxpayer identification number, if any, of the parties to the transaction and the location and general description of the real property to be transferred; and

(2) A calculation and written justification showing that the transferor will not realize any gain with respect to the transfer; or

(3) A calculation and written justification showing that there will be insufficient proceeds to pay the withholding required under subsection (b) after payment of all costs, including selling expenses and the amount of any mortgage or lien secured by the property.

Upon receipt of the application, the department shall determine whether the transferor has realized or will realize any gain with respect to the transfer, or whether there will be insufficient proceeds to pay the withholding. If the department is satisfied that no gain will be realized or that there will be insufficient proceeds to pay the withholding, it shall issue a withholding certificate stating the amount to be withheld, if any.

The submission of an application for a withholding certificate to the department does not relieve the transferee or the transferee's agent of its obligation to withhold or to make a return of the tax under subsections (b) and (c).

(f) No person shall be required to deduct and withhold any amount under subsection (b) if one or more individual transferors furnishes to the transferee an affidavit by the transferor stating the transferor's taxpayer identification number, that for the year preceding the date of the transfer the property has been used by the transferor as a principal residence, and that the amount realized for the property does not exceed $300,000.

(g) The department may enter into written agreements with persons who engage in more than one real property transaction in a calendar year or other persons to whom meeting the withholding requirements of this section are not practicable. The written agreements may allow the use of a withholding method other than that prescribed by this section or may waive the withholding requirement under this section.

(h) Every nonresident person that is a transferor under this section shall submit to the bureau of conveyances a certified tax clearance certificate issued by the department stating that the transferor has paid all general excise, transient accommodations, and income taxes. Submission of the tax clearance certificate shall be made a condition to the recording of any transfer of title of real property located in Hawaii by a nonresident person that is a transferor under this section.

(i) The director of taxation shall prepare forms as may be necessary to satisfy the requirements of this section. The director may also require the nonresident person who is a transferor to furnish information to ascertain the person's compliance with the requirements of this section and may adopt rules necessary to effectuate the purposes of this section pursuant to chapter 91.

(j) For purposes of this section, a transferor has no permanent place of business in Hawaii if it is not organized under the laws of Hawaii, it does not maintain and staff a permanent office in Hawaii, and it does not have any business activities in Hawaii. The mere holding of Hawaii real estate for investment purposes does not constitute a business activity."

SECTION 4. Section 247-2, Hawaii Revised Statutes, is amended to read as follows:

"§247-2 Basis and rate of tax. (a) The tax imposed by section 247-1 shall be based on the actual and full consideration [(],whether cash or otherwise[,] and 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; 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; and

of [~~such~~] the 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.

(b) With respect to the transfer of any intangible ownership, capital, or profits interest in a real property holding company, the tax at the rates enumerated in subsection (a) above, shall be applied to the amount of any consideration, whether cash or otherwise, including any promise, act, forbearance, property interest, value, gain, advantage, benefit, or profit, paid or to be paid on such transfer that is attributable to the realty located in Hawaii that is owned by the real property holding company, the amount to be determined by applying the percentage of the fair market value of all assets of the real property holding company that is comprised of all realty located in Hawaii owned by the real property holding company to the total consideration paid."

SECTION 5. Section 247-3, Hawaii Revised Statutes, is amended to read as follows:

"§247-3 Exemptions. The tax imposed by section 247-1 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[.];

(18) Any document or instrument that memorializes a bona fide pledge of any ownership, capital, or profits interest in a real property holding company as collateral on a loan;

(19) Any document or instrument that transfers any ownership, capital, or profits interest in a real property holding company that is regularly traded on an established securities market; and

(20) Any document or instrument that transfers an interest in a partnership (or limited liability company that is taxed as a partnership) that is a real property holding company if the partnership is not a terminated partnership immediately after the transfer."

SECTION 6. Section 247-6, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) No certificate is required to be filed for any document or instrument made exempt by section 247-3, except that in the following situations, a certificate shall be filed in the manner and place which the director shall prescribe, within ninety days after the transaction or prior to the recordation or filing of the document or instrument with the registrar of conveyances or the assistant registrar of the land court or after such period, recordation, or filing as the director shall prescribe:

(1) In the case of any document or instrument described under section 247-3(3), any party to the document or instrument shall file a certificate declaring that the document or instrument merely confirms or corrects a deed, lease, sublease, assignment, transfer, or conveyance previously recorded or filed[.];

(2) In the case of any document or instrument described under section 247-3(4), any party to the document or instrument shall file a certificate declaring the amount of the nominal consideration paid and marital or parental relationship of the parties[.];

(3) In the case of any document or instrument described under section 247-3(5), any party to the document or instrument shall file a certificate declaring the reasons why the consideration is $100 or less[.];

(4) In the case of any document or instrument described in section 247-3(6), any party to the document or instrument shall file a certificate declaring that the document or instrument is made pursuant to an agreement of sale, and where applicable, an assignment or assignments of agreements of sale[.];

(5) In the case of any document or instrument described under section 247-3(8), any person made a party to the document or instrument as grantee, assignee, or transferee shall file a certificate declaring the full and actual consideration of the property transferred[.];

(6) In the case of any document or instrument described under section 247-3(11), any party to the document or instrument shall file a certificate declaring each owner's:

(A) Undivided interest in the real property and the value of that interest before partition; and

(B) Proportionate interest and the value of that interest after partition[.];

(7) In the case of any document or instrument described under section 247-3(12), any party to the document or instrument shall file a certificate declaring that the document or instrument is made pursuant to an order of the court and containing the court case number[.];

(8) In the case of any document or instrument described under section 247-3(13), any party to the document or instrument shall file a certificate declaring that the document or instrument conveys real property from a testamentary trust to a trust beneficiary[.];

(9) In the case of any document or instrument described under section 247-3(14), any party to the document or instrument shall file a certificate declaring that the document or instrument conveys real property from the grantor to a grantor's revocable living trust or from a grantor's revocable living trust to the grantor[.]; and

(10) In the case of any document or instrument described under section 247-3(20), any party to the document or instrument shall file a certificate declaring that the document conveys an interest in a real property holding company that is taxed as a partnership and that, immediately after the conveyance, the partnership is not a terminated partnership."

SECTION 7. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 8. This Act shall take effect on January 1, 2010.

THE SENATE	S.B. NO.	1230
TWENTY-FIFTH LEGISLATURE, 2009		S.D. 1
STATE OF HAWAII