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THE SENATE                              S.B. NO.           S.D. 2
TWENTIETH LEGISLATURE, 1999                                H.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE GENERAL EXCISE TAXATION OF RELATED ENTITIES.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Section 237-23.5, Hawaii Revised Statutes, is
 
 2 amended by amending subsection (a) to read as follows:
 
 3      "(a)  This chapter shall not apply to amounts received,
 
 4 charged, or attributable to services furnished by one related
 
 5 entity to another related entity or to imputed or stated interest
 
 6 attributable to loans, advances, or use of capital between
 
 7 related entities.
 
 8      As used in this subsection:
 
 9      "Related entities" [mean:] means:
 
10      (1)  An affiliated group of corporations within the meaning
 
11           of section 1504 (with respect to affiliated group
 
12           defined) of the federal Internal Revenue Code of 1986,
 
13           as amended;
 
14      (2)  A controlled group of corporations within the meaning
 
15           of section 1563 (with respect to definitions and
 
16           special rules) of the federal Internal Revenue Code of
 
17           1986, as amended; [and]
 
18      (3)  Those entities connected through ownership of at least
 
19           eighty per cent of the total value and at least eighty
 

 
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 1           per cent of the total voting power of each such entity
 
 2           (or combination thereof), including partnerships,
 
 3           associations, trusts, S corporations, nonprofit
 
 4           corporations, [or any other group or combination of
 
 5           these or other tax entities acting as a business unit;]
 
 6           limited liability partnerships, or limited liability
 
 7           companies; and
 
 8      (4)  Any group or combination of the entities described in
 
 9           paragraph (3) above constituting a unitary business for
 
10           income tax purposes;
 
11      whether or not the entity is located within or without the
 
12      State or licensed under this chapter.
 
13      "Services" [mean] means legal and accounting services and
 
14 those managerial and administrative services performed by an
 
15 employee, officer, partner, trustee, sole proprietor, member, or
 
16 manager in the person's capacity as an employee, officer,
 
17 partner, trustee, sole proprietor, member, or manager of one of
 
18 the related entities and shall include overhead costs
 
19 attributable to those services."
 
20      SECTION 2.  Section 237-24.7, Hawaii Revised Statutes, is
 
21 amended to read as follows:
 
22      "237-24.7  Additional amounts not taxable.  In addition to
 
23 the amounts not taxable under section 237-24, this chapter shall
 
24 not apply to:
 

 
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 1      (1)  Amounts received by the operator of a hotel from the
 
 2           owner of the hotel in amounts equal to and which are
 
 3           disbursed by the operator for employee wages, salaries,
 
 4           payroll taxes, insurance premiums, and benefits,
 
 5           including retirement, vacation, sick pay, and health
 
 6           benefits.  As used in this paragraph:
 
 7                "Employee" means employees directly engaged in the
 
 8           day-to-day operation of the hotel and employed by the
 
 9           operator.
 
10                "Hotel" means an operation licensed under section
 
11           445-92.
 
12                "Operator" means any person who, pursuant to a
 
13           written contract with the owner of a hotel, operates or
 
14           manages the hotel for the owner.
 
15                "Owner" means the fee owner or lessee under a
 
16           recorded lease of a hotel;
 
17      (2)  Amounts received by the operator of a county
 
18           transportation system operated under an operating
 
19           contract with a political subdivision, where the
 
20           political subdivision is the owner of the county
 
21           transportation system.  As used in this paragraph:
 
22                "County transportation system" means a mass
 
23           transit system of motorized buses providing regularly
 

 
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 1           scheduled transportation within a county.
 
 2                "Operating contract" or "contract" means a
 
 3           contract to operate and manage a political
 
 4           subdivision's county transportation system, which
 
 5           provides that:
 
 6           (A)  The political subdivision shall exercise
 
 7                substantial control over all aspects of the
 
 8                operator's operation;
 
 9           (B)  The political subdivision controls the development
 
10                of transit policy, service planning, routes, and
 
11                fares; and
 
12           (C)  The operator develops in advance a draft budget in
 
13                the same format as prescribed for agencies of the
 
14                political subdivision.  The budget must be subject
 
15                to the same constraints and controls regarding the
 
16                lawful expenditure of public funds as any public
 
17                sector agency, and deviations from the budget must
 
18                be subject to approval by the appropriate
 
19                political subdivision officials involved in the
 
20                budgetary process.
 
21                "Operator" means any person who, pursuant to an
 
22           operating contract with a political subdivision,
 
23           operates or manages a county transportation system.
 

 
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 1                "Owner" means a political subdivision that owns or
 
 2           is the lessee of all the properties and facilities of
 
 3           the county transportation system (including buses, real
 
 4           estate, parking garages, fuel pumps, maintenance
 
 5           equipment, office supplies, etc.), and that owns all
 
 6           revenues derived therefrom;
 
 7      (3)  Surcharge taxes on rental motor vehicles imposed by
 
 8           chapter 251 and passed on and collected by persons
 
 9           holding certificates of registration under that
 
10           chapter;
 
11      (4)  Amounts received by the operator of orchard properties
 
12           from the owner of the orchard property in amounts equal
 
13           to and which are disbursed by the operator for employee
 
14           wages, salaries, payroll taxes, insurance premiums, and
 
15           benefits, including retirement, vacation, sick pay, and
 
16           health benefits.  As used in this paragraph:
 
17                "Employee" means an employee directly engaged in
 
18           the day-to-day operations of the orchard properties and
 
19           employed by the operator.
 
20                "Operator" means a producer who, pursuant to a
 
21           written contract with the owner of the orchard
 
22           property, operates or manages the orchard property for
 
23           the owner where the property contains an area
 

 
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 1           sufficient to make the undertaking economically
 
 2           feasible.
 
 3                "Orchard property" means any real property that is
 
 4           used to raise trees with a production life cycle of
 
 5           fifteen years or more producing fruits or nuts having a
 
 6           normal period of development from the initial planting
 
 7           to the first commercially saleable harvest of not less
 
 8           than three years.
 
 9                "Owner" means a fee owner or lessee under a
 
10           recorded lease of orchard property;
 
11      (5)  Taxes on nursing facility income imposed by chapter
 
12           346E and passed on and collected by operators of
 
13           nursing facilities;
 
14      (6)  Amounts received under property and casualty insurance
 
15           policies for damage or loss of inventory used in the
 
16           conduct of a trade or business located within the State
 
17           or a portion thereof that is declared a natural
 
18           disaster area by the governor pursuant to section 209-
 
19           2;
 
20      (7)  Amounts received as compensation by community
 
21           organizations, school booster clubs, and nonprofit
 
22           organizations under a contract with the chief election
 
23           officer for the provision and compensation of precinct
 

 
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 1           officials and other election related personnel,
 
 2           services, and activities, pursuant to section 11-5; and
 
 3      (8)  Interest received by a person domiciled outside the
 
 4           State from a trust company (as defined in section
 
 5           412:8-101) acting as payment agent or trustee on behalf
 
 6           of the issuer or payees of an interest bearing
 
 7           instrument or obligation, if the interest would not
 
 8           have been subject to tax under this chapter if paid
 
 9           directly to the person domiciled outside the State,
 
10           without the use of a paying agent or trustee; provided
 
11           that if the interest would otherwise be taxable under
 
12           this chapter if paid directly to the person domiciled
 
13           outside the State it shall not be exempt solely because
 
14           of the use of a Hawaii trust company as paying agent or
 
15           trustee.
 
16      (9)  Amounts received by a management company from related
 
17           entities engaged in the business of selling interstate
 
18           or foreign common carrier telecommunications services
 
19           in amounts equal to and which are disbursed by the
 
20           management company for employee wages, salaries,
 
21           payroll taxes, insurance premiums, and benefits,
 
22           including retirement, vacation, sick pay, and health
 
23           benefits.  As used in this paragraph:
 

 
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 1                "Employee" means employees directly engaged in the
 
 2           day-to-day operation of related entities engaged in the
 
 3           business of selling interstate or foreign common
 
 4           carrier telecommunications services and employed by the
 
 5           management company.
 
 6                "Management company" means any person who,
 
 7           pursuant to a written contract with a related entity
 
 8           engaged in the business of selling interstate or
 
 9           foreign common carrier telecommunications services,
 
10           provides managerial or operational services to that
 
11           entity.
 
12                "Related entities" means:
 
13           (A)  An affiliated group of corporations within the
 
14                meaning of section 1504 (with respect to
 
15                affiliated group defined) of the federal Internal
 
16                Revenue Code of 1986, as amended;
 
17           (B)  A controlled group of corporations within the
 
18                meaning of section 1563 (with respect to
 
19                definitions and special rules) of the federal
 
20                Internal Revenue Code of 1986, as amended; [or]
 
21           (C)  Those entities connected through ownership of at
 
22                least eighty per cent of the total value and at
 
23                least eighty per cent of the total voting power of
 

 
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 1                each such entity (or combination thereof),
 
 2                including partnerships, associations, trusts,
 
 3                S corporations, nonprofit corporations, [or any
 
 4                other group or combination of these or other tax
 
 5                entities acting as a business unit;] limited
 
 6                liability partnerships, or limited liability
 
 7                companies; and
 
 8           (D)  Any group or combination of the entities described
 
 9                in paragraph (C) above constituting a unitary
 
10                business for income tax purposes;
 
11           whether or not the entity is located within or without
 
12           the State or licensed under this chapter."
 
13      SECTION 3.  This Act does not affect rights and duties that
 
14 matured, assessments and penalties that were incurred, and
 
15 proceedings that were begun, before its effective date.
 
16      SECTION 4.  Statutory material to be repealed is bracketed.
 
17 New statutory material is underscored.
 
18      SECTION 5.  This Act shall take effect on July 1, 1999, and
 
19 apply to gross income or gross proceeds received after June 30,
 
20 1999.
 
21 
 

 
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