REPORT TITLE:
Taxation


DESCRIPTION:
Clarifies the definition of "related entities" for purposes of
the general excise tax.  (SD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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THE SENATE                              S.B. NO.           S.D. 2
TWENTIETH LEGISLATURE, 1999                                
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
 

 
Page 2                                                     1178
                                     S.B. NO.           S.D. 2
                                                        
                                                        

 
 1           per cent of the total voting power of each such
 
 2           entity[,] (or combination thereof), including
 
 3           partnerships, associations, trusts, S corporations,
 
 4           nonprofit corporations, [or any other group or
 
 5           combination of these or other tax entities acting as a
 
 6           business unit;] limited liability partnerships, or
 
 7           limited liability companies; and
 
 8      (4)  Any group or combination of the entities described in
 
 9           paragraph (3) constituting a unitary business for
 
10           income tax purposes;
 
11 whether or not the entity is located within or without the State
 
12 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
 

 
Page 3                                                     1178
                                     S.B. NO.           S.D. 2
                                                        
                                                        

 
 1 not apply to:
 
 2      (1)  Amounts received by the operator of a hotel from the
 
 3           owner of the hotel in amounts equal to and which are
 
 4           disbursed by the operator for employee wages, salaries,
 
 5           payroll taxes, insurance premiums, and benefits,
 
 6           including retirement, vacation, sick pay, and health
 
 7           benefits.  As used in this paragraph:
 
 8                "Employee" means employees directly engaged in the
 
 9           day-to-day operation of the hotel and employed by the
 
10           operator.
 
11                "Hotel" means an operation licensed under section
 
12           445-92.
 
13                "Operator" means any person who, pursuant to a
 
14           written contract with the owner of a hotel, operates or
 
15           manages the hotel for the owner.
 
16                "Owner" means the fee owner or lessee under a
 
17           recorded lease of a hotel;
 
18      (2)  Amounts received by the operator of a county
 
19           transportation system operated under an operating
 
20           contract with a political subdivision, where the
 
21           political subdivision is the owner of the county
 
22           transportation system.  As used in this paragraph:
 
23                "County transportation system" means a mass
 

 
Page 4                                                     1178
                                     S.B. NO.           S.D. 2
                                                        
                                                        

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

 
Page 5                                                     1178
                                     S.B. NO.           S.D. 2
                                                        
                                                        

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

 
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                                     S.B. NO.           S.D. 2
                                                        
                                                        

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

 
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                                     S.B. NO.           S.D. 2
                                                        
                                                        

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

 
Page 8                                                     1178
                                     S.B. NO.           S.D. 2
                                                        
                                                        

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

 
Page 9                                                     1178
                                     S.B. NO.           S.D. 2
                                                        
                                                        

 
 1                least eighty per cent of the total voting power of
 
 2                each such entity[,] (or combination thereof),
 
 3                including partnerships, associations, trusts,
 
 4                S corporations, nonprofit corporations, [or any
 
 5                other group or combination of these or other tax
 
 6                entities acting as a business unit;] limited
 
 7                liability partnerships, or limited liability
 
 8                companies; and
 
 9           (D)  Any group or combination of the entities described
 
10                in subparagraph (C) constituting a unitary
 
11                business for income tax purposes;
 
12           whether or not the entity is located within or without
 
13           the State or licensed under this chapter; and
 
14     (10)  Amounts received as grants under section 206M-15."
 
15      SECTION 3.  This Act does not affect rights and duties that
 
16 matured, assessments and penalties that were incurred, and
 
17 proceedings that were begun, before its effective date.
 
18      SECTION 4.  Statutory material to be repealed is bracketed.
 
19 New statutory material is underscored.
 
20      SECTION 5.  This Act shall take effect on July 1, 1999, and
 
21 apply to gross income or gross proceeds received after June 30,
 
22 1999.