REPORT TITLE:
Taxation


DESCRIPTION:
Expands the definitions of "wholesaler" to include wholesale
services to alleviate the pyramiding of general excise and use
taxes. (SB638 HD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        638
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                H.D. 2
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO TAXATION.



BE IT ENACTED BY THE LEGISLATURE

 1      SECTION 1.  In the past, Hawaii's agricultural goods-
 
 2 dominated economy was not severely burdened because of the
 
 3 reduced general excise tax rate on intermediary sale of goods.
 
 4 However, Hawaii has moved from an agricultural goods to a
 
 5 service-dominated economy.  Because the general excise tax does
 
 6 not allow for the intermediary sale of services, the pyramiding
 
 7 effect of the general excise tax has become a large burden on
 
 8 business and the public.
 
 9      The pyramiding effect of the general excise tax and the use
 
10 tax significantly increases the cost of goods and services to
 
11 consumers.  The current law allows a reduced rate of one-half of
 
12 one per cent on the sale of tangible personal property for resale
 
13 and for limited intermediary sales but this is not enough.  The
 
14 Hawaii courts have narrowly construed the types of sales that
 
15 qualify for intermediary sales of services, so to promote
 
16 fairness and equality with wholesale goods, the legislature finds
 
17 that the taxation of wholesale sales of services should be
 
18 treated similarly to the taxation of wholesale sales of goods.
 

 
Page 2                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1      The purpose of this Act is to expand the treatment of
 
 2 intermediary sales of services by treating all intermediary
 
 3 services as wholesale sales.
 
 4      SECTION 2.  Chapter 237, Hawaii Revised Statutes, is amended
 
 5 by adding a new section to be appropriately designated and to
 
 6 read as follows:
 
 7      "237-      Application of sections 237-4(a)(8), 237-
 
 8 4(a)(10), and 237-13(6)(A).  (a)  Sections 237-4(a)(8), 237-
 
 9 4(a)(10), and 237-13(6)(A) to the contrary notwithstanding,
 
10 instead of the tax levied under sections 237-4 and 237-13(6)(A)
 
11 at one-half of one per cent, during the period January 1, 2000,
 
12 to December 31, 2005, the tax shall be as follows:
 
13      (1)  In calendar year 2000, 3.5 per cent;
 
14      (2)  In calendar year 2001, 3.0 per cent;
 
15      (3)  In calendar year 2002, 2.5 per cent;
 
16      (4)  In calendar year 2003, 2.0 per cent;
 
17      (5)  In calendar year 2004, 1.5 per cent;
 
18      (6)  In calendar year 2005, 1.0 per cent; and
 
19      (7)  In calendar year 2006 and thereafter, 0.5 per cent.
 
20      (b)  The department shall have the authority to implement
 
21 the tax rate changes in subsection (a) by prescribing tax forms
 
22 and instructions that require tax reporting and payment by
 
23 deduction, allocation, or any other method to determine tax
 
24 liability with due regard to the tax rate changes."
 

 
Page 3                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1      SECTION 3.  Section 237-1, Hawaii Revised Statutes, is
 
 2 amended by adding a new definition to be appropriately inserted
 
 3 and to read as follows:
 
 4      ""Overhead" means continuous or general costs occurring in
 
 5 the normal course of a business, including but not limited to
 
 6 costs for labor, rent, taxes, royalties, interest, discounts
 
 7 paid, insurance, lighting, heating, cooling, accounting, legal
 
 8 fees, equipment and facilities, telephone systems, depreciation,
 
 9 and amortization."
 
10      SECTION 4.  Section 237-4, Hawaii Revised Statutes, is
 
11 amended to read as follows:
 
12      "237-4 "Wholesaler", "jobber", defined.  (a)  "Wholesaler"
 
13 or "jobber" applies only to a person making sales at wholesale.
 
14 Only the following are sales at wholesale:
 
15      (1)  Sales to a licensed retail merchant, jobber, or other
 
16           licensed seller for purposes of resale;
 
17      (2)  Sales to a licensed manufacturer of material or
 
18           commodities which are to be incorporated by the
 
19           manufacturer into a finished or saleable product
 
20           (including the container or package in which the
 
21           product is contained) during the course of its
 
22           preservation, manufacture, or processing, including
 
23           preparation for market, and which will remain in such
 

 
Page 4                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           finished or saleable product in such form as to be
 
 2           perceptible to the senses, which finished or saleable
 
 3           product is to be sold and not otherwise used by the
 
 4           manufacturer;
 
 5      (3)  Sales to a licensed producer or cooperative association
 
 6           of materials or commodities which are to be
 
 7           incorporated by the producer or by the cooperative
 
 8           association into a finished or saleable product which
 
 9           is to be sold and not otherwise used by the producer or
 
10           cooperative association, including specifically
 
11           materials or commodities expended as essential to the
 
12           planting, growth, nurturing, and production of
 
13           commodities which are sold by the producer or by the
 
14           cooperative association;
 
15      (4)  Sales to a licensed contractor, of material or
 
16           commodities which are to be incorporated by the
 
17           contractor into the finished work or project required
 
18           by the contract and which will remain in such finished
 
19           work or project in such form as to be perceptible to
 
20           the senses;
 
21      (5)  Sales to a licensed producer, or to a cooperative
 
22           association described in section 237-23(a)(7) for sale
 
23           to such producer, or to a licensed person operating a
 

 
Page 5                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           feed lot, of poultry or animal feed, hatching eggs,
 
 2           semen, replacement stock, breeding services for the
 
 3           purpose of raising or producing animal or poultry
 
 4           products for disposition as described in section 237-5
 
 5           or to be incorporated in a manufactured product as
 
 6           described in paragraph (2) or for the purpose of
 
 7           breeding, hatching, milking, or egg laying other than
 
 8           for the customer's own consumption of the meat,
 
 9           poultry, eggs, or milk so produced; provided that in
 
10           the case of a feed lot operator, only the segregated
 
11           cost of the feed furnished by the feed lot operator as
 
12           part of the feed lot operator's service to a licensed
 
13           producer of poultry or animals to be butchered or to a
 
14           cooperative association described in section
 
15           237-23(a)(7) of such licensed producers shall be deemed
 
16           to be a sale at wholesale; and provided further that
 
17           any amount derived from the furnishing of feed lot
 
18           services, other than the segregated cost of feed, shall
 
19           be deemed taxable at the service business rate.  This
 
20           paragraph shall not apply to the sale of feed for
 
21           poultry or animals to be used for hauling,
 
22           transportation, or sports purposes;
 

 
 
 
Page 6                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1      (6)  Sales to a licensed producer, or to a cooperative
 
 2           association described in section 237-23(a)(7) for sale
 
 3           to the producer, of seed for producing agricultural
 
 4           products, or bait for catching fish (including the
 
 5           catching of bait for catching fish), which agricultural
 
 6           products or fish are to be disposed of as described in
 
 7           section 237-5 or to be incorporated in a manufactured
 
 8           product as described in paragraph (2);
 
 9      (7)  Sales to a licensed producer, or to a cooperative
 
10           association described in section 237-23(a)(7) for sale
 
11           to such producer; of polypropylene shade cloth; of
 
12           polyfilm; of polyethylene film; of cartons and such
 
13           other containers, wrappers, and sacks, and binders to
 
14           be used for packaging eggs, vegetables, fruits, and
 
15           other agricultural products; of seedlings and cuttings
 
16           for producing nursery plants; or of chick containers;
 
17           which cartons and such other containers, wrappers, and
 
18           sacks, binders, seedlings, cuttings, and containers are
 
19           to be used as described in section 237-5, or to be
 
20           incorporated in a manufactured product as described in
 
21           paragraph (2);
 

 
 
 
 
 
Page 7                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1      (8)  Sales of tangible personal property [to]:
 
 2           (A)  To a licensed [person] seller engaged in [the] a
 
 3                service business[;] or calling; provided that [(A)
 
 4                the]:
 
 5                (i)  The property is not consumed or incidental to
 
 6                     the performance of the services; [(B) there]
 
 7               (ii)  There is a resale of the article at the
 
 8                     retail rate of four per cent; and [[(C) the]
 
 9              (iii)  The resale of the article is separately
 
10                     charged or billed by the person rendering the
 
11                     services; and
 
12           (B)  Where:
 
13                (i)  Tangible personal property is sold upon the
 
14                     order or request of a licensed seller for the
 
15                     purpose of rendering a service in the course
 
16                     of the person's service business or calling
 
17                     or upon the order or request of a person,
 
18                     subject to tax under section 237D-2, for the
 
19                     purpose of furnishing transient
 
20                     accommodations;
 
21               (ii)  The property becomes or is used as an
 
22                     identifiable element of the service rendered;
 
23                     and
 

 
Page 8                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1              (iii)  The cost of the property does not constitute
 
 2                     overhead to the licensed seller;
 
 3                the sale shall be subject to section 237-    .
 
 4           Where the taxpayer is subject to both subparagraphs (A)
 
 5           and (B), then the taxpayer shall be taxed under
 
 6           subparagraph (A).  Subparagraph (A) shall be repealed
 
 7           on January 1, 2006.
 
 8      (9)  Sales to a licensed leasing company of capital goods
 
 9           which have a depreciable life, are purchased by the
 
10           leasing company for lease to its customers, and are
 
11           thereafter leased as a service to others[.  Capital
 
12           goods means goods which have a depreciable life and
 
13           which are purchased by the leasing company for lease to
 
14           its customers.]; and
 
15     (10)  Sales of services to a licensed seller engaging in a
 
16           business or calling whenever:
 
17           (A)  Either:
 
18                (i)  In the context of a service-to-service
 
19                     transaction, a service is rendered upon the
 
20                     order or request of a licensed seller for the
 
21                     purpose of rendering another service in the
 
22                     course of the seller's service business or
 
23                     calling;
 

 
Page 9                                                     638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1               (ii)  In the context of a service-to-goods
 
 2                     transaction, a service is rendered upon the
 
 3                     order or request of a licensed seller for the
 
 4                     purpose of manufacturing, producing,
 
 5                     preparing, or acquiring tangible personal
 
 6                     property to be sold;
 
 7              (iii)  In the context of a services-to-contracting
 
 8                     transaction, a service is rendered upon the
 
 9                     order or request of a licensed contractor as
 
10                     defined in section 237-6 for the purpose of
 
11                     assisting that licensed contractor in
 
12                     executing a contract; or
 
13               (iv)  In the context of a services-to-transient
 
14                     accommodations rental transaction, a service
 
15                     is rendered upon the order or request of a
 
16                     person subject to tax under section 237D-2
 
17                     for the purpose of furnishing transient
 
18                     accommodations;
 
19           (B)  The benefit of the service passes to the customer
 
20                of the licensed seller, licensed contractor, or
 
21                person furnishing transient accommodations as an
 
22                identifiable element of the other service or
 
23                property to be sold, the contracting, or the
 
24                furnishing of transient accommodations; and
 

 
Page 10                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           (C)  The cost of the service does not constitute
 
 2                overhead to the licensed seller, licensed
 
 3                contractor, or person furnishing transient
 
 4                accommodations.
 
 5           Sales subject to this paragraph shall be subject to
 
 6           section 237-    .
 
 7      (b)  If the use tax law is finally held by a court of
 
 8 competent jurisdiction to be unconstitutional or invalid insofar
 
 9 as it purports to tax the use or consumption of tangible personal
 
10 property imported into the State in interstate or foreign
 
11 commerce or both, wholesalers and jobbers shall be taxed
 
12 thereafter under this chapter in accordance with the following
 
13 definition (which shall supersede the preceding paragraph
 
14 otherwise defining "wholesaler" or "jobber"):  "Wholesaler" or
 
15 "jobber" means a person, or a definitely organized division
 
16 thereof, definitely organized to render and rendering a general
 
17 distribution service which buys and maintains at the person's
 
18 place of business a stock or lines of merchandise which the
 
19 person distributes; and which, through salespersons, advertising,
 
20 or sales promotion devices, sells to licensed retailers, to
 
21 institutional or licensed commercial or industrial users, in
 
22 wholesale quantities and at wholesale rates.  A corporation
 
23 deemed not to be carrying on a trade or business in this State
 

 
Page 11                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1 under section 235-6 shall nevertheless be deemed to be a
 
 2 wholesaler and shall be subject to the tax imposed by this
 
 3 chapter."
 
 4      SECTION 5.  Section 237-7, Hawaii Revised Statutes, is
 
 5 amended to read as follows:
 
 6      "237-7 "Service business or calling", defined."Service
 
 7 business or calling" includes all activities engaged in for other
 
 8 persons for a consideration which involve the rendering of a
 
 9 service, including professional services, as distinguished from
 
10 the sale of tangible property or the production and sale of
 
11 tangible property.  "Service business or calling" does not
 
12 include the services rendered by an employee to the employee's
 
13 employer."
 
14      SECTION 6.  Section 237-13, Hawaii Revised Statutes, is
 
15 amended to read as follows:
 
16      "237-13  Imposition of tax.  There is hereby levied and
 
17 shall be assessed and collected annually privilege taxes against
 
18 persons on account of their business and other activities in the
 
19 State measured by the application of rates against values of
 
20 products, gross proceeds of sales, or gross income, whichever is
 
21 specified, as follows:
 
22      (1)  Tax on manufacturers.
 
23           (A)  Upon every person engaging or continuing within
 
24                the State in the business of manufacturing,
 

 
Page 12                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                including compounding, canning, preserving,
 
 2                packing, printing, publishing, milling,
 
 3                processing, refining, or preparing for sale,
 
 4                profit, or commercial use, either directly or
 
 5                through the activity of others, in whole or in
 
 6                part, any article or articles, substance or
 
 7                substances, commodity or commodities, the amount
 
 8                of the tax to be equal to the value of the
 
 9                articles, substances, or commodities,
 
10                manufactured, compounded, canned, preserved,
 
11                packed, printed, milled, processed, refined, or
 
12                prepared, for sale, as shown by the gross proceeds
 
13                derived from the sale thereof by the manufacturer
 
14                or person compounding, preparing, or printing
 
15                them, multiplied by one-half of one per cent.
 
16           (B)  The measure of the tax on manufacturers is the
 
17                value of the entire product for sale, regardless
 
18                of the place of sale or the fact that deliveries
 
19                may be made to points outside the State.
 
20           (C)  If any person liable for the tax on manufacturers
 
21                ships or transports the person's product, or any
 
22                part thereof, out of the State, whether in a
 
23                finished or unfinished condition, or sells the
 

 
Page 13                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                same for delivery outside of the State (for
 
 2                example, consigned to a mainland purchaser via
 
 3                common carrier f.o.b. Honolulu), the value of the
 
 4                products in the condition or form in which they
 
 5                exist immediately before entering interstate or
 
 6                foreign commerce, determined as hereinafter
 
 7                provided, shall be the basis for the assessment of
 
 8                the tax imposed by this paragraph.  This tax shall
 
 9                be due and payable as of the date of entry of the
 
10                products into interstate or foreign commerce,
 
11                whether the products are then sold or not.  The
 
12                department of taxation shall determine the basis
 
13                for assessment, as provided by this paragraph, as
 
14                follows:
 
15                (i)  If the products at the time of their entry
 
16                     into interstate or foreign commerce already
 
17                     have been sold, the gross proceeds of sale,
 
18                     less the transportation expenses, if any,
 
19                     incurred in realizing the gross proceeds for
 
20                     transportation from the time of entry of the
 
21                     products into interstate or foreign commerce,
 
22                     including insurance and storage in transit,
 
23                     shall be the measure of the value of the
 
24                     products[.];
 

 
Page 14                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1               (ii)  If the products have not been sold at the
 
 2                     time of their entry into interstate or
 
 3                     foreign commerce, and in cases governed by
 
 4                     clause (i) in which the products are sold
 
 5                     under circumstances such that the gross
 
 6                     proceeds of sale are not indicative of the
 
 7                     true value of the products, the value of the
 
 8                     products constituting the basis for
 
 9                     assessment shall correspond as nearly as
 
10                     possible to the gross proceeds of sales for
 
11                     delivery outside the State, adjusted as
 
12                     provided in clause (i), or if sufficient data
 
13                     are not available, sales in the State, of
 
14                     similar products of like quality and
 
15                     character and in similar quantities, made by
 
16                     the taxpayer (unless not indicative of the
 
17                     true value) or by others.  Sales outside the
 
18                     State, adjusted as provided in clause (i),
 
19                     may be considered when they constitute the
 
20                     best available data.  The department shall
 
21                     prescribe uniform and equitable rules for
 
22                     ascertaining the values[.];
 

 
 
 
Page 15                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1              (iii)  At the election of the taxpayer and with the
 
 2                     approval of the department, the taxpayer may
 
 3                     make the taxpayer's returns under clause (i)
 
 4                     even though the products have not been sold
 
 5                     at the time of their entry into interstate or
 
 6                     foreign commerce[.]; and
 
 7               (iv)  In all cases in which products leave the
 
 8                     State in an unfinished condition, the basis
 
 9                     for assessment shall be adjusted so as to
 
10                     deduct the portion of the value as is
 
11                     attributable to the finishing of the goods
 
12                     outside the State.
 
13      (2)  Tax on business of selling tangible personal property;
 
14           producing.
 
15           (A)  Upon every person engaging or continuing in the
 
16                business of selling any tangible personal property
 
17                whatsoever (not including, however, bonds or other
 
18                evidence of indebtedness, or stocks), there is
 
19                likewise hereby levied, and shall be assessed and
 
20                collected, a tax equivalent to four per cent of
 
21                the gross proceeds of sales of the business;
 
22                provided that insofar as certain retailing is
 
23                taxed by section 237-16, the tax shall be that
 

 
Page 16                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                levied by section 237-16, and in the case of a
 
 2                wholesaler, the tax shall be equal to one-half of
 
 3                one per cent of the gross proceeds of sales of the
 
 4                business and provided that insofar as the sales of
 
 5                tangible personal property is a wholesale sale
 
 6                under section 237-4(a)(8)(B) the sale shall be
 
 7                subject to section 237-   .  Upon every person
 
 8                engaging or continuing within this State in the
 
 9                business of a producer, the tax shall be equal to
 
10                one-half of one per cent of the gross proceeds of
 
11                sales of the business, or the value of the
 
12                products, for sale, if sold for delivery outside
 
13                the State or shipped or transported out of the
 
14                State, and the value of the products shall be
 
15                determined in the same manner as the value of
 
16                manufactured products covered in the cases under
 
17                paragraph (1)(C).
 
18           (B)  Gross proceeds of sales of tangible property in
 
19                interstate and foreign commerce shall constitute a
 
20                part of the measure of the tax imposed on persons
 
21                in the business of selling tangible personal
 
22                property, to the extent, under the conditions, and
 
23                in accordance with the provisions of the
 

 
Page 17                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                Constitution of the United States and the Acts of
 
 2                the Congress of the United States which may be now
 
 3                in force or may be hereafter adopted, and whenever
 
 4                there occurs in the State an activity to which,
 
 5                under the Constitution and Acts of Congress, there
 
 6                may be attributed gross proceeds of sales, the
 
 7                gross proceeds shall be so attributed.
 
 8           (C)  No manufacturer or producer, engaged in such
 
 9                business in the State and selling the
 
10                manufacturer's or producer's products for delivery
 
11                outside of the State (for example, consigned to a
 
12                mainland purchaser via common carrier f.o.b.
 
13                Honolulu), shall be required to pay the tax
 
14                imposed in this chapter for the privilege of so
 
15                selling the products, and the value or gross
 
16                proceeds of sales of the products shall be
 
17                included only in determining the measure of the
 
18                tax imposed upon the manufacturer or producer.
 
19           (D)  When a manufacturer or producer, engaged in such
 
20                business in the State, also is engaged in selling
 
21                the manufacturer's or producer's products in the
 
22                State at wholesale, retail, or in any other
 
23                manner, the tax for the privilege of engaging in
 

 
Page 18                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                the business of selling the products in the State
 
 2                shall apply to the manufacturer or producer as
 
 3                well as the tax for the privilege of manufacturing
 
 4                or producing in the State, and the manufacturer or
 
 5                producer shall make the returns of the gross
 
 6                proceeds of the wholesale, retail, or other sales
 
 7                required for the privilege of selling in the
 
 8                State, as well as making the returns of the value
 
 9                or gross proceeds of sales of the products
 
10                required for the privilege of manufacturing or
 
11                producing in the State.  The manufacturer or
 
12                producer shall pay the tax imposed in this chapter
 
13                for the privilege of selling its products in the
 
14                State, and the value or gross proceeds of sales of
 
15                the products, thus subjected to tax, may be
 
16                deducted insofar as duplicated as to the same
 
17                products by the measure of the tax upon the
 
18                manufacturer or producer for the privilege of
 
19                manufacturing or producing in the State; except
 
20                that no producer of agricultural products who
 
21                sells the products to a purchaser who will process
 
22                the products outside the State shall be required
 
23                to pay the tax imposed in this chapter for the
 
24                privilege of producing or selling those products.
 

 
Page 19                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           (E)  A taxpayer selling to a federal cost-plus
 
 2                contractor may make the election provided for by
 
 3                paragraph (3)(C), and in that case the tax shall
 
 4                be computed pursuant to the election,
 
 5                notwithstanding this paragraph or paragraph (1) to
 
 6                the contrary.
 
 7           (F)  The department, by rule, may provide that a seller
 
 8                may take from the purchaser of tangible personal
 
 9                property a certificate, in a form [as] prescribed
 
10                by the department [shall prescribe], certifying
 
11                that the sale is a sale at wholesale[.  If the
 
12                certificate is so provided for by rule of the
 
13                department:]; provided that:
 
14                (i)  Any purchaser who furnishes a certificate
 
15                     shall be obligated to pay to the seller, upon
 
16                     demand, [if the sale in fact is not at
 
17                     wholesale,] the amount of the additional tax
 
18                     [which by reason thereof] that is imposed
 
19                     upon the seller[;] whenever the sale in fact
 
20                     is not at wholesale; and
 
21               (ii)  The absence of a certificate[, unless the
 
22                     sales of the business are exclusively at
 
23                     wholesale,] in itself shall give rise to the
 

 
Page 20                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                     presumption that the sale is not at
 
 2                     wholesale[.] unless the sales of the business
 
 3                     are exclusively at wholesale.
 
 4      (3)  Tax upon contractors.
 
 5           (A)  Upon every person engaging or continuing within
 
 6                the State in the business of contracting, the tax
 
 7                shall be equal to four per cent of the gross
 
 8                income of the business; provided that insofar as
 
 9                the business of contracting is taxed by section
 
10                237-16, which relates to certain retailing, the
 
11                tax shall be that levied by section 237-16.
 
12           (B)  In computing the tax levied under this paragraph
 
13                or section 237-16, there shall be deducted from
 
14                the gross income of the taxpayer so much thereof
 
15                as has been included in the measure of the tax
 
16                levied under subparagraph (A) or section 237-16,
 
17                on:
 
18                (i)  Another taxpayer who is a contractor, as
 
19                     defined in section 237-6;
 
20               (ii)  A specialty contractor, duly licensed by the
 
21                     department of commerce and consumer affairs
 
22                     pursuant to section 444-9, in respect of the
 
23                     specialty contractor's business; or
 

 
Page 21                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1              (iii)  A specialty contractor who is not licensed by
 
 2                     the department of commerce and consumer
 
 3                     affairs pursuant to section 444-9, but who
 
 4                     performs contracting activities on federal
 
 5                     military installations and nowhere else in
 
 6                     this State;
 
 7                but any person claiming a deduction under this
 
 8                paragraph shall be required to show in the
 
 9                person's return the name and general excise number
 
10                of the person paying the tax on the amount
 
11                deducted by the person.
 
12           (C)  In computing the tax levied under this paragraph
 
13                against any federal cost-plus contractor, there
 
14                shall be excluded from the gross income of the
 
15                contractor so much thereof as fulfills the
 
16                following requirements:
 
17                (i)  The gross income exempted shall constitute
 
18                     reimbursement of costs incurred for
 
19                     materials, plant, or equipment purchased from
 
20                     a taxpayer licensed under this chapter, not
 
21                     exceeding the gross proceeds of sale of the
 
22                     taxpayer on account of the transaction; and
 

 
 
 
Page 22                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1               (ii)  The taxpayer making the sale shall have
 
 2                     certified to the department that the taxpayer
 
 3                     is taxable with respect to the gross proceeds
 
 4                     of the sale, and that the taxpayer elects to
 
 5                     have the tax on gross income computed the
 
 6                     same as upon a sale to the state government.
 
 7           (D)  A person who, as a business or as a part of a
 
 8                business in which the person is engaged, erects,
 
 9                constructs, or improves any building or structure,
 
10                of any kind or description, or makes, constructs,
 
11                or improves any road, street, sidewalk, sewer, or
 
12                water system, or other improvements on land held
 
13                by the person (whether held as a leasehold, fee
 
14                simple, or otherwise), upon the sale or other
 
15                disposition of the land or improvements, even if
 
16                the work was not done pursuant to a contract,
 
17                shall be liable to the same tax as if engaged in
 
18                the business of contracting, unless the person
 
19                shows that at the time the person was engaged in
 
20                making the improvements it was, and for the period
 
21                of at least one year after completion of the
 
22                building, structure, or other improvements, it
 
23                continued to be the person's purpose to hold and
 

 
Page 23                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                not sell or otherwise dispose of the land or
 
 2                improvements.  The tax in respect of the
 
 3                improvements shall be measured by the amount of
 
 4                the proceeds of the sale or other disposition that
 
 5                is attributable to the erection, construction, or
 
 6                improvement of such building or structure, or the
 
 7                making, constructing, or improving of the road,
 
 8                street, sidewalk, sewer, or water system, or other
 
 9                improvements.  The measure of tax in respect of
 
10                the improvements shall not exceed the amount which
 
11                would have been taxable had the work been
 
12                performed by another, subject as in other cases to
 
13                the deductions allowed by subparagraph (B).  Upon
 
14                the election of the taxpayer, this paragraph may
 
15                be applied notwithstanding the improvements were
 
16                not made by the taxpayer, or were not made as a
 
17                business or as a part of a business, or were made
 
18                with the intention of holding the same.  However,
 
19                this paragraph shall not apply in respect of any
 
20                proceeds that constitute or are in the nature of
 
21                rent; all such gross income shall be taxable under
 
22                paragraph [(10);] (9); provided that insofar as
 
23                the business of renting or leasing real property
 

 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                under a lease is taxed under section 237-16.5, the
 
 2                tax shall be levied by section 237-16.5.
 
 3      (4)  Tax upon theaters, amusements, radio broadcasting
 
 4           stations, etc.  Upon every person engaging or
 
 5           continuing within the State in the business of
 
 6           operating a theater, opera house, moving picture show,
 
 7           vaudeville, amusement park, dance hall, skating rink,
 
 8           radio broadcasting station, or any other place at which
 
 9           amusements are offered to the public, the tax shall be
 
10           equal to four per cent of the gross income of the
 
11           business.
 
12      (5)  Tax upon sales representatives, etc.  Upon every person
 
13           classified as a representative or purchasing agent
 
14           under section 237-1, engaging or continuing within the
 
15           State in the business of performing services for
 
16           another, other than as an employee, there is likewise
 
17           hereby levied and shall be assessed and collected a tax
 
18           equal to four per cent of the commissions and other
 
19           compensation attributable to the services so rendered
 
20           by the person.
 
21      (6)  Tax on service business.
 
22           (A)  Upon every person engaging or continuing within
 
23                the State in any service business or calling
 

 
Page 25                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                including professional services not otherwise
 
 2                specifically taxed under this chapter, there is
 
 3                likewise hereby levied and shall be assessed and
 
 4                collected a tax equal to four per cent of the
 
 5                gross income of the business[; provided that
 
 6                where], and in the case of a wholesaler under
 
 7                section 237-4(a)(10), the tax shall be equal to
 
 8                one-half of one per cent of the gross income of
 
 9                the business.  Sales subject to this subparagraph
 
10                shall be subject to section 237-     .
 
11           (B)  The department, by rule, may require that the
 
12                person rendering a service at wholesale take from
 
13                the licensed seller a certificate, in a form
 
14                prescribed by the department, certifying that the
 
15                sale is a sale at wholesale; provided that:
 
16                (i)  Any licensed seller who furnishes a
 
17                     certificate shall be obligated to pay to the
 
18                     person rendering the service, upon demand,
 
19                     the amount of additional tax that is imposed
 
20                     upon the seller whenever the sale is not at
 
21                     wholesale; and
 
22               (ii)  The absence of a certificate in itself shall
 
23                     give rise to the presumption that the sale is
 

 
Page 26                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                     not at wholesale unless the person rendering
 
 2                     the sale is exclusively rendering services at
 
 3                     wholesale.
 
 4           (C)  Where any person engaging or continuing within the
 
 5                State in any service business or calling renders
 
 6                those services upon the order of or at the request
 
 7                of another taxpayer who is engaged in the service
 
 8                business and who, in fact, acts as or acts in the
 
 9                nature of an intermediary between the person
 
10                rendering those services and the ultimate
 
11                recipient of the benefits of those services, so
 
12                much of the gross income as is received by the
 
13                person rendering the services shall be subjected
 
14                to the tax at the rate of one-half of one per cent
 
15                and all of the gross income received by the
 
16                intermediary from the principal shall be subjected
 
17                to a tax at the rate of four per cent; [and
 
18                provided that where]  Where the taxpayer is
 
19                subject to both this subparagraph and to the
 
20                lowest tax rate under subparagraph (A), the
 
21                taxpayer shall be taxed under this subparagraph.
 
22                This subparagraph shall be repealed on January 1,
 
23                2006.
 

 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           (D)  Where any person is engaged in the business of
 
 2                selling interstate or foreign common carrier
 
 3                telecommunication services within and without the
 
 4                State, the tax shall be imposed on that portion of
 
 5                gross income received by a person from service
 
 6                which is originated or terminated in this State
 
 7                and is charged to a telephone number, customer, or
 
 8                account in this State notwithstanding any other
 
 9                state law (except for the exemption under section
 
10                237-23(a)(1)) to the contrary.  If, under the
 
11                Constitution and laws of the United States, the
 
12                entire gross income as determined under this
 
13                paragraph of a business selling interstate or
 
14                foreign common carrier telecommunication services
 
15                cannot be included in the measure of the tax, the
 
16                gross income shall be apportioned as provided in
 
17                section 237-21; provided that the apportionment
 
18                factor and formula shall be the same for all
 
19                persons providing those services in the State.
 
20      (7)  Tax on insurance solicitors and agents.  Upon every
 
21           person engaged as a licensed solicitor, general agent,
 
22           or subagent pursuant to chapter 431, there is hereby
 
23           levied and shall be assessed and collected a tax equal
 

 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           to .15 per cent of the commissions due to that
 
 2           activity.
 
 3     [(8)  Professions.  Upon every person engaging or continuing
 
 4           within the State in the practice of a profession,
 
 5           including those expounding the religious doctrines of
 
 6           any church, there is likewise hereby levied and shall
 
 7           be assessed and collected a tax equal to four per cent
 
 8           of the gross income on the practice or exposition.
 
 9      (9)] (8)  Tax on receipts of sugar benefit payments.  Upon
 
10           the amounts received from the United States government
 
11           by any producer of sugar (or the producer's legal
 
12           representative or heirs), as defined under and by
 
13           virtue of the Sugar Act of 1948, as amended, or other
 
14           Acts of the Congress of the United States relating
 
15           thereto, there is hereby levied a tax of one-half of
 
16           one per cent of the gross amount received[,]; provided
 
17           that the tax levied hereunder on any amount so received
 
18           and actually disbursed to another by a producer in the
 
19           form of a benefit payment shall be paid by the person
 
20           or persons to whom the amount is actually disbursed,
 
21           and the producer actually making a benefit payment to
 
22           another shall be entitled to claim on the producer's
 
23           return a deduction from the gross amount taxable
 

 
Page 29                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           hereunder in the sum of the amount so disbursed.  The
 
 2           amounts taxed under this paragraph shall not be taxable
 
 3           under any other paragraph, subsection, or section of
 
 4           this chapter.
 
 5    [(10)] (9)  Tax on other business.  Upon every person engaging
 
 6           or continuing within the State in any business, trade,
 
 7           activity, occupation, or calling not included in the
 
 8           preceding paragraphs or any other provisions of this
 
 9           chapter, there is likewise hereby levied and shall be
 
10           assessed and collected, a tax equal to four per cent of
 
11           the gross income thereof.  In addition, the rate
 
12           prescribed by this paragraph shall apply to a business
 
13           taxable under one or more of the preceding paragraphs
 
14           or other provisions of this chapter, as to any gross
 
15           income thereof not taxed thereunder as gross income or
 
16           gross proceeds of sales or by taxing an equivalent
 
17           value of products, unless specifically exempted."
 
18      SECTION 7.  Section 237-16, Hawaii Revised Statutes, is
 
19 amended to read as follows:
 
20      "237-16  Tax on certain retailing.(a)  This section
 
21 relates to certain retailing in the State as follows:
 
22      (1)  This section relates to the sale of tangible personal
 
23           property, for consumption or use by the purchaser and
 

 
Page 30                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           not for resale, the renting of tangible personal
 
 2           property, and the rendering of services by one engaged
 
 3           in a service business or calling, as defined, to a
 
 4           person who is not purchasing the services for resale,
 
 5           but does not relate to the sale or rental of tangible
 
 6           personal property or the rendering of services to the
 
 7           State, its political subdivisions, or agencies or
 
 8           instrumentalities of the State or a political
 
 9           subdivision, or to the United States or its agencies or
 
10           instrumentalities (other than national banks), or to a
 
11           corporation, organization, or other person designated
 
12           in section 237-23 who is not subject to the tax imposed
 
13           by this chapter, or to a person licensed under this
 
14           chapter in connection with the person's business.
 
15      (2)  This section relates to the business of a contractor,
 
16           as defined, but does not relate to contracting with, or
 
17           any gross income or proceeds of a subcontractor if the
 
18           principal contract is with the State, its political
 
19           subdivisions, or agencies or instrumentalities of the
 
20           State or a political subdivision, or with the United
 
21           States or its agencies or instrumentalities (other than
 
22           national banks), or with a person designated in section
 
23           237-23 who is not subject to the tax imposed by this
 

 
Page 31                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           chapter, or with a person licensed under this chapter
 
 2           in connection with the person's business.
 
 3      (3)  This section relates to furnishing of transient
 
 4           accommodations in a hotel, apartment hotel, or other
 
 5           place in which lodgings are regularly furnished to
 
 6           transients for a consideration which includes the
 
 7           rendering of services.
 
 8      (b)  There is hereby levied, and shall be assessed and
 
 9 collected annually, a privilege tax against persons engaging or
 
10 continuing within the State in the retailing to which this
 
11 section relates, on account of such retailing activities, as set
 
12 forth in subsection (a), equal to four per cent of the gross
 
13 proceeds of sale or gross income received or derived from such
 
14 retailing.  Persons on whom a tax is imposed by this section
 
15 hereinafter are called "retailers".
 
16      (c)  No retailer shall advertise or hold out to the public
 
17 in any manner, directly or indirectly, that the tax imposed by
 
18 this section is not considered as an element in the price to the
 
19 consumer.  Any person violating this subsection shall be fined
 
20 not more than $50 for each offense.
 
21      (d)  This section shall not cause the tax upon a taxpayer,
 
22 with respect to any item of the taxpayer's gross income, to
 
23 exceed four per cent.
 

 
Page 32                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1      (e)  This section shall not apply to:
 
 2      (1)  Sales of tangible personal property treated as a
 
 3           wholesale sale under section 237-4(a)(8)(B) to a
 
 4           licensed seller engaged in a service business or
 
 5           calling or a person furnishing transient
 
 6           accommodations; or
 
 7      (2)  Sales of services treated as a wholesale sale under
 
 8           section 237-4(a)(10) to to a licensed seller engaged in
 
 9           a business or calling, a contractor as defined in
 
10           section 237-6, or a person furnishing transient
 
11           accommodations."
 
12      SECTION 8.  Section 238-2, Hawaii Revised Statutes, is
 
13 amended to read as follows:
 
14      "238-2 Imposition of tax; exemptions.  There is hereby
 
15 levied an excise tax on the use in this State of tangible
 
16 personal property which is imported, or purchased from an
 
17 unlicensed seller, for use in this State.  The tax imposed by
 
18 this chapter shall accrue when the property is acquired by the
 
19 importer or purchaser and becomes subject to the taxing
 
20 jurisdiction of the State.  The rates of the tax hereby imposed
 
21 and the exemptions thereof are as follows:
 
22      (1)  If the importer or purchaser is licensed under chapter
 
23           237 and is:
 

 
Page 33                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           (A)  [a] A wholesaler or jobber importing or purchasing
 
 2                for purposes of resale[,]; or
 
 3           (B)  [a] A manufacturer importing or purchasing
 
 4                material or commodities which are to be
 
 5                incorporated by the manufacturer into a finished
 
 6                or saleable product (including the container or
 
 7                package in which the product is contained) wherein
 
 8                it will remain in such form as to be perceptible
 
 9                to the senses, and which finished or saleable
 
10                product is to be sold in such manner as to result
 
11                in a further tax on the activity of the
 
12                manufacturer as the manufacturer or as a
 
13                wholesaler, and not as a retailer,
 
14           there shall be no tax[,]; provided that if the
 
15           wholesaler, jobber, or manufacturer is also engaged in
 
16           business as a retailer (so classed under chapter 237),
 
17           paragraph (2) shall apply to the wholesaler, jobber, or
 
18           manufacturer, but the director of taxation shall refund
 
19           to the wholesaler, jobber, or manufacturer, in the
 
20           manner provided under section 231-23(c) such amount of
 
21           tax as the wholesaler, jobber, or manufacturer shall,
 
22           to the satisfaction of the director, establish to have
 
23           been paid by the wholesaler, jobber, or manufacturer to
 

 
Page 34                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1           the director with respect to property which has been
 
 2           used by the wholesaler, jobber, or manufacturer for the
 
 3           purposes stated in this paragraph[.];
 
 4      (2)  If the importer or purchaser is licensed under chapter
 
 5           237 and is:
 
 6           (A)  [a] A retailer or other person importing or
 
 7                purchasing for purposes of resale, not exempted by
 
 8                paragraph (1)[, or];
 
 9           (B)  [a] A manufacturer importing or purchasing
 
10                material or commodities which are to be
 
11                incorporated by the manufacturer into a finished
 
12                or saleable product (including the container or
 
13                package in which the product is contained) wherein
 
14                it will remain in such form as to be perceptible
 
15                to the senses, and which finished or saleable
 
16                product is to be sold at retail in this State, in
 
17                such manner as to result in a further tax on the
 
18                activity of the manufacturer in selling such
 
19                products at retail[, or];
 
20           (C)  [a] A contractor importing or purchasing material
 
21                or commodities which are to be incorporated by the
 
22                contractor into the finished work or project
 
23                required by the contract and which will remain in
 

 
Page 35                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1                such finished work or project in such form as to
 
 2                be perceptible to the senses[,]; or
 
 3           (D)  A person engaged in a service business or calling
 
 4                as defined in section 237-7, or a person
 
 5                furnishing transient accommodations subject to the
 
 6                tax imposed by section 237D-2, in which the import
 
 7                or purchase of tangible personal property would
 
 8                have qualified as a sale at wholesale as defined
 
 9                in section 237-4(a)(8) had the seller of the
 
10                property been subject to the tax in chapter 237,
 
11           the tax shall be one-half of one per cent of the
 
12           purchase price of the property, if the purchase and
 
13           sale are consummated in Hawaii; or, if there is no
 
14           purchase price applicable thereto, or if the purchase
 
15           or a person furnishing transient accommodations subject
 
16           to the tax imposed by section 237D-2, or sale is
 
17           consummated outside of Hawaii, then one-half of one per
 
18           cent of the value of such property[.]; and
 
19      (3)  In all other cases, four per cent of the value of the
 
20           property."
 
21      SECTION 9.  Statutory material to be repealed is bracketed.
 
22 New statutory material is underscored.
 

 
 
 
Page 36                                                    638
                                     S.B. NO.           S.D. 1
                                                        H.D. 2
                                                        

 
 1      SECTION 10.  This Act shall take effect upon its approval
 
 2 and shall apply to gross income or gross proceeds received after
 
 3 December 31, 1999; provided that section 8 of this Act shall
 
 4 apply to amounts paid or incurred after December 31, 1999.