Honolulu, Hawaii
                                                     , 1999

                                   RE:  S.B. No. 44
                                        S.D. 1

Honorable Norman Mizuguchi
President of the Senate
Twentieth State Legislature
Regular Session of 1999
State of Hawaii


     Your Committee on Ways and Means, to which was referred S.B.
No. 44 entitled: 


begs leave to report as follows:

     The purpose of this measure is to exempt exported services
from the general excise tax and to subject imported services to
the use tax.

     Testimony in support of the intent of this measure was
submitted by the Department of Business, Economic Development,
and Tourism, Department of Taxation, American Institute of
Architects-Hawaii State Council, and Hawaii Association of
Realtors.  The Tax Foundation of Hawaii submitted comments on the

     Your Committee finds that Hawaii's economy needs assistance
from its tax system.  Currently, unlike other states with a sales
tax, Hawaii taxes the exportation of services but does not tax
the importation of services.  In addition, Hawaii's tax system
does not treat goods and services in this area the same.  In
1987, Hawaii exempted exported goods from the general excise tax
in order to level the paying field between Hawaii and other
states.  This is the year to level the playing field for

     Hawaii already taxes imported goods and your Committee
believes that imported services should be treated in the same

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manner.  By making this change in taxation, Hawaii will encourage
the exportation of services and these services will be given the
same treatment that other states give to their exported services.

     In 1989, Professor William F. Fox prepared a report entitled
"Defining the General Excise Tax Base:  Exemptions and
Pyramiding" for the 1989 Tax Review Commission.  In that report,
he noted that Hawaii was a net importer of services.  Although
there are no more recent estimates, based on 1985 data, he
estimated that Hawaii imported $920.2 million in services and
exported $760.7 million.  This leads your Committee to believe
that the current projections of no revenue loss as a result of
this measure are probably accurate.

     Your Committee believes that this change in Hawaii's tax
system will benefit the economy and remove a disincentive for
many who may wish to locate in Hawaii.

     Your Committee has amended the measure by deleting the
purpose section and using some of the language concerning imports
from Senate Bill No. 1172, the administration measure on this
subject.  The language from Senate Bill No. 1172 has been
reviewed and updated by the Department of Taxation and
practitioners in the field of taxation to produce what your
Committee feels is a viable measure.  In addition, your Committee
has added a new subsection to the new section added to chapter
237, Hawaii Revised Statutes, to provide that services and
contracting sold to a purchaser for resale, consumption, or use
outside the State are exempt.  This provision is necessary to
prevent the pyramiding of the general excise tax on sales finally
made outside the State.

     This measure retains the exemption from taxation for
services imported into Hawaii for the purpose of bundling and
re-export.  This exemption will allow Hawaii to be a staging area
in which to gather together a number of services to be exported
to Asia and elsewhere without being taxed.  Thus, services will
be treated in the same manner as goods that are only in Hawaii
for a limited period of time until they are re-exported.  If we
do not provide for this important function, other states will act
as staging areas and Hawaii will be bypassed.

     As affirmed by the record of votes of the members of your
Committee on Ways and Means that is attached to this report, your
Committee is in accord with the intent and purpose of S.B.
No. 44, as amended herein, and recommends that it pass Second
Reading in the form attached hereto as S.B. No. 44, S.D. 1, and
be placed on the calendar for Third Reading.

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                                 Respectfully submitted on behalf
                                 of the members of the Committee
                                 on Ways and Means,

                                 CAROL FUKUNAGA, Co-Chair

                                 ANDREW LEVIN, Co-Chair

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