Honolulu, Hawaii
                                                     , 1999

                                   RE:  S.B. No. 638
                                        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. 638 entitled: 


begs leave to report as follows:

     The purpose of this measure is address the pyramiding of the
general excise tax on services.

     The Chamber of Commerce of Hawaii, Tax Committee of the
Hawaii Society of Certified Public Accountants, Tax Section of
the Hawaii State Bar Association, Textron Systems Kauai, Native
Hawaiian Chamber of Commerce, Hawaii Farm Bureau, Hawaii Business
Roundtable, and Pacific Resource Partnership submitted testimony
in favor of the measure.  The Department of Taxation submitted
testimony in favor of the intent of the measure.  The Tax
Foundation of Hawaii submitted comments on the measure.

     Your Committee finds that when goods are sold at wholesale
to a retailer, the income from the sale is taxed under the
general excise tax at one-half of one per cent.  When services
are sold, no matter to whom sold, the income from the sale of
services is taxed under the general excise tax at four per cent.
An exception does exist for intermediary service transactions,
but that exception is so narrow that few service transactions can
fit.  In many instances services are sold in the same manner as
goods are wholesaled, but no one-half per cent tax rate can be

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     Your Committee finds that the discussion of how to treat
services that are sold in a manner that would result as a
wholesale sale if they were goods has been on going for the last
thirty years.  Study after study, Tax Review Commission after Tax
Review Commission have discussed the problem.  Addressing this
problem will stimulate the economy, create employment
opportunities, and attract investment.  This measure will address
the pyramiding problem of the general excise tax by addressing
the sale of services to businesses in the context of a service to
service transaction or in the context of a service to goods
transaction.  In appropriate instances such transactions will
result in the imposition of the one-half per cent general excise
tax rate.

     Your Committee has amended this measure to provide for a
phase in of the reduction of the general excise tax on certain
service transactions.  This will reduce the revenue loss in one
year of some $133 million to a reduction that government can take
steps to meet.  In addition, it will allow both the Department of
Taxation and the private sector time to get used to the new
provisions and to work out any unforeseen problems.  Since
implementation will not be effective immediately, the
intermediary transaction tax rate of one-half per cent has been
kept in the law until the change in the treatment of wholesale
services is fully phased in.

     The measure also has been amended to add services-to-
contracting transactions to the amendments to the wholesale
provisions of the bill.  Contracting is defined in section 237-6,
Hawaii Revised Statutes (HRS), and is not considered either a
service or a sale of goods by chapter 237, HRS.  Section
237-13(6)(B)(i), HRS, has been amended by adding missing words
regarding the requirement that the additional tax be paid when
the sale is not at wholesale.  Technical, nonsubstantive
amendments also were made for style and clarity.

     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. 638, as amended herein, and recommends that it pass Second
Reading in the form attached hereto as S.B. No. 638, S.D. 1, and
be placed on the calendar for Third Reading.

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                                   STAND. COM. REP. NO. 718
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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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