Real Property Asset Acquisition Tax; Stock Ownership Transfer
Authorizes a tax on individuals and entities that transfer a stock ownership interest in a legal entity that owns real property located in Hawaii. (SD2)
TWENTY-FIFTH LEGISLATURE, 2009
STATE OF HAWAII
A BILL FOR AN ACT
RELATING TO TAXATION.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The largest source of state revenues is from the payment of various taxes by residents and nonresidents. During these tough economic times, it is especially important for the State to protect and improve upon the collection of its various taxes in order to provide widespread financial support to social programs, infrastructure projects, and public education. Taxpayers subject to the tax laws of Hawaii should share equitably in providing those financial support obligations in a fair, just, and objective manner. One area that the State can improve upon is collecting tax revenues in areas where complex transactions are developed and implemented to avoid paying state taxes under the State's current tax laws.
The legislature finds that there are numerous complex transactions occurring in Hawaii that involve the purchase, transfer, or exchange of real property located in Hawaii through the sale or exchange of ownership interests in legal entities. Under the State's current tax laws, many of these complex transactions involving the transfer of real property located in Hawaii are taking place without any tax consequences. Many of those complex transactions are even escaping the payment of conveyance taxes.
The purpose of this Act is to create a new tax that is separate from the conveyance tax and that is imposed on an individual or entity engaged in a sale transaction of any ownership interest or partial ownership interest of an entity that holds real property located in Hawaii. It is the intent of this Act that the newly created tax would capture taxes on transactions designed to avoid liability under the conveyance tax. This Act is not intended to serve as a penalty for those individuals and entities that transfer ownership in entities that hold real property located in Hawaii. Rather, this Act is intended to capture a fair and just amount of tax revenues from one of the State's principle natural resources. Tax revenues from this resource have been escaping economic realization to the State for many years. For instance, when stock ownership of an entity that holds real property in Hawaii is sold, there are no tax revenues remitted to the State that pertain specifically to the transfer of the real property from the selling entity to the buying entity or individual. In the event of real property in Hawaii continuing to change hands between different entities through complex stock ownership sale transactions, the imposition of a real property asset acquisition tax would enable the State to capture this previously untapped source of tax revenues. By establishing a real property asset acquisition tax, this Act will enable the State to levy, assess, and collect a tax on those sale transactions that meet the threshold value levels provided for in this Act.
The real property asset acquisition tax is modeled after, but is in addition to, the rates and threshold of taxes payable under the conveyance tax in chapter 247, Hawaii Revised Statutes. Specifically, the real property asset acquisition tax assessed is based upon the value of the real property transferred and will likely generate a comparable level of tax revenues as the conveyance tax.
The real property asset acquisition tax rates and thresholds will not be identical to those applicable to the conveyance tax. However, the conveyance tax rates and thresholds will be used as a guide. Accordingly, this Act provides for the assessment of real property asset acquisition taxes at rates and thresholds similar to the following conveyance tax rates and threshold:
(1) Fifteen cents per $100 for properties with a value of less than $600,000;
(2) Twenty-five cents per $100 for properties with a value of at least $600,000, but less than $1,000,000; and
(3) Thirty-five cents per $100 for properties with a value of $1,000,000 or greater.
SECTION 2. Chapter 247, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:
"Part . ReAL PROPERTY asset acquisition tax
§247-A Short title. This part may be cited as the "Real Property Asset Acquisition Tax Law."
§247-B Definitions. For purposes of this part, the following terms shall have the following meaning:
"Applicable transfer" means all transfers of real property located in Hawaii or any interest therein that is affected by a sale transaction.
"Entity" means a taxpayer subject to the tax laws of Hawaii that is a corporation, limited liability company, single member limited liability company, partnership, limited liability partnership, or S corporation, excluding any trust or nonprofit taxpayer.
"Fair market value" means the greater of the following:
(1) The cost, contract, sales price, or other consideration transferred, purchased, or exchanged for the stock;
(2) The value carried on the seller's audited financial statements at the date of the stock transaction; or
(3) The value obtained by a certified appraiser taking into consideration the highest and best use of the real property.
"Sale transaction" means a purchase, transfer, or exchange of any interest in the ownership of a legal entity held by a individual or another entity; provided that the individual or entity selling or transferring the ownership interest holds real property located in Hawaii that has a fair market value exceeding $ on the date of the purchase, transfer, or exchange of the ownership interest of the transferor.
§247-C Imposition of tax. There is hereby imposed and shall be levied, collected, and paid, a real property asset acquisition tax as hereinafter provided, on all applicable transfers; provided that the tax imposed under this part is in addition to any conveyance tax that may be assessed under part I of this chapter.
§247-D Basis and rate of tax. The tax imposed by section 247‑C shall be based on the actual and full consideration (whether cash or otherwise, including any promise, act, forbearance, property interest, value, gain, advantage, benefit, or profit) paid or to be paid for all applicable transfers of real property located in Hawaii or any interest therein, that shall include any liens or encumbrances thereon at the time of sale, lease, sublease, assignment, transfer, or conveyance, and shall be at the following rates:
(1) cents per $ for properties with a value of less than $ ;
(2) cents per $ for properties with a value of at least $ , but less than $ ; and
(3) cents per $ for properties with a value of $ or greater,
depending upon the fair market value of the real property on the date of the stock transaction; provided that in the case of a lease or sublease, this part shall apply only to a lease or sublease where the full unexpired term is for a period of five years or more, and in those cases, including (where appropriate) those cases where the lease has been extended or amended, the tax in this part shall be based on the cash value of the lease rentals discounted to present day value and capitalized at the rate of six per cent, plus the actual and full consideration paid or to be paid for any and all improvements, if any, that shall include on-site as well as off-site improvements, applicable to the leased premises; and provided further that the tax imposed for each transaction shall be not less than $1.
§247-E Exemptions. The tax imposed by this part shall not apply to:
(1) Any applicable transfer that is executed before January 1, 2010;
(2) Any existing mortgages on single family homes, apartments, or condominiums;
(3) Any applicable transfer executed pursuant to a tax sale conducted by the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof for delinquent taxes or assessments;
(4) Any applicable transfer conveying real property to the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof pursuant to the threat of the exercise or the exercise of the power of eminent domain;
(5) Any applicable transfer that results in conveying real property from a testamentary trust to a beneficiary under the trust;
(6) Any applicable transfer that results in conveying real property from a grantor to the grantor's revocable living trust, or from a grantor's revocable living trust to the grantor as beneficiary of the trust;
(7) Any applicable transfer that results in conveying real property, or any interest therein, from a dissolving limited partnership to its corporate general partner that owns, directly or indirectly, at least a ninety per cent interest in the dissolving limited partnership, determined by applying section 318 (with respect to constructive ownership of stock) of the Internal Revenue Code, to the constructive ownership of interests in the partnership; and
(8) Any applicable transfer that results in conveying real property to any nonprofit or for-profit organization that has been certified by the Hawaii housing finance and development corporation for low-income housing development.
§247-F Payment and liability of the tax; penalties. (a) The tax imposed by this part shall be paid by the grantor, lessor, sublessor, assignor, transferor, seller, conveyor, or any other person conveying realty, or any interest therein; except, however, in the case where the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof is the grantor, lessor, sublessor, assignor, transferor, seller, or conveyor, in which case the tax shall be paid by the grantee, lessee, sublessee, assignee, transferee, purchaser, or conveyee, as the case may be.
(b) The tax imposed by this part shall be paid at the place or places as the director of taxation may direct and shall be due and payable no later than ninety days after the taxable transaction.
(c) Penalties and interest shall be added to and become a part of the taxes, when and as provided by section 231-39.
§247-G Appeals. Any person aggrieved by any assessment of the tax imposed by this part may appeal from the assessment in the manner and within the time and in all other respects as provided in the case of income tax appeals by section 235-114. The hearing and disposition of the appeal, including the distribution of costs, shall be as provided in chapter 232.
§247-H Disposition of taxes. All taxes collected under this part shall be paid into the state treasury to the credit of the general fund of the State, to be used and expended for the purposes for which the general fund was created and exists by law; provided that of the taxes collected each fiscal year:
(1) per cent shall be paid to the credit of the land conservation fund established by section 173A-5;
(2) per cent shall be paid to the credit of the rental housing trust fund established pursuant to section 201H-202; and
(3) per cent shall be paid to the credit of the natural area reserve fund established pursuant to section 195-9.
§247-I Refunds. The director of taxation may order the refund in whole or in part of any tax that has been erroneously or unjustly paid under this part. The order shall be made in accordance with section 231-23. As to all tax payments for which a refund or credit is not authorized by this section (including, without prejudice to the generality of the foregoing, cases of unconstitutionality), the remedies provided by appeal or by section 40-35 are exclusive.
§247-J Enforcement and administration. (a) The director of taxation, with the support of the department of commerce and consumer affairs, shall administer and enforce the taxes imposed by this part. The director of taxation or director of commerce and consumer affairs may prescribe rules not inconsistent with the provisions in this part for their detailed and efficient administration. At any time after the making of an applicable transfer subject to the tax imposed by this part, the director of taxation may investigate and ascertain whether the tax, in the proper amount, was paid. For this purpose, the director of taxation or director of commerce and consumer affairs may invoke all statutory powers vested in them, including but not limited to section 231-7.
(b) The director of taxation shall prepare forms as may be necessary to satisfy the requirements of this part. The director may also require the nonresident person that is a transferee under this section to furnish information to ascertain that person's compliance with the requirements of this part and may adopt rules necessary to effectuate the purposes of this part pursuant to chapter 91."
SECTION 3. Chapter 247, Hawaii Revised Statutes, is amended by amending its title to read as follows:
SECTION 4. Chapter 247, Hawaii Revised Statutes, is amended by designating sections 247-1 through 247-13, Hawaii Revised Statutes, as part I and inserting a title to read as follows:
"PART I. CONVEYANCE TAX"
SECTION 5. In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.
SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.
SECTION 7. This Act shall take effect on January 1, 2010.