THE SENATE

S.B. NO.

2698

THIRTIETH LEGISLATURE, 2020

 

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 legislature finds that Hawaii's income tax laws concerning real estate investment trusts should more closely conform to federal tax law to create more consistency with equitable tax policies.

In section 235-3, Hawaii Revised Statutes, the legislature states its intent to adopt the Internal Revenue Code as then amended, except that the legislature may choose to adopt none of the amendments to the Internal Revenue Code or may provide that certain amendments are limited in their operation.

The legislature further finds that real estate investment trusts were given preferential tax status by the federal government for the benefit of small investors to give them the opportunity to invest in large scale income producing real estate. The federal real estate investment trust provisions allow a dividends paid deduction to the real estate investment trust, thereby allowing the real estate investment trust itself to not pay tax on income distributed to its shareholders, who would then pay tax on that income. The federal real estate investment trust provisions also provide for withholding of tax by a real estate investment trust for non-residents or non-citizens of the United States. Hawaii law conformed to the real estate investment trust dividend paid provision in the 1960's, but failed to adopt this provision for non-resident withholding. This created an anomaly because a real estate investment trust that does business in Hawaii, but pays dividends to shareholders out of the state, results in no Hawaii income tax collected either from the real estate investment trust or from its shareholders, due to the fact that shareholders pay any tax on dividends to the state in which they reside, not where the income was generated.

The legislature additionally finds that real estate investment trusts in Hawaii now own real estate assets of about $17 billion, generating an annual income of $1 billion, which, if taxed at the current corporate rate assessed to all other corporations, would generate Hawaii taxes of $64 million per year. A 2016 analysis conducted by the department of business, economic development, and tourism concluded that the State had foregone about $36 million in income tax in year 2014 due to this anomaly, and that the amount of real estate investment trust investments has risen substantially since 2014.

Some real estate investment trust shareholders live in Hawaii, but a substantial majority do not. Further, while real estate investment trusts own more real estate in Hawaii per capita than in any other state, Hawaii ranks fortieth in the nation for the number of real estate investment trust shareholders as a percentage of the population. Additional studies show that Hawaii is in the worst situation in this regard, compared to any other state in the country. As a result, many real estate investment trusts and their shareholders pay a mere fraction of the Hawaii state income tax compared to what other corporations pay.

The legislature therefore finds that it would be more equitable to now adopt a withholding provision like the federal system so that real estate investment trusts and their shareholders, like all other corporations and business entities doing real estate business in Hawaii, pay a fair tax burden commensurate with the substantial privileges and resources in Hawaii that were utilized to generate their profits. Real estate investment trusts would still continue to receive their generous federal and Hawaii income tax exemptions and continue to benefit from Hawaii's low property tax rates.

Accordingly, the purpose of this Act is to, for taxable years beginning after December 31, 2020:

(1) Require that real estate investment trusts file returns reporting their shareholders' pro rata shares of net income and net income attributable to this State;

(2) Require withholding on all payments to shareholders; and

(3) Appropriate funds to the department of taxation to carry out the purposes of this Act.

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to part VI to be appropriately designated and to read as follows:

"235-   Real estate investment trust returns; withholding on dividends paid. (a) Every real estate investment trust shall make a return for each taxable year, stating specifically:

(1) The items of its gross income and the deductions allowable by this chapter;

(2) The name, address, and social security or federal identification number of each person owning stock in the real estate investment trust at any time during the taxable year;

(3) The number of shares of stock owned by each shareholder at all times during the taxable year;

(4) The income attributable to the State and income not attributable to the State with respect to each shareholder as determined under this chapter;

(5) Any modifications required under this chapter;

(6) The amount of money and other property distributed by the real estate investment trust during the taxable year to each shareholder;

(7) The date of each distribution; and

(8) Any other information the department may prescribe by form or rule.

(b) Each real estate investment trust shareholder's pro rata share of income attributable to the State and the shareholder's pro rata share of income not attributable to the State, to the extent modified under this chapter, shall be taken into account by the shareholder for the purposes of this chapter under rules similar to those adopted pursuant to section 235-122(c).

(c) The real estate investment trust, on or before the day on which the return is filed, shall furnish to each person who was a shareholder during the taxable year a copy of the information shown on the return as the department may prescribe by form or rule. Any return filed pursuant to this section, for purposes of sections 235-111 and 235-112, shall be treated as a return filed by the real estate investment trust under section 235-92.

(d) The department may permit composite returns and payments to be made on behalf of resident shareholders.

(e) A real estate investment trust shall withhold and pay to this State, on behalf of any shareholder, an amount equal to six and four-tenths per cent multiplied by the amount of the shareholder's pro rata share of the ordinary income and four per cent of the capital gains attributable to the State, as reflected on the real estate investment trust's return for the taxable period. A real estate investment trust shall be entitled to recover a payment made pursuant to this subsection from the shareholder on whose behalf the payment was made.

(f) The amount withheld by a real estate investment trust under subsection (e) shall be the minimum tax due to Hawaii by each real estate investment trust shareholder on their Hawaii source income. A real estate investment trust shareholder that is not otherwise required to file Hawaii tax returns need not file a Hawaii return to report the income received and tax paid. Any real estate investment trust shareholder that is tax exempt under federal income tax law shall not be liable for the minimum tax on their real estate investment trust income and may file a claim for refund for the amount withheld and paid to the State by the real estate investment trust.

(g) Any amount paid by the real estate investment trust to this State pursuant to subsection (e) shall be considered to be a payment by the shareholder on account of the income tax imposed on the shareholder for the taxable period.

(h) Any officer of any real estate investment trust who wilfully fails to provide any information, file any return or agreement, or make any payment as required by this section or section 231-15.6 shall be guilty of a misdemeanor.

(i) Persons who are ultimately responsible for the payment of the tax on any portion of the real estate investment trust's income from dividend distributions due to ownership in pass through entities shall be entitled to the credit for tax withheld and paid by a real estate investment trust, whether the person is a direct shareholder of the real estate investment trust or not.

(j) As used in this section:

"Real estate investment trust" means a corporation, trust, or association for which a valid election in accordance with section 856 of the Internal Revenue Code, as amended, is in effect."

SECTION 3. There is appropriated out of the general revenues of the State of Hawaii the sum of $           or so much thereof as may be necessary for fiscal year 2020-2021 for the purposes of reviewing and certifying returns and withholdings.

The sum appropriated shall be expended by the department of taxation for the purposes of this Act.

SECTION 4. New statutory material is underscored.


SECTION 5. This Act, upon its approval, shall apply to taxable years beginning after December 31, 2020.

 

INTRODUCED BY:

_____________________________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 


 

Report Title:

Taxation; Income Tax; Tax Returns; Real Estate Investment Trusts; Appropriation

 

Description:

Requires that real estate investment trusts file returns reporting their shareholders' pro rata shares of net income and net income attributable to this State. Requires withholding on all payments to shareholders. Appropriates funds. Applies to taxable years beginning after 12/31/2020.

 

 

 

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.