THIRTY-SECOND LEGISLATURE, 2023
STATE OF HAWAII
A BILL FOR AN ACT
RELATING TO NONPROFIT ORGANIZATIONS.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that the federal government exempts nonprofit organizations from the federal income tax because these organizations provide communities with critically needed programs, goods, and services, many of which would otherwise be provided by government agencies and, therefore, taxpayers. However, the federal government does not exempt any income of nonprofit organizations that is generated by an unrelated business activity not substantially related to the nonprofit organization's tax-exempt purpose.
The legislature further finds that, like the federal income tax law, the State provides an exemption from the general excise tax for income generated by a nonprofit organization's charitable activities. Similar to the spirit and intent of the federal "unrelated business income" tax provision, state general excise tax law does not exempt any income of nonprofit organizations that is generated by activity "the primary purpose of which is to produce income even though the income is to be used for or in furtherance of the exempt activities" of the nonprofit organization.
The legislature also finds that because the State's general excise tax law referring to "the primary purpose of which is to produce income" does not align with the federal "unrelated business income" provision, nonprofit organizations have additional burdens in accounting for income in disparate ways. While the federal law is clear with an extensive body of interpretation, there remains ambiguity with the state general excise tax provision. More significantly, federal income tax law does not consider fundraising income as unrelated business income and, therefore, fundraising income is not subject to federal income tax. However, state law has been interpreted to regard fundraising income as subject to the general excise tax.
The legislature additionally finds that imposing the general excise tax on a nonprofit organization's fundraising income deprives the nonprofit sector of needed financial support for the delivery of program services. Since the general excise tax is imposed on gross income, nonprofit organizations are taxed on fundraising income without deduction for any costs related to those fundraising activities, such as room rentals, food and beverage services, marketing, and other expenses, resulting in a financial "double whammy" on nonprofit organizations.
The purpose of this Act is to align the state general excise tax law with the federal income tax law by exempting from the State's general excise tax the fundraising income generated by a tax-exempt nonprofit organization, while retaining the general excise tax for gross income derived from any "unrelated trade or business", as defined by the Internal Revenue Code. This Act expands the general excise tax exemptions available to charitable, religious, and educational organizations and is not intended to limit or restrict any existing available tax exemptions. Furthermore, this Act does not affect rental income generated by an unrelated trade or business, which will continue to be subject to the general excise tax.
SECTION 2. Section 237-23, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:
"(b) The exemptions enumerated in subsection (a)(3) to (7) shall apply only:
(1) To those persons who shall have registered
with the department of taxation by filing a written application for
registration in [
such] a form as the department shall prescribe,
shall have paid the registration fee of $20, and shall have had the exemption
allowed by the department or by a court or tribunal of competent jurisdiction
upon appeal from any assessment resulting from disallowance of the exemption by
(2) To activities from which no profit inures to the benefit of any private stockholder or individual, except for death or other benefits to the members of fraternal societies; and
(3) To the fraternal, religious, charitable,
scientific, educational, communal, or social welfare activities of such
persons, or to the activities of hospitals, infirmaries, sanitaria, and potable
water companies, as such[
, and not to any activity the primary purpose of
which is to produce income even though the income is to be used for or in
furtherance of the exempt activities of such persons.]; provided that gross
income derived from any "unrelated trade or business", as defined in
section 513 of the Internal Revenue Code of 1986, as amended, shall not be
exempt under this section; provided further that in considering whether an
activity is an "unrelated trade or business", the modifications to
unrelated business taxable income, as provided in section 512(b)(3) of the
Internal Revenue Code of 1986, as amended, shall not apply."
SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.
SECTION 4. This Act shall take effect on June 30, 3000; provided that, on December 31, 2028, this Act shall be repealed and section 237-23(b), Hawaii Revised Statutes, shall be reenacted in the form in which it read on the day before the effective date of this Act.
Nonprofit Organizations; GET; Fundraising; Exemption; Unrelated Trade or Business Activities
Clarifies the application of the general excise tax law with regard to gross income derived from unrelated trade or business activities of nonprofit organizations. Effective 6/30/3000. Sunsets 12/31/2028. (HD1)
The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.