New Tax Law Sending Shockwaves Through Hawaii Business Community

BY SEN. SAM SLOM – Gov. Neil Abercrombie signed Act 105 (SB 754) a month ago on June 14, 2011. As predicted, the law, which went into effect July 1, is causing major economic disturbances in Hawaii.

The bill was a key component in the Governor’s 2011 plan to increase tax revenues to cover the state’s $1.3 billion two-year (FY 12, FY 13) budget deficit. The one measure will generate more than $400 million in tax revenues over two years.

This one bill, by “temporarily” suspending long-practiced exemptions from the State’s regressive and pyramiding gross income general excise tax, has added to cost burdens for business and individuals.

Most impacted are those in the construction, airlines and shipping industries and those who use these services.

Proponents of the bill say it is an “equity” measure that will end tax loopholes and bring in needed revenues. It also was heralded as a “temporary” measure. Do you remember the last “temporary” Hawaii tax?

We opponents of this bill explained this was not a loophole but an attempt to balance out double taxation in the GET. We warned that the law would have far-reaching negative economic implications, unintended consequences and a new and heftier cost burden on Island residents.

All of this has come true since July 1 including higher airline costs, added shipping surcharges (Matson added $52 per container just for this law) , and there are new costs for sub contractors and sub lessees.

However, the other shoe has fallen. Other issues—unintended—began to surface last week as the Association of Apartment Owners began to notify owners that previously tax-excluded utility, maintenance and other separated cost items would now be subject to the 4.5% GET on Oahu. And local vendors who sell to commissaries and other federal government outlets have been notified that they are subject to the tax, making their products less competitive.

Non profits are also adversely burdened.  Other transfer entities have also been informed of new tax costs.

Calls to the State Department of Taxation for clarification have resulted in mixed, but generally unsatisfactory, responses. Calls to individual legislative offices also have resulted in confusion.

Why? Because the law is confusing and not fully transparent.

The history of the law also needs to be disclosed.

Especially, since lawmakers such as myself supported the original bill, and now are being criticized for supporting the new law (we don’t).

SB 754 was introduced on January 21 this year by Senators Carol Fukunaga, Suzanne Chun Oakland and Roz Baker. Four other Senators, including myself, signed on to the bill.

SB 754 was a Small Business Caucus package bill that “Amends distribution of partial payment of taxes to principal first, tehn penalties, then interest.” A good bill. A necessary bill.

The small business reform bill passed the Senate Ways and Means Committee with amendments unanimously, and the full Senate 24-0 (Shimabukuro was excused) on March 8. The bill was then transmitted to the House.

On April 4, the House Finance Committee amended the bill further.

By now, the bill’s contents had been “gutted and replaced” with the tax increase in place.

On April 29, the new bill, SB 754,SD1, HD1, CD1 emerged from Conference Committee.

The public was just beginning to understand the full impact of this bill. There was bipartisan pushback from the final version of the bill.

Final NO votes in the House (5/3/2011) were: Reps. Brower, Ching, Cullen, Fontaine, Har, Johanson, Marumoto, Riviere, Thielen and Ward. (Carroll and Pine were excused).

Final NO votes in the Senate (5/3/2011) were:  Senators Baker, Chun Oakland, Espero, Fukunaga, Green, Ihara, Slom and Wakai.

Now the bill is law and the consequences continue to emerge. My office will inform the public on any further tax decisions.

In the meantime, the senate Minority’s Budget Chief, Arik Look, has prepared this summary with additional information:

GET exemptions suspended:
• Gross income received by contractors
• Reimbursements received by federal cost plus contractors for costs of purchased materials, plant, and equipment
• Gross revenue of homes service providers providing mobile telcom to other home service providers
• Gross income from real property lessees from sublessees
• Gross income of nonprofit organizations from certain conventions, conferences, trade show exhibits, or display spaces
• Amounts received by sugarcane producers and revenues from:
• the loading, transportation, and unloading of agricultural commodities shipped interisland
• sale of liquor, cigarettes, tobacco products, and agricultural meat, or fish products to persons or common carriers engaged in interstate or foreign commerce
• the loading or unloading of cargo
• tugboat and towage services
• the transportation of pilots or government official
• labor organizations for real property leases
• rent for aircraft or aircraft engines used for interstate air transportation
• high technology research and development grants
• the servicing and maintenance of aircraft or construction of aircraft service and maintenance facilities
• petroleum product refiners from other refiners for further refining of petroleum products; and gross proceeds from:
• the building or maintenance of air pollution control facilities
•  shipbuilding and ship repairs.
• qualified businesses in enterprise zones.
• certain contractors to build in enterprise zones for the qualified businesses.

Other exemptions “temporarily” suspended:
• Leasing or renting of aircraft for commercial transportation of passengers and goods involved in interstate air transportation
• Use of oceangoing vehicles for passenger or passenger and goods transportation within the state.
• The use of material, parts, or tools imported for the use of aircraft service and maintenance or the construction of aircraft service facilities.

Hope this is helpful.

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