Hawaii-2024-SB359-Introduced

SECTION 1. The legislature finds that the State's income tax treatment of real estate investment trusts should be decoupled from the federal income tax treatment.

Pursuant to existing law, it is the legislature's intent to conform the income tax law of the State as closely as possible to the Internal Revenue Code, unless there is good reason to the contrary. 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 additionally finds that real estate investment trusts were established by the federal government to give investors, especially small investors, access to 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. Existing state law conforms to these provisions but creates 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 collections 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 further finds that real estate investment trusts in Hawaii own real estate assets of about $17,000,000,000 generating an annual income of $1,000,000,000, which, if taxed at the current corporate rate assessed to all other corporations, would generate Hawaii taxes of $65,000,000 per year. A 2016 analysis conducted by the department of business, economic development, and tourism concluded that the State had foregone about $36,000,000 in income tax in 2014 and that the amount of real estate investment trust investments had risen substantially since 2014.

Some real estate investment trust shareholders live in Hawaii, but a substantial majority do not. Furthermore, while real estate investment trusts own more real estate in Hawaii per capita than in any other state, it ranks fortieth in the nation for the number of real estate investment trust shareholders as a percentage of the population. 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 decouple from the federal system in this regard so that corporations and other business entities doing business in Hawaii pay a fair tax burden commensurate with the substantial privileges and resources in Hawaii that were used to generate their profits. Real estate investment trusts would continue to receive their generous federal tax exemptions and continue to benefit from Hawaii's low property tax rates.

Accordingly, the purpose of this Act is to:

(1) Temporarily disallow dividends paid deductions for real estate investment trusts for taxable years beginning after December 31, 2023, and ending before January 1, 2027; and

(2) Evenly divide and deposit the amounts collected from the disallowance into the dwelling unit revolving fund and rental housing revolving fund.

SECTION 2. Section 235-2.3, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) The following Internal Revenue Code subchapters, parts of subchapters, sections, subsections, and parts of subsections shall not be operative for the purposes of this chapter, unless otherwise provided:

(1) Subchapter A (sections 1 to 59A) (with respect to determination of tax liability), except section 1(h)(2) (relating to net capital gain reduced by the amount taken into account as investment income), except sections 2(a), 2(b), and 2(c) (with respect to the definition of "surviving spouse" and "head of household"), except section 41 (with respect to the credit for increasing research activities), except section 42 (with respect to low-income housing credit), except sections 47 and 48, as amended, as of December 31, 1984 (with respect to certain depreciable tangible personal property), and except section 48(d)(3), as amended, as of February 17, 2009 (with respect to the treatment of United States Department of Treasury grants made under section 1603 of the American Recovery and Reinvestment Tax Act of 2009). For treatment, see sections 235-110.91, 235-110.7, and 235-110.8;

(2) Section 78 (with respect to dividends received from certain foreign corporations by domestic corporations choosing foreign tax credit);

(3) Section 86 (with respect to social security and tier 1 railroad retirement benefits);

(4) Section 91 (with respect to certain foreign branch losses transferred to specified 10-percent owned foreign corporations);

(5) Section 103 (with respect to interest on state and local bonds). For treatment, see section 235-7(b);

(6) Section 114 (with respect to extraterritorial income). For treatment, any transaction as specified in the transitional rule for 2005 and 2006 as specified in the American Jobs Creation Act of 2004 section 101(d) and any transaction that has occurred pursuant to a binding contract as specified in the American Jobs Creation Act of 2004 section 101(f) are inoperative;

(7) Section 120 (with respect to amounts received under qualified group legal services plans). For treatment, see section 235-7(a)(9) to (11);

(8) Section 122 (with respect to certain reduced uniformed services retirement pay). For treatment, see section 235-7(a)(3);

(9) Section 135 (with respect to income from United States savings bonds used to pay higher education tuition and fees). For treatment, see section 235-7(a)(1);

(10) Section 139C (with respect to COBRA premium assistance);

(11) Subchapter B (sections 141 to 150) (with respect to tax exemption requirements for state and local bonds);

(12) Section 151 (with respect to allowance of deductions for personal exemptions). For treatment, see section 235-54;

(13) Section 179B (with respect to expensing of capital costs incurred in complying with Environmental Protection Agency sulphur regulations);

(14) Section 181 (with respect to special rules for certain film and television productions);

(15) Section 196 (with respect to deduction for certain unused investment credits);

(16) Section 199 (with respect to the U.S. production activities deduction);

(17) Section 199A (with respect to qualified business income);

(18) Section 222 (with respect to qualified tuition and related expenses);

(19) Sections 241 to 247 (with respect to special deductions for corporations). For treatment, see section 235-7(c);

(20) Section 250 (with respect to foreign-derived intangible income and global intangible low-taxed income);

(21) Section 267A (with respect to certain related party amounts paid or accrued in hybrid transactions or with hybrid entities);

(22) Section 280C (with respect to certain expenses for which credits are allowable). For treatment, see section 235-110.91;

(23) Section 291 (with respect to special rules relating to corporate preference items);

(24) Section 367 (with respect to foreign corporations);

(25) Section 501(c)(12), (15), (16) (with respect to exempt organizations); except that section 501(c)(12) shall be operative for companies that provide potable water to residential communities that lack any access to public utility water services;

(26) Section 515 (with respect to taxes of foreign countries and possessions of the United States);

(27) Subchapter G (sections 531 to 565) (with respect to corporations used to avoid income tax on shareholders);

(28) Subchapter H (sections 581 to 597) (with respect to banking institutions), except section 584 (with respect to common trust funds). For treatment, see chapter 241;

(29) Section 642(a) and (b) (with respect to special rules for credits and deductions applicable to trusts). For treatment, see sections 235-54(b) and 235-55;

(30) Section 646 (with respect to tax treatment of electing Alaska Native settlement trusts);

(31) Section 668 (with respect to interest charge on accumulation distributions from foreign trusts);

(32) Subchapter L (sections 801 to 848) (with respect to insurance companies). For treatment, see sections 431:7-202 and 431:7-204;

(33) Section 853 (with respect to foreign tax credit allowed to shareholders). For treatment, see section 235-55;

(34) Section 853A (with respect to credits from tax credit bonds allowed to shareholders);

(35) Section 857(b)(2)(B) (with respect to the dividends paid deduction for real estate investment trusts);

[~~(35)~~] (36) Subchapter N (sections 861 to 999) (with respect to tax based on income from sources within or without the United States), except sections 985 to 989 (with respect to foreign currency transactions). For treatment, see sections 235-4, 235-5, and 235-7(b), and 235-55;

[~~(36)~~] (37) Section 1042(g) (with respect to sales of stock in agricultural refiners and processors to eligible farm cooperatives);

[~~(37)~~] (38) Section 1055 (with respect to redeemable ground rents);

[~~(38)~~] (39) Section 1057 (with respect to election to treat transfer to foreign trust, etc., as taxable exchange);

[~~(39)~~] (40) Sections 1291 to 1298 (with respect to treatment of passive foreign investment companies);

[~~(40)~~] (41) Subchapter Q (sections 1311 to 1351) (with respect to readjustment of tax between years and special limitations);

[~~(41)~~] (42) Subchapter R (sections 1352 to 1359) (with respect to election to determine corporate tax on certain international shipping activities using per ton rate);

[~~(42)~~] (43) Subchapter U (sections 1391 to 1397F) (with respect to designation and treatment of empowerment zones, enterprise communities, and rural development investment areas). For treatment, see chapter 209E;

[~~(43)~~] (44) Subchapter W (sections 1400 to 1400C) (with respect to District of Columbia enterprise zone);

[~~(44)~~] (45) Section 1400O (with respect to education tax benefits);

[~~(45)~~] (46) Section 1400P (with respect to housing tax benefits);

[~~(46)~~] (47) Section 1400R (with respect to employment relief);

[~~(47)~~] (48) Section 1400T (with respect to special rules for mortgage revenue bonds);

[~~(48)~~] (49) Section 1400U-1 (with respect to allocation of recovery zone bonds);

[~~(49)~~] (50) Section 1400U-2 (with respect to recovery zone economic development bonds); and

[~~(50)~~] (51) Section 1400U-3 (with respect to recovery zone facility bonds)."

SECTION 3. Section 235-71, Hawaii Revised Statutes, is amended by amending subsection (d) to read as follows:

"(d) In the case of a real estate investment trust there is imposed on the taxable income, computed as provided in sections 857 and 858 of the Internal Revenue Code but with the changes and adjustments made by this chapter (without prejudice to the generality of the foregoing, for taxable years beginning before January 1, 2024, the deduction for dividends paid is limited to [~~such~~] the amount of dividends as is attributable to income taxable under this chapter[),] and, for taxable years beginning after December 31, 2023, no deductions for dividends paid shall be allowed), a tax consisting in the sum of the following: 4.4 per cent if the taxable income is not over $25,000, 5.4 per cent if over $25,000 but not over $100,000, and on all over $100,000, 6.4 per cent. In addition to any other penalty provided by law any real estate investment trust whose tax liability for any taxable year is deemed to be increased pursuant to section 859(b)(2)(A) or 860(c)(1)(A) after December 31, 1978, (relating to interest and additions to tax determined with respect to the amount of the deduction for deficiency dividends allowed) of the Internal Revenue Code shall pay a penalty in an amount equal to the amount of interest for which the trust is liable that is attributable solely to the increase. The penalty payable under this subsection with respect to any determination shall not exceed one-half of the amount of the deduction allowed by section 859(a), or 860(a) after December 31, 1978, of the Internal Revenue Code for the taxable year.

Notwithstanding the foregoing, beginning January 1, 2022, the department shall require a real estate investment trust subject to this chapter to:

(1) Notify the department, in the manner prescribed by the department, of its operation as a real estate investment trust in the State no later than fifteen days from the first day of operation in the State; provided that, for real estate investment trusts operating in the State as of July 1, 2021, the department shall be notified no later than January 15, 2022;

(2) Properly designate on its tax return that it is a real estate investment trust, as required by the department;

(3) Complete its tax return in the specific manner required by the department, including following line-by-line instructions; and

(4) Submit a copy of the real estate investment trust's federal tax return covering the same period with each state tax return that the real estate investment trust files with the department under this chapter.

Any real estate investment trust that fails to comply with these requirements shall be assessed a penalty of $50 per day.

Notwithstanding any law to the contrary, amounts collected as taxes on dividends paid under this subsection shall be paid into the state treasury as state realizations to be kept and accounted for as provided by law; provided that fifty per cent shall be deposited to the credit of the dwelling unit revolving fund established pursuant to section 201H-191 and fifty per cent shall be deposited to the credit of the rental housing revolving fund established pursuant to section 201H-202."

SECTION 4. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 5. This Act, upon its approval, shall apply to taxable years beginning after December 31, 2023; provided that this Act shall be repealed on December 31, 2026, and sections 235-2.3(b) and 235-71(d), Hawaii Revised Statutes, shall be reenacted in the form in which they read on the day prior to the effective date of this Act.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	359
THIRTY-SECOND LEGISLATURE, 2023
STATE OF HAWAII