REPORT TITLE:
Income taxation


DESCRIPTION:
Repeals section 235-4.3, and its method for calculating
nonresident taxpayers' income taxes and institutes a new method.
Repeals the authority of the department of taxation to exempt
nonresident employees from withholding to sunset on September 1,
2002.  (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT

RELATING TO THE INCOME TAXATION OF NONRESIDENTS.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that the taxation of
 
 2 nonresidents established in Act 281, Session Laws of Hawaii 1997
 
 3 (Act 281), has proved to result in anomalies and difficulties for
 
 4 both the taxpayer and the department of taxation.  Section
 
 5 235-4.3 Hawaii Revised Statutes (HRS), formally Act 281, should
 
 6 be repealed and a new methodology should be enacted.
 
 7      The legislature also finds that section 235-61, Hawaii
 
 8 Revised Statutes, requires employers to deduct and withhold from
 
 9 wages paid to an employee an amount of income tax, and pay that
 
10 withheld amount over to the department of taxation on a periodic
 
11 basis.  Subsection (e) allows the department, by rule, to exempt
 
12 any employer from the requirement.
 
13      The legislature also finds that nonresidents are generally
 
14 not subject to the income tax law and the department of taxation
 
15 has adopted section 18-235-61-04, Hawaii Administrative Rules,
 
16 that exempts wages paid to nonresident employees from the
 
17 withholding requirements.  Section 18-235-61-04 also qualifies
 
18 employees as nonresidents, for the purposes of withholding taxes,
 
19 as those employees who are temporarily performing services in the
 

 
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 1 State for not more than sixty days during the calendar year.
 
 2      The legislature further finds that members of the
 
 3 construction industry have testified in previous hearings on the
 
 4 matter that this rule is being abused to avoid the withholding of
 
 5 income tax that is legally due to the State.  According to
 
 6 industry representatives, some employees attempt to qualify as
 
 7 nonresidents by leaving the State on the fifty-ninth day only to
 
 8 return a few days later to restart another sixty-day period.
 
 9      In addition to the resulting loss of revenues to the State,
 
10 the legislature believes that this abuse unfairly penalizes
 
11 residents of the State, and that treating residents and
 
12 nonresidents similarly regarding withholding is fair and
 
13 equitable.  If there is no income tax liability, nonresidents may
 
14 file for a return claiming a refund, as residents do.
 
15      The purpose of this Act is to enact a new method of taxing
 
16 the income of nonresidents and to repeal the ability of the
 
17 department of taxation to exempt nonresident employees from
 
18 withholding and to require all employees' wages to be subject to
 
19 withholding regardless of residency.
 
20      SECTION 2.  Section 235-2.4, Hawaii Revised Statutes, is
 
21 amended by amending subsection (a) to read as follows:
 
22      "(a)  Section 63 (with respect to taxable income defined) of
 
23 the Internal Revenue Code shall be operative for the purposes of
 

 
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 1 this chapter, except that the standard deduction amount in
 
 2 section 63(c) of the Internal Revenue Code shall instead mean:
 
 3      (1)  $1,900 in the case of:
 
 4           (A)  A joint return as provided by section 235-93, or
 
 5           (B)  A surviving spouse (as defined in section 2(a) of
 
 6                the Internal Revenue Code),
 
 7      (2)  $1,650 in the case of a head of household (as defined
 
 8           in section 2(b) of the Internal Revenue Code),
 
 9      (3)  $1,500 in the case of an individual who is not married
 
10           and who is not a surviving spouse or head of household,
 
11           or
 
12      (4)  $950 in the case of a married individual filing a
 
13           separate return.
 
14 Section 63(c)(4) shall not be operative in this State.
 
15 Section 63(c)(5) shall be operative, except that the limitation
 
16 on basic standard deduction in the case of certain dependents
 
17 shall be the greater of $500 or such individual's earned income.
 
18 Section 63(f) shall not be operative in this State.
 
19      The standard deduction amount for nonresidents shall be
 
20 calculated pursuant to section 235-5."
 
21      SECTION 3.  Section 235-5, Hawaii Revised Statutes, is
 
22 amended to read as follows:
 
23      "§235-5  Allocation of income of persons not taxable upon
 

 


 
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 1 entire income.(a)  This section applies to income not subject
 
 2 to part II of this chapter, including nonbusiness income and
 
 3 certain section 235-22 income.
 
 4      (b)  Income (including gains), also losses, from property
 
 5 owned in the State and from any other source in the State shall
 
 6 be determined by an allocation and separate accounting so far as
 
 7 practicable.  Losses from property owned outside the State and
 
 8 from other sources outside the State shall not be deducted.
 
 9      (c)  Deductions connected with income taxable under this
 
10 chapter shall be allowed, but deductions connected with income
 
11 not taxable under this chapter shall not be allowed.
 
12 Deductions from adjusted gross income that are not connected with
 
13 particular property or income, such as medical expenses, shall be
 
14 allowed only to the extent of the ratio of the adjusted gross
 
15 income attributed to this State to the entire adjusted gross
 
16 income computed without regard to source in the State.
 
17      Deductions by individual taxpayers from gross income for
 
18 alimony and separate maintenance payments under section 215 of
 
19 the Internal Revenue Code shall be allowed only to the extent of
 
20 the ratio of gross income attributed to this State to the entire
 
21 gross income computed without regard to source in this State;
 
22 provided that as used in this sentence "gross income means gross
 
23 income as defined in the Internal Revenue Code, minus the
 

 
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 1 deductions allowed by section 62 of the Internal Revenue Code,
 
 2 other than the deductions for alimony and separate maintenance
 
 3 payments under section 215 of the Internal Revenue Code.
 
 4      Deductions by individual taxpayers from gross income for
 
 5 pension, profit-sharing, stock bonus plans, and other plans
 
 6 qualified under sections 401 to 409 of the Internal Revenue Code,
 
 7 as such sections are operative for the purposes of this chapter,
 
 8 shall be allowed only to the extent that such deductions are
 
 9 attributed to compensation earned in this State.
 
10      (d)  The standard deduction as provided in section 235-2.4
 
11 and personal exemptions as provided in section 235-54 shall be
 
12 allowed only to the extent of the ratio of the adjusted gross
 
13 income attributed to this State to the entire adjusted gross
 
14 income computed without regard to source in the State.
 
15      [(d)] (e)  If in the opinion of the department the
 
16 allocations hereinabove provided do not clearly and accurately
 
17 reflect the actual amount of the adjusted gross income and
 
18 taxable income received or derived from all property owned and
 
19 any and every other source in the State, or if any person shows
 
20 that the allocations hereinabove provided result in adjusted
 
21 gross income or taxable income being attributed to the State in a
 
22 larger amount than is just and equitable, then the same shall be
 
23 determined, allocated, and apportioned under such rules,
 

 
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 1 processes, and formulas as the department prescribes as being
 
 2 just and equitable."
 
 3      SECTION 4.  Section 235-54, Hawaii Revised Statutes, is
 
 4 amended by amending subsection (a) to read as follows:
 
 5      "(a)  In computing the taxable income of any individual,
 
 6 there shall be deducted, in lieu of the personal exemptions
 
 7 allowed by the Internal Revenue Code, personal exemptions
 
 8 computed as follows:  Ascertain the number of exemptions which
 
 9 the individual can lawfully claim under the Internal Revenue
 
10 Code, add an additional exemption for the taxpayer or the
 
11 taxpayer's spouse who is sixty-five years of age or older within
 
12 the taxable year, and multiply that number by $1,040, for taxable
 
13 years beginning after December 31, 1984.  A nonresident shall [be
 
14 entitled to the same personal exemptions as a resident, without
 
15 proration of] prorate the personal exemptions on account of
 
16 income from sources outside the State[.] as provided in section
 
17 235-5.  In the case of an individual with respect to whom an
 
18 exemption under this section is allowable to another taxpayer for
 
19 a taxable year beginning in the calendar year in which the
 
20 individual's taxable year begins, the personal exemption amount
 
21 applicable to such individual under this subsection for such
 
22 individual's taxable year shall be zero."
 
23      SECTION 5.  Section 235-61, Hawaii Revised Statutes, is
 

 
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 1 amended by amending subsection (e) to read as follows:
 
 2      "(e)  The department, by rule, may require the deduction and
 
 3 withholding of tax from any remuneration or compensation paid for
 
 4 or attributable to services that are not subject to the general
 
 5 excise tax imposed by chapter 237, whether or not such
 
 6 withholding is provided for hereinabove.  Every person so
 
 7 required to deduct and withhold tax, or from whom tax is required
 
 8 to be deducted and withheld, shall be subject to sections 235-61
 
 9 to 235-67, and every person so required to deduct and withhold
 
10 tax shall be deemed an employer for the purposes of this chapter.
 
11      The department[, by rule,] may not exempt any employer from
 
12 the requirement of deduction and withholding of taxes[, even
 
13 though the requirement is imposed by this section, if and to the
 
14 extent that the department finds the requirement unduly onerous
 
15 or impracticable of enforcement]."
 
16      SECTION 6.  Section 235-4.3, Hawaii Revised Statutes, is
 
17 repealed.
 
18      ["§235-4.3 Special rules for nonresidents and part-year
 
19 residents.  There shall be imposed for each taxable year upon the
 
20 entire taxable income of every nonresident or party-year resident
 
21 which is derived from sources in this State a tax which shall be
 
22 equal to the tax computed on the basis of the rates prescribed by
 
23 section 235-51 or 235-53, as appropriate, as if the nonresident
 

 
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 1 or part-year resident were a resident multiplied by the ratio of
 
 2 Hawaii adjusted gross income to total adjusted gross income from
 
 3 all sources."]
 
 4      SECTION 7.  Statutory material to be repealed is bracketed.
 
 5 New statutory material is underscored.
 
 6      SECTION 8.  This Act shall take effect upon its approval and
 
 7 sections 2, 3, 4, and 6 of this Act shall apply to taxable years
 
 8 beginning after December 31, 1998; provided that section 5 of
 
 9 this Act shall take effect on September 1, 1999, and shall be
 
10 repealed on September 1, 2002; provided that section 235-61(e),
 
11 Hawaii Revised Statutes, shall be reenacted in the form in which
 
12 read on the day before the effective date of this Act.