SB2104

PART I

SECTION 1. The legislature finds that the cost of living in the State is among the highest in the nation, with many residents struggling to afford basic necessities such as food and medication. According to a survey conducted for the Hawaii Foodbank, thirty-two per cent of households in the State were food insecure in 2024, of which two-thirds were experiencing very low food security.

The legislature further finds that the State does not exempt groceries or nonprescription drugs from the general excise tax, nor does it apply a reduced rate to those items. Hawaii is one of only four states in the nation that tax groceries at their full sales or general excise tax rate, whereas most other states exempt groceries or impose a reduced tax rate, thereby improving affordability and stimulating local economies.

The legislature also finds that sales taxes on necessities, such as groceries and nonprescription drugs, are regressive in nature because they impose a disproportionate burden on low- and moderate-income households who must allocate a larger share of their income to these essential goods compared to higher-income households.

The legislature additionally finds that the State's refundable food/excise tax credit provides only modest relief in practice. Under existing law, which limits eligibility to households with an adjusted gross income below $60,000 for non‑single filers or $40,000 for single filers, the tax credit ranges from $220 at the lowest income levels to $0 at the highest income levels, which is then multiplied by the number of exemptions claimed. For many low- and moderate-income households, the resulting tax credit may be relatively small. Furthermore, many asset limited, income constrained, employed (ALICE) households--households earning above the federal poverty level but still unable to afford basic living costs--do not qualify for the tax credit at all, despite facing significant cost-of-living pressures in the State.

The legislature further finds that taxes on groceries exacerbate food insecurity. Research indicates that a one percentage point increase in grocery tax rates is associated with an estimated 0.84 per cent increase in food insecurity among low-income households. Applying this estimate to the State's current 4.712 per cent general excise tax rate (including county surcharges and maximum business pass-on rates) suggests an approximate 3.96 per cent increase in food insecurity attributable to grocery taxation.

The legislature also finds that eliminating the general excise tax on groceries for preparation and consumption at home will primarily benefit the State's low- and moderate-income households rather than visitors, because residents purchase most of their food for such purpose, whereas visitors incur the vast majority of their food expenditures on meals prepared and consumed away from home.

The legislature finds that several states have repealed their taxes on groceries through a phased approach to improve access to essential goods while maintaining long-term fiscal stability. For example, Kansas enacted a phased repeal of the state sales and use tax on food, food ingredients, and certain prepared food beginning in 2022, culminating in the elimination of the state tax on those items as of January 1, 2025. Georgia also adopted a phased approach to exempting food for off-premises consumption, applicable to most grocery items, from the state sales tax, reaching a zero per cent tax rate on October 1, 1998.

With respect to fiscal feasibility, the legislature finds that the State's general fund revenues and reserves are sufficient to support a phased elimination of the general excise tax on groceries beginning on January 1, 2027. According to the United States Department of Agriculture Economic Research Service's Food Expenditure Series, food purchased for consumption at home in Hawaii totaled approximately $4.6 billion in 2024, excluding taxes and tips. Applying the State's current general excise tax rate of four per cent--excluding county surcharges and maximum business pass-on rates--to this amount indicates that a state-level grocery tax exemption would reduce state revenues by approximately $184 million annually. On the budgetary side, according to the State's Annual Comprehensive Financial Report for fiscal year 2024, which compares changes in the State's net position to fiscal year 2023, general excise tax revenues declined from $11.080 billion to $10.413 billion while total government-wide expenses increased from $15.190 billion to $17.634 billion. Nevertheless, the State realized a $1.267 billion increase in net position for the fiscal year. Furthermore, the governor's executive budget and the council on revenue's general fund tax revenue forecasts project steady surpluses and growing balances in the years following a brief shortfall in fiscal year 2026. Taken together, these data reflect the State's overall fiscal capacity and demonstrate that, with prudent budgeting, the State can absorb a gradual and targeted general excise tax exemption on certain essential goods.

Furthermore, the legislature acknowledges that food security is a matter of statewide concern that directly affects the general welfare of the people of Hawaii and the State's long-term economic and social well-being.

Accordingly, the purpose of this Act is to provide immediate and ongoing point-of-sale relief on groceries and nonprescription drugs, reduce food insecurity, and improve affordability while maintaining the State's fiscal stability by:

(1) Implementing a phased repeal of the state general excise tax on the sale of groceries and nonprescription drugs in the State; and

(2) Prohibiting counties from establishing county surcharges on the state general excise tax on gross income or gross proceeds from the sale of groceries and nonprescription drugs in the State.

PART II

SECTION 2. Section 237-13, Hawaii Revised Statutes, is amended to read as follows:

"§237-13 Imposition of tax. There is hereby levied and shall be assessed and collected annually privilege taxes against persons on account of their business and other activities in the State measured by the application of rates against values of products, gross proceeds of sales, or gross income, whichever is specified, as follows:

(1) Tax on manufacturers.

(A) Upon every person engaging or continuing within the State in the business of manufacturing, including compounding, canning, preserving, packing, printing, publishing, milling, processing, refining, or preparing for sale, profit, or commercial use, either directly or through the activity of others, in whole or in part, any article or articles, substance or substances, commodity or commodities, the amount of the tax to be equal to the value of the articles, substances, or commodities, manufactured, compounded, canned, preserved, packed, printed, milled, processed, refined, or prepared for sale, as shown by the gross proceeds derived from the sale thereof by the manufacturer or person compounding, preparing, or printing them, multiplied by one-half of one per cent.

(B) The measure of the tax on manufacturers is the value of the entire product for sale.

(2) Tax on business of selling tangible personal property; producing. Except as provided in paragraphs (9) and (10):

(A) Upon every person engaging or continuing in the business of selling any tangible personal property whatsoever, there is likewise hereby levied, and shall be assessed and collected, a tax equivalent to four per cent of the gross proceeds of sales of the business; provided that, in the case of a wholesaler, the tax shall be equal to one-half of one per cent of the gross proceeds of sales of the business; and provided further that insofar as the sale of tangible personal property is a wholesale sale under section 237-4(a)(8), the tax shall be one-half of one per cent of the gross proceeds. Upon every person engaging or continuing within this State in the business of a producer, the tax shall be equal to one-half of one per cent of the gross proceeds of sales of the business, or the value of the products, for sale.

(B) Gross proceeds of sales of tangible property in interstate and foreign commerce shall constitute a part of the measure of the tax imposed on persons in the business of selling tangible personal property, to the extent, under the conditions, and in accordance with the provisions of the Constitution of the United States and the Acts of the Congress of the United States which may be now in force or may be hereafter adopted, and whenever there occurs in the State an activity to which, under the Constitution and Acts of Congress, there may be attributed gross proceeds of sales, the gross proceeds shall be so attributed.

(C) No manufacturer or producer, engaged in such business in the State and selling the manufacturer's or producer's products for delivery outside of the State (for example, consigned to a mainland purchaser via common carrier f.o.b. Honolulu), shall be required to pay the tax imposed in this chapter for the privilege of so selling the products, and the value or gross proceeds of sales of the products shall be included only in determining the measure of the tax imposed upon the manufacturer or producer.

(D) A manufacturer or producer, engaged in such business in the State, shall pay the tax imposed in this chapter for the privilege of selling its products in the State, and the value or gross proceeds of sales of the products, thus subjected to tax, may be deducted insofar as duplicated as to the same products by the measure of the tax upon the manufacturer or producer for the privilege of manufacturing or producing in the State; provided that no producer of agricultural products who sells the products to a purchaser who will process the products outside the State shall be required to pay the tax imposed in this chapter for the privilege of producing or selling those products.

(E) A taxpayer selling to a federal cost-plus contractor may make the election provided for by paragraph (3)(C), and in that case the tax shall be computed pursuant to the election, notwithstanding this paragraph or paragraph (1) to the contrary.

(F) The department, by rule, may require that a seller take from the purchaser of tangible personal property a certificate, in a form prescribed by the department, certifying that the sale is a sale at wholesale; provided that:

(i) Any purchaser who furnishes a certificate shall be obligated to pay to the seller, upon demand, the amount of the additional tax that is imposed upon the seller whenever the sale in fact is not at wholesale; and

(ii) The absence of a certificate in itself shall give rise to the presumption that the sale is not at wholesale unless the sales of the business are exclusively at wholesale.

(3) Tax upon contractors.

(A) Upon every person engaging or continuing within the State in the business of contracting, the tax shall be equal to four per cent of the gross income of the business.

(B) In computing the tax levied under this paragraph, there shall be deducted from the gross income of the taxpayer so much thereof as has been included in the measure of the tax levied under subparagraph (A), on another taxpayer who is a contractor, as defined in section 237-6; provided that any person claiming a deduction under this paragraph shall be required to show in the person's return the name and general excise number of the person paying the tax on the amount deducted by the person.

(C) In computing the tax levied under this paragraph against any federal cost-plus contractor, there shall be excluded from the gross income of the contractor so much thereof as fulfills the following requirements:

(i) The gross income exempted shall constitute reimbursement of costs incurred for materials, plant, or equipment purchased from a taxpayer licensed under this chapter, not exceeding the gross proceeds of sale of the taxpayer on account of the transaction; and

(ii) The taxpayer making the sale shall have certified to the department that the taxpayer is taxable with respect to the gross proceeds of the sale, and that the taxpayer elects to have the tax on gross income computed the same as upon a sale to the state government.

(D) A person who, as a business or as a part of a business in which the person is engaged, erects, constructs, or improves any building or structure, of any kind or description, or makes, constructs, or improves any road, street, sidewalk, sewer, or water system, or other improvements on land held by the person (whether held as a leasehold, fee simple, or otherwise), upon the sale or other disposition of the land or improvements, even if the work was not done pursuant to a contract, shall be liable to the same tax as if engaged in the business of contracting, unless the person shows that at the time the person was engaged in making the improvements the person intended, and for the period of at least one year after completion of the building, structure, or other improvements the person continued to intend to hold and not sell or otherwise dispose of the land or improvements. The tax in respect of the improvements shall be measured by the amount of the proceeds of the sale or other disposition that is attributable to the erection, construction, or improvement of such building or structure, or the making, constructing, or improving of the road, street, sidewalk, sewer, or water system, or other improvements. The measure of tax in respect of the improvements shall not exceed the amount which would have been taxable had the work been performed by another, subject as in other cases to the deductions allowed by subparagraph (B). Upon the election of the taxpayer, this paragraph may be applied notwithstanding that the improvements were not made by the taxpayer, or were not made as a business or as a part of a business, or were made with the intention of holding the same. However, this paragraph shall not apply in respect of any proceeds that constitute or are in the nature of rent, which shall be taxable under paragraph (9); provided that insofar as the business of renting or leasing real property under a lease is taxed under section 237-16.5, the tax shall be levied by section 237-16.5.

(4) Tax upon theaters, amusements, radio broadcasting stations, etc.

(A) Upon every person engaging or continuing within the State in the business of operating a theater, opera house, moving picture show, vaudeville, amusement park, dance hall, skating rink, radio broadcasting station, or any other place at which amusements are offered to the public, the tax shall be equal to four per cent of the gross income of the business, and in the case of a sale of an amusement at wholesale under section 237‑4(a)(13), the tax shall be one-half of one per cent of the gross income.

(B) The department may require that the person rendering an amusement at wholesale take from the licensed seller a certificate, in a form prescribed by the department, certifying that the sale is a sale at wholesale; provided that:

(i) Any licensed seller who furnishes a certificate shall be obligated to pay to the person rendering the amusement, upon demand, the amount of additional tax that is imposed upon the seller whenever the sale is not at wholesale; and

(ii) The absence of a certificate in itself shall give rise to the presumption that the sale is not at wholesale unless the person rendering the sale is exclusively rendering the amusement at wholesale.

(5) Tax upon sales representatives, etc. Upon every person classified as a representative or purchasing agent under section 237-1, engaging or continuing within the State in the business of performing services for another, other than as an employee, there is likewise hereby levied and shall be assessed and collected a tax equal to four per cent of the commissions and other compensation attributable to the services so rendered by the person.

(6) Tax on service business.

(A) Upon every person engaging or continuing within the State in any service business or calling including professional services not otherwise specifically taxed under this chapter, there is likewise hereby levied and shall be assessed and collected a tax equal to four per cent of the gross income of the business, and in the case of a wholesaler under section 237-4(a)(10), the tax shall be equal to one-half of one per cent of the gross income of the business.

(B) The department may require that the person rendering a service at wholesale take from the licensed seller a certificate, in a form prescribed by the department, certifying that the sale is a sale at wholesale; provided that:

(i) Any licensed seller who furnishes a certificate shall be obligated to pay to the person rendering the service, upon demand, the amount of additional tax that is imposed upon the seller whenever the sale is not at wholesale; and

(ii) The absence of a certificate in itself shall give rise to the presumption that the sale is not at wholesale unless the person rendering the sale is exclusively rendering services at wholesale.

(C) Where any person is engaged in the business of selling interstate or foreign common carrier telecommunication services within and without the State, other than as a home service provider, the tax shall be imposed on that portion of gross income received by a person from service which is originated or terminated in this State and is charged to a telephone number, customer, or account in this State notwithstanding any other state law (except for the exemption under section 237-23(a)(1)) to the contrary. If, under the Constitution and laws of the United States, the entire gross income as determined under this paragraph of a business selling interstate or foreign common carrier telecommunication services cannot be included in the measure of the tax, the gross income shall be apportioned as provided in section 237-21; provided that the apportionment factor and formula shall be the same for all persons providing those services in the State.

(D) Where any person is engaged in the business of a home service provider, the tax shall be imposed on the gross income received or derived from providing interstate or foreign mobile telecommunications services to a customer with a place of primary use in this State when the services originate in one state and terminate in another state, territory, or foreign country; provided that all charges for mobile telecommunications services which are billed by or for the home service provider are deemed to be provided by the home service provider at the customer's place of primary use, regardless of where the mobile telecommunications originate, terminate, or pass through; provided further that the income from charges specifically derived from interstate or foreign mobile telecommunications services, as determined by books and records that are kept in the regular course of business by the home service provider in accordance with section 239-24, shall be apportioned under any apportionment factor or formula adopted under subparagraph (C). Gross income shall not include:

(i) Gross receipts from mobile telecommunications services provided to a customer with a place of primary use outside this State;

(ii) Gross receipts from mobile telecommunications services that are subject to the tax imposed by chapter 239;

(iii) Gross receipts from mobile telecommunications services taxed under section 237-13.8; and

(iv) Gross receipts of a home service provider acting as a serving carrier providing mobile telecommunications services to another home service provider's customer.

For the purposes of this paragraph, "charges for mobile telecommunications services", "customer", "home service provider", "mobile telecommunications services", "place of primary use", and "serving carrier" have the same meaning as in section 239-22.

(7) Tax on insurance producers. Upon every person engaged as a licensed producer pursuant to chapter 431, there is hereby levied and shall be assessed and collected a tax equal to 0.15 per cent of the commissions due to that activity.

(8) Tax on receipts of sugar benefit payments. Upon the amounts received from the United States government by any producer of sugar (or the producer's legal representative or heirs), as defined under and by virtue of the Sugar Act of 1948, as amended, or other Acts of the Congress of the United States relating thereto, there is hereby levied a tax of one-half of one per cent of the gross amount received; provided that the tax levied hereunder on any amount so received and actually disbursed to another by a producer in the form of a benefit payment shall be paid by the person or persons to whom the amount is actually disbursed, and the producer actually making a benefit payment to another shall be entitled to claim on the producer's return a deduction from the gross amount taxable hereunder in the sum of the amount so disbursed. The amounts taxed under this paragraph shall not be taxable under any other paragraph, subsection, or section of this chapter.

(9) Tax on businesses selling groceries in the State.

(A) Upon every person engaging or continuing in the business of selling any groceries in the State, there is likewise hereby levied, and shall be assessed and collected, a tax equivalent to the following percentages of the gross proceeds of sales of the business:

(i) 4.0 per cent until December 31, 2026;

(ii) 3.5 per cent for the period beginning on January 1, 2027, to December 31, 2027;

(iii) 3.0 per cent for the period beginning on January 1, 2028, to December 31, 2028;

(iv) 2.5 per cent for the period beginning on January 1, 2029, to December 31, 2029;

(v) 2.0 per cent for the period beginning on January 1, 2030, to December 31, 2030;

(vi) 1.5 per cent for the period beginning on January 1, 2031, to December 31, 2031;

(vii) 1.0 per cent for the period beginning on January 1, 2032, to December 31, 2032;

(viii) 0.5 per cent for the period beginning on January 1, 2033, to December 31, 2033; and

(ix) For the period beginning on January 1, 2034, and thereafter, this chapter shall no longer apply.

(B) Upon every person engaging or continuing in the business of selling any groceries in the State as a wholesaler, the tax shall be equal to:

(i) One-half of one per cent of the gross proceeds of sales of the business; or

(ii) One-half of one per cent of the gross proceeds, insofar as the sale of groceries is a wholesale sale under section 237‑4(a)(8);

provided that beginning on January 1, 2028, and thereafter, this chapter shall no longer apply.

(C) Upon every person engaging or continuing within this State in the business of a manufacturer or producer of groceries, the tax shall be equal to one-half of one per cent of the gross proceeds of sales of the business, or the value of the products, for sale in the State; provided that beginning on January 1, 2028, and thereafter, this chapter shall no longer apply.

(F) The department, by rule, may require that a seller take from the purchaser of nonprescription drugs, a certificate certifying that the sale is a sale at wholesale pursuant to paragraph (2)(F).

For the purposes of this paragraph:

"Groceries" means any food or food product for home consumption except alcoholic beverages, tobacco, and hot foods or hot food products prepared for immediate consumption.

"Food" or "food product" means any substance, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that is sold for ingestion or chewing by humans and is consumed for its taste or nutritional value.

(10) Tax on businesses selling nonprescription drugs in the State.

(A) Upon every person engaging or continuing in the business of selling any nonprescription drugs in the State, there is likewise hereby levied, and shall be assessed and collected, a tax equivalent to the following percentages of the gross proceeds of sales of the business: