Act 165 tightens up the definition of "related entities" for purposes of the general excise tax (GET), expands the definition of "related entities" to include limited liability partnerships and limited liability companies, and clarifies the "business unit" language in the prior law by replacing it with the more familiar "unitary business" terminology. Act 165 is effective as of July 1, 1999 and applies to gross income or gross proceeds received after June 30, 1999.
The GET is applicable to transactions between a business entity and its shareholders or members, except where a specific exemption applies. Sections 237-23.5 and 237-24.7, Hawaii Revised Statutes (HRS), exempt certain transactions between "related entities." Under prior law, sections 237-23.5(a) and 237-24.7(9) HRS, spoke alternatively in terms of 80% voting power or value in determining whether entities qualify as "related entities." Thus, valuation games were being played by taxpayers without the requisite 80% voting power. By comparison, the Internal Revenue Code contains a conjunctive 80% voting power and value test before corporations may file consolidated returns and ignore intercorporate transactions.
Act 165, which is based upon a bill introduced by Governor Cayetano's administration, eliminates the practice of taxpayers using valuation premiums to establish qualification for the "related entities" exemption. Act 165 tightens up sections 237-23.5(a) (relating to amounts received for services and interest) and 237-24.7(9), HRS, (relating to amounts received by a management company from related entities engaged in the business of selling interstate or foreign common carrier telecommunications services) by clarifying that the "related entities" exemption requires both the 80% value and voting power relationship.
Act 165 also expands the definition of "related entities" to include limited liability partnerships and limited liability companies as entities that qualify for the exemption. Further, Act 165 clarifies the vague "business unit" language in the prior law by replacing it with the more familiar "unitary business" terminology. Thus, the "related entities" exemption will apply to any group or combination of entities, such as partnerships, associations, trusts, S corporations, nonprofit corporations, limited liability partnerships, and limited liability companies, if the group or combination of entities constitute a unitary business for income tax purposes.
Forms and other tax information may be downloaded from the Department's website at: http://www.state.hi.us/tax/tax.html. On Oahu, forms may be ordered by calling the Department's Forms Request Line at: 587-7572. Persons who are not calling from Oahu may call: 1-800-222-7572 to receive forms by mail or 808-678-0522 from a fax machine to receive forms by fax.
RAY K. KAMIKAWA
Director of Taxation