June 30, 1998


RE:  Telecommunications Tax Reform

In light of the deregulation of the telecommunications industry, the Department of Taxation ("Department") is planning to seek legislation to restructure the public service company tax as it applies to that industry. The Department finds that there is a need to re-examine the manner in which the telecommunications industry (which includes regulated and non-regulated persons) is taxed under the public service company and general excise tax laws. Our objective is to foster simplicity and level the playing field for all persons engaging in telecommunications activity.

Currently, the public service company tax is assessed on the gross income of a public utility. The rate of tax is determined by a ratio of the public utility's net income to its gross income; the rate ranges from 5.885% to a maximum of 8.2%. If the ratio of net income to gross income exceeds 15%, then for each percentage point exceeding 15%, the tax rate shall be increased by .2675%. Hawaii Revised Statutes (HRS) section 239-5(a). For purposes of chapter 239, HRS, a "public utility" is defined by section 269-1, HRS (Supp. 1997), in part as follows:

every person who may own, control, operate, or manage as owner, lessee, trustee, receiver, or otherwise, whether under a franchise, charter, license, articles of association, or otherwise, any plant or equipment, or any part thereof, directly or indirectly for public use, for...the conveyance or transmission of telecommunications messages, or the furnishing of facilities for the transmission of intelligence by electricity by land or water or air within the State, or between points within the State[.]
(Emphasis added.)

Therefore, income received from intrastate telecommunications activity is subject to the public service company tax under chapter 239, HRS. The public service company tax is paid in lieu of all other taxes except income taxes; taxes imposed under chapter 249 (county vehicular taxes); fees charged under chapter 269 (public utilities commission); taxes imposed by the terms of the public utility's franchise or under chapter 240 (public utilities; franchise tax); the use tax imposed under chapter 238; and employment taxes. Public utilities are also exempt from real property taxes imposed under chapter 246, HRS, if they meet specific reporting and filing requirements. HRS section 239-3 (Supp. 1997). In addition, the public service company tax at the rate of one-half percent (1/2%) applies to the gross income received from sales of goods and services made from one public utility to another. HRS section 239-5(c).

In contrast, those taxpayers who are engaged in interstate or foreign common carrier telecommunications activity do not meet the definition of a "public utility" and are thus subject to the general excise tax under the second proviso of section 237-13(6), HRS, on the income received from interstate telecommunications services which originate or terminate in the State and are charged to a telephone number, customer, or account in Hawaii. In general, these taxpayers are commonly referred to as long distance carriers. The general excise tax is imposed upon an apportioned amount of the taxpayer's gross receipts at the rate of four percent (4%). The Hawaii Administrative Rules (HAR) define a "long distance carrier" to include resellers of telecommunication services. HAR section 18-237-13-06.16(b). Thus, resellers of telecommunications are also subject to the general excise tax at the rate of 4% upon an apportioned amount.

To help us identify pertinent issues which should be considered in reforming this area of the law, we are requesting input from persons in the telecommunications industry and other interested parties. Your written comments may be faxed to Jayna Uyehara of the Rules Office at (808) 587-1560 or sent to the following address:

Department of Taxation
Rules Office
Attention: Jayna Uyehara
P. O. Box 259
Honolulu, Hawaii 96809-0259

If you have any questions regarding this project, please call Jayna Uyehara at (808) 587-1540.

Director of Taxation