Hawaii Tax News
Administering the tax laws for the State of Hawaii in a consistent, uniform, and fair manner

Volume 8, Number 2State of Hawaii • Department of Taxation

Tax Season Update

First, we would like to congratulate all of you whoparticipated in the joint federal-State e-filingprogram for far exceeding our expectations! Last year,
we had 114,120 e-filed Forms N-11. This year, we
surpassed that number by mid-April and, as of the end of
April, 131,333 returns had been e-filed!
In general, it seems that more taxpayers filed earlier
this year than last year. Still, we collected approximately
3,900 tax documents during our annual April 20th
curbside service this year which is much more than theapproximately 2,700 we collected last year!
We are also happy to say that our reorganized
one-stop Taxpayer Services Branch did a lot better infielding tax inquiries than last year. On average, thenumber of callers who got through the telephone lines
was 82%, although it dipped to 74% at one point late in
the filing season.
Our new automated information service is proving to
be a big hit, especially for those calling about theirincome tax refunds. Approximately 23% of the callers
used the automated service.
That was the good news. On April 28, just 8 days
after the filing deadline, we prematurely sent out 10,000
income tax bills to taxpayers, including a number toindividuals who e-filed their income tax returns early inthe season (which thereby created tax balances on those
taxpayers’ accounts) and who subsequently mailed intheir payments close to the filing deadline.
We know that we can’t open the mountain of mailthat comes in right at the filing deadline and get all thosepayments processed in such a short time. What happened
was that billing notices were prematurely generated,
before we were able to post the corresponding payments.
The results were predictable – lots of upset taxpayers.
We really heard it from all of you, but the bottom lineis that we should not have sent many of those bills at thattime. We did add a message to our automatedinformation system and issue a news release to informthe public as soon as we became aware of the problem. A
second income tax billing notice was sent out in early
June, and only those taxpayers who receive a bill in Juneactually have a tax liability with us. We thoroughly
apologize for this occurrence, and have already taken
steps to ensure that it doesn’t happen again.

SUMMER 2004

Hawaii Tax Information
at a GlanceH

ave you ever had to contact the Tax
Department for or about something? If yes, did
you always know what to do or who to contact?
Fortunately, we have made contact and resource
information readily available to Hawaii taxpayers for anumber of years. The April 2004 revision of our “Hawaii
Tax Information at a Glance” brochure has just been
printed and is definitely the one tax publication that you
should keep handy.
This tri-fold brochure is packed with information
about our website, our 24-hour forms by fax/mailservice, e-filing, and more.
Do you have a tax question or problem, a problem
that just can’t seem to get resolved through the normal
channels, or a need to learn more about running a small
business? See the information about our one-stop
Taxpayer Services, Taxpayer Advocate, and External
Training and Outreach programs.
If you want to let us know what we’re doing right orwhat we could be doing better, or if you want to make asuggestion or two, this brochure even lists the names,
phone and fax numbers, and e-mail addresses for key
Department personnel. Information about our Maui,
Hawaii, and Kauai district tax offices is also included!
If you have been using an earlier version of thisbrochure, you’ll need to get the latest revision since allof the Department’s e-mail addresses have changed.
Although we have been using both the old and the new
e-mail addresses since the beginning of the year, the old
See Tax Information, Page 2

IN THIS ISSUE
Tax Season Update . . . . . . . . . . . . . . . . . . 1
Hawaii Tax Information at a Glance . . . . . . 1
The Direct Line . . . . . . . . . . . . . . . . . . . . . . 2
Summer Workshops . . . . . . . . . . . . . . . . . . 2
Practitioners’ Forum . . . . . . . . . . . . . . . . . . 2
Cigarette Tax Rate Increase . . . . . . . . . . . . 3
Legislative Highlights . . . . . . . . . . . . . . . . . 3
Recently Issued Tax Publications . . . . . . . . 6
Pending Tax Publications . . . . . . . . . . . . . . 6
Third Quarter State Tax Collections . . . . . . 7

Page 2

Hawaii Tax NewsThe Direct Line (By Director Kurt Kawafuchi

The 2004 legislative session is over, and it has been achallenging one for my staff and I as we had to track alarge number of tax-related bills. Included in this issueof the Hawaii Tax News is a summary of the tax-related
bills passed by the 2004 Legislature. Unfortunately,
administration proposals to increase the standard
deduction and to seek penalties and injunctive relief
against tax preparers who take unrealistic positions onclients’ tax returns and promoters of abusive tax shelters
were not passed by the Legislature.
I look forward to seeing you at one of our summer
workshops which will include a discussion on the 2004
legislation.

Tax Information(From Page 1)

ones will soon be retired permanently.
To get your copy, download it from our website atwww.state.hi.us/tax, or call our forms by fax/mailrequest line at 587-7572 (toll-free at 1-800-222-7572).
Of course, you can also obtain a copy at any district tax
office during business hours.

Summer Workshops

Summer 2004

worthwhile.
One topic that may at first seem a little dry is an
update of our Integrated Tax Information Management
System. However, big changes are coming this Octoberwhen the final component of the system comes on-line!
This part of the system replaces the old business tax
computer system, and will have a major impact onlicensing and other procedures relating to business taxes
such as the general excise tax. Not only will there be asystem implementation, but Phase III of the
Department’s planned reorganization also will occur on
October 1, 2004.
Since many of you are registered for one or more of
the affected taxes, we’re sure that this will prove
interesting and relevant to you.
Presentations also will be made on the 2004 tax
legislation, licensing and tax clearance issues relating tosingle-member disregarded LLCs, and more!
Be sure to register soon because space is limited.

Practitioners’ ForumThe Department of Taxation held its 2004
Practitioners’ Forum on May 25 in the Princess
Ruth Keelikolani Building. Topics which werediscussed included electronic filing programs;
feasibility of eliminating Form N-11 or N-12; general
excise tax, transient accommodations tax, rental motor
vehicle and tour vehicle surcharge tax, and withholding
tax forms (including vouchers) returning to letter size;
compliance issues; tax clearance issues relating to
LLCs; and tax services and processing update.
See Practitioners’ Forum, Page 3

Planning has begun for our Summer Workshop
series. The dates for the half-day workshops are:
Kauai - Tuesday, August 17, 2004
Kona - Wednesday, September 1, 2004
Hilo - Thursday, September 2, 2004
Oahu - Wednesday, September 8, 2004
Maui - Thursday, September 9, 2004
The workshops will be held from 8:30 A.M. to 12:30
P.M., and four hours of continuing professional
education (CPE) credits will be offered. Attendees also
will get a CD with the tax statutes and administrative
rules, updated through December 31, 2003, in theirworkshop packets.
The information and registration flyer should be on
our website at www.state.hi.us/tax in July. The price has
increased, but so have our costs. It is also still very
inexpensive for the number of CPE credits you get and,more importantly, we think you’ll find the time spent

The Hawaii Tax News is a publication of the State of
Hawaii, Department of Taxation.
Director:
Editor:Address:
Telephone:
Fax:
E-mail:Website:Forms By
Fax/Mail:
Consumer Dial:

Kurt Kawafuchi
Lynne Kuroda
Princess Ruth Keelikolani Building
830 Punchbowl Street, Room 219
Honolulu, HI 96813-5094
808-587-1577
808-587-1584
Tax.Technical.Section@hawaii.gov
www.state.hi.us/tax
808-587-7572
Toll-Free 1-800-222-7572
808-587-1234, code 7700

Summer 2004

Hawaii Tax News

Practitioners’ Forum(From Page 2)

The Practitioners’ Forum is an informal meeting with
Director Kurt Kawafuchi, key Department of Taxation
staff members, and tax practitioners to discuss various
matters, raise questions, and resolve problems and tax
issues. This is not an educational workshop, but isinstead an opportunity for the tax practitioner
community to make their concerns known and to engage
in an informal dialog with the Department about thoseconcerns.

Cigarette Tax Rate
IncreaseT

he cigarette tax will be going up on July 1, 2004,
from 6.5 cents per cigarette to 7 cents per
cigarette. The new cigarette stamps are blue, and went onsale on June 1, 2004, at First Hawaiian Bank.
Packs of cigarettes with the current pink cigarette
stamps affixed to them can continue to be sold after June
30th under certain circumstances. For more information,
see Department of Taxation Announcement No.
2004-01, which is available on our website atwww.state.hi.us/tax, by calling our request line at587-7572 (toll-free at 1-800-222-7572), and at any
district tax office.

Legislative HighlightsT

he following is a digest of bills passed by the2004 Legislature. It includes only thosemeasures which affect Hawaii’s tax laws and is provided
for your information. It is issued solely as a guide and is
not intended to be either authoritative or complete.
Copies of the Senate and House bills passed by theLegislature may be obtained from the Senate and House
printshops, or from the Legislature’s website atwww.capitol.hawaii.gov.
Administrative Tax Measures
ACT 123 (H.B. No. 851, H.D. 1, S.D. 1, C.D. 1)
Relating to Taxation Appeals
Makes the tax appeal procedures more fair and equitableby: (1) providing that the first appeal to either the Boardof Review or the Tax Appeal Court may be made without
payment of the assessed tax, and (2) allowing thePage 3

taxpayer to appeal an adverse decision made by the
Board of Review or Tax Appeal Court after paying theoutstanding tax assessment.
Applies to tax appeals filed on or after July 1, 2004.
ACT 113 (H.B. No. 2511, S.D. 1, C.D. 1)
Relating to Income Tax Withholding
Conforms the State withholding tax remittance due datefor employers with an annual State withholding tax
liability that exceeds $40,000, to the remittance due daterequired under federal employment tax provisions. Alsochanges the State remittance due date from monthly to“semi-weekly” and lowers the electronic funds transfer
threshold amount for withholding taxes to amounts thatexceed $40,000.
Applies to withholding requirements for payroll periods
beginning on or after December 31, 2004.
ACT 115 (S.B. No. 2990, H.D. 1)
Relating to the Integrated Tax Information
Management Systems Acquisition by the
Department of Taxation
Extends the “sunset date” of the Integrated Tax
Information Management Systems special fund to July
1, 2005, to provide additional time for remaining workon the Department of Taxation’s computer project.
Effective June 30, 2004.
General Excise/Use Tax Measures
S.B. No. 2396, S.D. 1, H.D. 1, C.D. 1
Relating to the General Excise Tax
Exempts from the general excise tax all of the value orgross income derived by an Internal Revenue Codesection 501(c) organization from fees for convention,
conference, or trade show exhibit or display spaces;
provided that the gross proceeds of sales by a vendor
through the use of exhibit or display space at aconference, convention, or trade show shall be subject tothe general excise tax.
Effective July 1, 2004.
ACT 114 (S.B. No. 2994, S.D. 1, H.D. 2)
Relating to the Use Tax
Clarifies when a seller is subject to the 0.5 percent use
tax. Restores the imposition of taxes on goods purchased
both within and outside the State. Clarifies that the use
tax applies to sellers who acquire goods from outside theState and import the product for sale or resale in theState.
Effective retroactive to taxable years beginning after
December 31, 1998.
Income Tax Measures
H.B. No. 1848, H.D. 1, S.D. 1, C.D. 1
Relating to Exceptional Trees
Establishes an income tax deduction from gross income
for amounts paid by an individual taxpayer for
See Legislative Highlights, Page 4

Page 4

Hawaii Tax News

Legislative Highlights(From Page 3)

expenditures to maintain an exceptional tree on the
taxpayer’s real property. The deduction, up to $3,000 per
exceptional tree, is allowed once every three consecutive
taxable years.
Applies to amounts paid in taxable years beginning after
December 31, 2003.
H.B. No. 1860, H.D. 1, S.D. 2, C.D. 1
Relating to Child Abuse and Neglect
Allows an individual whose state income tax refund forany taxable year is $5 or more to designate $5 of therefund to be paid over as follows:(1) One-third to the Hawaii children’s trust fund, and(2) Two-thirds to be divided equally among:(a) The domestic violence prevention special fundunder the Department of Health;(b) The spouse and child abuse special account under
the Department of Human Services; and(c) The spouse and child abuse special account under
the Judiciary.
Applies to taxable years beginning after December 31,
2004.
H.B. No. 1904, H.D. 1, S.D. 2, C.D. 1
Relating to Taxation
Increases the allowable income tax deduction for
National Guard members and reservists to amounts
equivalent to pay received for forty-eight drills(equivalent of twelve weekends) and fifteen days ofannual duty at stated pay grades over five years
beginning in taxable year 2005.
Effective January 1, 2005.
H.B. No. 2396, H.D. 2, S.D. 2, C.D. 1
Relating to Capital Investments• Establishes the State Private Investment Fund toprovide additional financing tools to meet thegrowing needs of the high technology industry.
• Extends the provisions for the high technology
business investment tax credit, technology
infrastructure renovation tax credit, and the tax credit
for research activities through 2010.
• Modifies the definition of qualified research as it
relates to the development and design of computer
software to provide that qualified research means thedevelopment and design of computer software for
ultimate commercial sale, lease, license or to beotherwise marketed, for economic consideration.
With respect to the software’s development anddesign, the business shall have substantial control
and retain substantial rights to the resulting

Summer 2004

intellectual property.
• Removes language that the high technology tax
incentives be “liberally” construed by the
Department of Taxation.
• For the high technology business investment tax
credit and the tax credit for research activities:
The taxpayer shall submit a written, certifiedstatement before March 31 identifying: (1) qualified
investments or expenditures, if any, made in theprevious taxable year; and (2) the amount of tax
credits claimed, if any, in the previous taxable year.
The Department of Taxation shall: (1) maintain
information including the name, address, and thetotal amount of qualified investments or
expenditures; (2) verify the nature and amount of thequalifying investments or expenditures; (3) total all
qualifying and cumulative investments or
expenditures certified; and (4) certify the amount of
the tax credit for each taxable year and thecumulative amount of the tax credit.
The Department of Taxation shall issue a certificate
to the taxpayer verifying the information submitted
to the Department which the taxpayer will attach to
the taxpayer’s tax return.
• Allows the Department of Taxation to charge a fee
for the issuance of comfort letters and certificates.
Effective July 1, 2004.
S.B. No. 1611, H.D. 2, C.D. 1
Relating to the Deposit Beverage Container Program
As it relates to taxation, creates a net income tax
exemption for amounts received as a deposit beveragecontainer deposit.
Effective upon approval.
ACT 89 (S.B. No. 2983, S.D. 2, H.D. 1)
Relating to Conformity of the Hawaii Income Tax
Law to the Internal Revenue Code
Amends section 235-2.3(a), HRS, to conform the
Hawaii Income Tax Law to the operative Internal
Revenue Code (IRC) sections of subtitle A, chapter 1,
amended as of December 31, 2003. Generally, subtitle
A, chapter 1, refers to IRC sections 1 through 1400. For
conformity purposes, the federal effective dates foramendments to operative IRC sections are adopted.
This bill conforms Hawaii’s income tax law to all of thetax provisions of the Military Family Tax Relief Act of
2003, including the following:• Above-the-line deduction for overnight travel
expenses of National Guard and Reserve members.
• Special rule for excluding the gain from the sale of aprincipal residence for members of the uniformed
services or foreign service.
• Expansion of combat zone filing rules to persons
See Legislative Highlights, Page 5

Summer 2004

Hawaii Tax News

Legislative Highlights(From Page 4)

deployed outside the U.S. who are participating incontingency operations as designated by the
Secretary of Defense.
Also conforms to provisions affecting medical savings
accounts to the extent applicable to Hawaii taxation.
Amends section 235-2.4, HRS, relating to operative IRC
sections for which the State provides specific treatmentby providing that Hawaii does not conform to:• IRC section 163(d)(4)(B) which excludes dividends
from net investment income and allows those
dividends to be taxed at capital gain rates.
• IRC section 168(k) which provides a 50 percent
bonus depreciation and an increase of the first-year
depreciation for certain passenger automobiles.
• IRC section 179(b)(1) which increases the
maximum deduction to $100,000.
• IRC section 179(b)(2) which increases the qualifying
investment amount to $400,000.
• IRC section 179(d)(1) which includes computer
software in the definition of section 179 property.
• IRC section 179(b)(5) inflation adjustments.
• IRC section 179(c)(2) irrevocable election.
Applies to taxable years beginning after December 31,
2003.
ACT 97 (S.B. No. 3162, S.D. 1, H.D. 1, C.D. 1)
Relating to Renewable Energy Technologies
Income Tax Credit
Clarifies that the credit is nonrefundable and that any
unused credit may be claimed in subsequent taxable
years until exhausted. Clarifies that financial
institutions, partnerships, S corporations, estates, andtrusts are eligible to claim the credit.
Applies to taxable years beginning after December 31,
2002.
ACT 140 (S.B. No. 3207, S.D. 2, H.D. 2, C.D. 1)
Relating to Ethanol Tax Credit
Changes the ethanol investment tax credit to a facility tax
credit. Clarifies that the tax credit shall not exceed theamount invested in the qualifying ethanol production
facility. Clarifies that the credit may be claimed in a yearthat the production of ethanol, on an annualized basis, isequal to at least seventy-five percent of the nameplate
capacity of the facility. Clarifies the definition of“investment”. Prohibits a taxpayer from claiming or
receiving any other income tax credit relating to thedevelopment of the qualifying ethanol production facility
for any taxable year in which the credit is claimed.
Applies to taxable years beginning after December 31,
2003.

Page 5

Miscellaneous Tax Measures
VETOED (H.B. No. 2061, H.D. 2, S.D. 1, C.D. 1)
Relating to Transient Accommodations Tax
As it relates to taxation, redistributes the percentage oftransient accommodations tax revenues given to eachcounty.
Effective July 1, 2004.
ACT 96 (S.B. No. 1239, S.D. 1, H.D. 2, C.D. 1)
Relating to Energy
Reduces the tax rate on alternative fuel for operation of
an internal combustion engine from 1 cent to .25 cents;
and reduces the percentages that are applied to the rate
for diesel oil in determining the rates for ethanol (from.29 to .145); methanol (from .22 to .11); biodiesel (from.5 to .25); and other alternative fuels, other than liquefied
petroleum gas.
Effective July 1, 2004.
ACT 157 (S.B. No. 2840, S.D. 2, H.D. 2, C.D. 1)
Relating to Tobacco
Prohibits the distribution of untaxed cigarettes via
telephone, mail order, the Internet, or other on-line
sources to address the availability of low-priced
cigarettes to underage smokers. Revises the provisions
relating to the Attorney General’s seizure andconfiscation authority. Limits supersedeas bond amountfor tobacco master settlement signatories to ensure theirability to continue to make settlement payments.
Effective July 1, 2004.
Tax-Related Resolution
H.R. No. 69, H.D. 1
Requesting the Departments of Taxation andBusiness, Economic Development, and Tourism to
Conduct a Review and Cost Benefit Analysis of All
Current Tax Incentives Under Title 14, Hawaii
Revised Statutes
Requests the Department of Taxation (DOTAX) tocompile data on all current tax incentives provided
under title 14, Hawaii Revised Statutes, that benefit a
specific person, group, or organization and does not
apply to the general public. Requests DOTAX toprovide the data to the Department of Business,
Economic Development, and Tourism (DBEDT), whichis requested to conduct a review and cost benefit analysisof all current tax incentives, with the assistance of
DOTAX, Enterprise Honolulu, and the University of
Hawaii Economic Research Organization. DBEDT is toinclude in its review and cost benefit analysis a detailed
justification for each of these tax incentives.
Announcements describing the provisions of the acts
will be posted on the Department of Taxation website atwww.state.hi.us/tax.

Page 6

Hawaii Tax News

Recently Issued Tax
Publications

T

he following is a list of the publications issued
by the Department of Taxation from July 2003
through June 2004. Copies of these publications may beobtained from our website at www.state.hi.us/tax. With
the exception of the Reports, copies of these publications
also may be obtained by calling our request line at587-7572 (toll-free at 1-800-222-7572), or from any
district tax office.
A limited number of the Reports are available for anominal fee from our Tax Research and Planning Office.
Contact them by phone at 808-587-1440 or by e-mail at
Tax.Research@hawaii.gov to request an order form.
Announcement No. 2003-12 - Announces the
adoption of the IRS optional standard mileage rates for
2004.
Announcement No. 2004-01 - Provides informationon the increase in the cigarette tax to 7 cents per cigarettefor sales, use, or possession of cigarettes after June 30,
2004.
Hawaii Tax Information at a Glance Brochure Revised April 2004.
Digest of Tax Measures - Enacted by the State of
Hawaii, Twenty-Second Legislature, Regular Session of2003.
Reports:• Annual Report 2002-2003• Tax Credits Claimed by Hawaii Taxpayers - 2001
• Hawaii Income Patterns - Individuals - 2001

Pending Tax
Publications

T

he following is a list of some of the
Department’s pending tax publications.
Administration of Taxes• Application of penalties and interest and the waiverof penalties and interest - sections 231-3 and 231-39,
HRS.
• Clarification of the offers in compromise process.
Income Tax Law• Clarification of the application of the Hawaii tax
credit for increasing research activities.
General Excise Tax Law• Clarification of the general excise tax rules,
including the application of the general excise tax for

Summer 2004

reimbursements - section 237-20, HRS.
Transient Accommodations Tax• Clarification of the application of the transient
accommodations tax.
Conveyance Tax Law• Clarification of the application of the conveyancetax.

Summer 2004

Hawaii Tax News

Page 7

Third Quarter State Tax Collections
January 2004 - March 2004
(In Millions of Dollars)
Difference
Individual Income Tax
Corporate Income Tax
General Excise Tax
Transient Accommodations Tax
All Others
Total Tax Collections
General Fund Revenues

FY 2004$ 261.8
12.0
506.1
50.2
186.3
$ 1,016.4

FY 2003$ 254.1
-25.4
455.0
44.0
169.0
$ 896.7

Amount
$ 7.7
37.4
51.1
6.2
17.3
$ 119.7

Percent
3.0%
nm*
11.2%
14.0%
10.2%
13.3%

$ 874.0$ 761.9$ 112.1

14.7%(Note: Totals may not add up due to rounding.)
nm* = not meaningful

Total tax collections for the third quarter of fiscal year 2004 amounted to $1,016.4 million, or $119.7 million morethan the same period of last fiscal year. General fund revenues of $874.0 million for the third quarter also advanced$112.1 million from last year’s total of $761.9 million. All major tax components have increased significantly as the
economy continues to grow strongly. General excise tax collections jumped $51.1 million, while transient
accommodations tax collections went up by $6.2 million. Corporate and individual income tax collections also grew
by $37.4 million and $7.7 million, respectively.

Taxpayer Services BranchState of Hawaii
Department of Taxation
P.O. Box 259
Honolulu, HI 96809-0259

TAXPAYER SERVICES BRANCH
Princess Ruth Keelikolani Building
830 Punchbowl Street
Honolulu, HI 96813-5094
Website: www.state.hi.us/tax
E-mail: Taxpayer.Services@hawaii.gov
Fax: 808-587-1488
Telephone:808-587-4242
1-800-222-3229 (Toll-Free)808-587-1418 (TDD - For the hearing impaired)
1-800-887-8974 (TDD Toll-Free - For the hearing impaired)
Forms By Fax/Mail:
808-587-7572
1-800-222-7572 (Toll-Free)