DAVID Y. IGE

MARIA E. ZIELINSKI

GOVERNORDIRECTOR OF TAXATIONSHAN TSUTSUIDAMIEN A. ELEFANTE
DEPUTY DIRECTOR

LT. GOVERNOR```````STATE OF HAWAII

DEPARTMENT OF TAXATIONP.O. BOX 259
HONOLULU, HAWAII 96809

PHONE NO: (808) 587-1530
FAX NO: (808) 587-1584

July 26, 2016

DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2016-07
RE:Tax Law Changes from the 2016 Regular Legislative Session

This Announcement lists and summarizes the Acts, enacted as part of the State ofHawaii's 2016 Legislative Session, amending or affecting the State tax law. Below is a list of theActs addressed in this Announcement, with a short description of the Act's contents:

Act 33: Income and Estate Tax Conformity
Act 52: Real Property Tax Law Cleanup
Act 53: Income Tax Law Cleanup
Act 76: Amends the Fuel Tax Rate for Naphtha Fuel Sold to a Power-Generating Facility
Act 129: Amends the Low-Income Housing Tax Credit
Act 182: Amends the Income Tax Credit for Converting Cesspools
Act 202: Establishes Renewable Fuels Production Tax Credit; Repeals Ethanol FacilityTax Credit
Act 222: Extends the Reporting Date of the 2015-2017 Tax Review Commission
Act 230: Tax-Related Amendments and Clarification Related to the State's MedicalMarijuana Dispensary ProgramAct 235: Amends the Income Tax Credit for Expenses for Household and Dependent
Care Services Necessary for Gainful Employment
Act 245: Requires the State Auditor to Periodically Review Tax Credits, Exclusions, andDeductions under Income Tax and Financial Institution Tax Laws
Act 258: Organic Foods Production Tax Credit
Act 261: Requires the State Auditor to Periodically Review Exemptions, Exclusions, andCredits under the General Excise, Use, Public Service Company, and Insurance Premium
Tax Laws

Act 33: Income and Estate Tax Conformity
Act 33 (Senate Bill 2921, H.D. 1) is effective April 29, 2016 and applies to tax years
beginning and to decedents dying after December 31, 2015. Retroactive amendments to operative
Internal Revenue Code (IRC) sections are adopted for Hawaii income tax and estate andgeneration-skipping transfer tax (estate) tax laws.

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July 26, 2016
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Act 33 updates section 235-2.3(a), Hawaii Revised Statutes (HRS), to conform to theoperative IRC sections of subtitle A, chapter 1, as amended as of December 31, 2015. Act 33 also
updates section 236E-3, HRS, to conform Hawaii’s estate tax to subtitle B of the IRC asamended as of December 31, 2015. Finally, Act 33 updates the date in section 236E-3, HRS, toensure that the updated provisions only apply to decedents dying after December 31, 2015.
Act 52: Real Property Tax Law Cleanup
Act 52 (House Bill 2217, H.D. 1, S.D. 1) is effective July 1, 2016. Act 52 repeals
obsolete State law, which imposed a real property tax, by repealing chapters 246 and 246A, HRS,in their entirety. Act 52 also amends other sections of the HRS to remove cross-references to thereal property tax under chapters 246 and 246A, HRS.
The Department reviewed the proposed repeal of chapters 246 and 246A, HRS, and theconforming amendments to ensure the changes had no substantive effect and were merely acleanup of the statute. The power to tax real property was transferred to the counties by theHawaii Constitution, therefore chapters 246 and 246A, HRS, have no effect and their repeal has
no substantive effect.
Act 53: Income Tax Law Cleanup
Act 53 (House Bill 2218, H.D. 1, S.D. 1) is effective July 1, 2016. Act 53 repeals sections
235-2, 235-2.1, and 235-2.2, HRS, and amends section 235-2.3, HRS.
Sections 235-2, 235-2.1, and 235-2.2, HRS, conformed Hawaii income tax law to federal
income tax law prior to January 1, 1978. Prior to January 1, 1978, Hawaii conformed to federal
income tax law by addressing each tax-related federal public law individually through these
sections. After January 1, 1978 Hawaii began to conform to federal income tax law byconforming to the entire IRC, as amended, rather than to individual public laws.
Due to this change in practice and to the passage of time, the sections conforming to theindividual public laws (sections 235.2, 235-2.1, and 235-2.2, HRS) have become unnecessary.
Act 53 repeals those sections. The Act also amends section 235-2.3, HRS, to provide that “priorlaw” will still apply to years prior to 1978. This is to ensure that those tax years continue to begoverned by the law as it existed at the time.
Act 76: Amends the Fuel Tax Rate for Naphtha Fuel Sold to a Power-Generating Facility
Act 76 (Senate Bill 2131, S.D. 2, H.D. 2, C.D. 1) is effective June 20, 2016 and applies
retroactively beginning January 1, 2016. It amends the fuel tax to add a special rate of 2 cents per
gallon of naphtha fuel sold to a power-generating facility. It also adds a definition of “powergenerating facility” and amends section 206M-15.5, HRS, pertaining to the high technology
special fund.

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July 26, 2016
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Act 129: Amends the Low-Income Housing Tax Credit
Act 129 (Senate Bill 2833, S.D. 2, H.D. 2, C.D. 1) is effective January 1, 2017 andapplies to buildings that are awarded low-income housing tax credits after December 31, 2016. It
is repealed on December 31, 2021. Act 129 creates an additional incentive to encourage
investment in buildings that are intended for low-income individuals and families by shortening
the time over which the State tax credit is taken from ten years to five years. The Hawaii Housing
Finance and Development Corporation (a division of the Department of Business, EconomicDevelopment, and Tourism) continues to have primary responsibility over selection of qualified
buildings and the allocation of any tax credits thereto.
Act 182: Amends the Income Tax Credit for Converting Cesspools
Act 182 (Senate Bill 3084, S.D. 1, H.D. 2, C.D. 1) is effective upon approval and applies
to taxable years beginning after December 31, 2015. Act 182 corrects an oversight made when
section 235-16.5, HRS, was enacted last session, and permits large capacity cesspools to qualify
for the credit, with each tax map key parcel associated with the large capacity cesspool eligible
for the credit of up to $10,000. The Department of Health continues to have primary
responsibility over certification of eligible cesspools and the associated amount of any tax credits
which may be claimed in relation thereto.
Act 202: Establishes Renewable Fuels Production Tax Credit; Repeals Ethanol Facility TaxCredit
Act 202 (Senate Bill 2652, S.D. 2, H.D. 2, C.D. 1) is effective July 5, 2016, applies totaxable years beginning after December 31, 2016. Act 202 repeals the ethanol facility tax credit
and creates a new, nonrefundable income tax credit for production of renewable fuels. The credit
is available for five consecutive years beginning with the first taxable year in which the taxpayer
claiming the credit begins producing at least 15 billion British thermal units of renewable fuel peryear. To qualify as renewable fuels, fuels must be produced from renewable feedstocks, including
various agricultural crops and various types of waste. The Department of Business, EconomicDevelopment, and Tourism must certify all claims for the credit. The credit amount is 20 cents
per 76,000 British thermal units of renewable fuel sold for distribution in Hawaii, up to amaximum credit amount for any given taxpayer of $3,000,000 per taxable year. The amount ofcredits certified in any given tax year cannot exceed $3,000,000.
Act 222: Extends the Reporting Date of the 2015-2017 Tax Review Commission
Act 222 (Senate Bill 2922, H.D. 1, C.D. 1) is effective July 6, 2016, though its
appropriation is effective July 1, 2016. It provides the 2015-2017 Tax Review Commission anextension of one year to submit its report to the Legislature and appropriates $250,000 to be usedby the Commission to conduct an evaluation of the State's tax structure and recommend revenueand tax policy.

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July 26, 2016
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Act 230: Tax-Related Amendments and Clarification Related to the State's Medical
Marijuana Dispensary ProgramAct 230 (House Bill 2707, H.D. 1, S.D. 2, C.D. 1) is effective July 1, 2016. The incometax provisions of Act 230 apply to taxable years beginning after December 31, 2015. Act 230 isan omnibus medical marijuana cleanup act. The Act contains three tax-related changes:First, of the three changes, the change to conformity to IRC section 280E is the mostcomplicated. IRC section 280E denies deductions and credits to any taxpayer trafficking in a
Schedule I or Schedule II substance. Prior to January 1, 2016, Hawaii conformed to this sectionfor Hawaii income tax purposes, meaning taxpayers engaged in medical marijuana businesses
could not account for Hawaii income tax the same as other legitimate businesses by deducting
business expenses and claiming tax credits. Act 230 relaxes application of this section only for
medical marijuana businesses operating under Hawaii’s medical marijuana dispensary program.
This means that these businesses may account for Hawaii income tax the same as other legitimate
businesses in Hawaii.
Second, Act 230 amends the Enterprise Zone (EZ) law to deny all EZ benefits to medical
marijuana businesses. Generally, businesses located in enterprise zones that satisfy certain
requirements are exempt from general excise tax (GET) and eligible for income tax credits.
Finally, Act 230 clarifies that the GET exemption for prescription drugs does not apply tosales of medical marijuana. This amendment makes the exemption clear and unambiguous asapplied to sales of medical marijuana. The amendment is consistent with the Department’s priorinterpretation of the prescription drug exemption.

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July 26, 2016
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Act 235: Amends the Income Tax Credit for Expenses for Household and Dependent Care
Services Necessary for Gainful Employment
Act 235 (House Bill 1702, H.D. 1, S.D. 1, C.D. 1) is effective July 12, 2016 and applies
to taxable years beginning after December 31, 2015. Act 235 increases the credit amount thatcertain taxpayers may claim for expenses for household and dependent care services necessary
for gainful employment. Act 235 amends the credit by modifying the phasedown of percentage ofexpenses on which the credit can be claimed at various AGI thresholds. The table below shows
the percentages and AGI thresholds for the current credit and for the credit as amended by thisbill.
Prior lawAGI
$22,000 or less
$22,001 to $24,000$24,001 to $26,000$26,001 to $28,000$28,001 to $30,000$30,001 to $32,000$32,001 to $34,000$34,001 to $36,000$36,001 to $38,000$38,001 to $40,000
Over $40,000

Applicable
percentage
25%
24%
23%
22%
21%
20%
19%
18%
17%
16%
15%

As amended by Act 235
AGI
Applicable
percentage$25,000 or less25%
$25,001 to $30,000
24%$30,001 to $35,000
23%$35,001 to $40,000
22%$40,001 to $45,000
21%$45,001 to $50,000
20%Over $50,000
15%Under prior law, the highest percentage was 25% and was reduced to 15% beginning at
AGI of $22,000. As amended by Act 235, the highest percentage is still 25% but is reduced to15% beginning at AGI of $25,000.
Further, under prior law, the percentage was reduced by one percentage point for every$2,000 in AGI over $22,000, down to a minimum of 15%. The minimum rate of 15% applied totaxpayers with AGI over $40,000. As amended, the percentage is reduced by one percentage
point for every $5,000 in AGI over $25,000, down to a minimum of 15%. The minimum rate of15% applies to taxpayers with AGI over $50,000.
Act 245: Requires the State Auditor to Periodically Review Tax Credits, Exclusions, andDeductions under Income Tax and Financial Institution Tax Laws
Act 245 (House Bill 1527, H.D. 1, S.D. 1, C.D. 1) is effective July 1, 2018. It requires theState Auditor (Auditor) to periodically review certain tax credits, exclusions, and deductions forthe income tax under chapter 235, HRS, and financial institutions tax under chapter 241, HRS,
beginning in 2019.

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Specifically, Act 245 requires the Auditor to: (1) determine the amount of tax expenditure
for the credit, exclusion, or deduction for each of the previous three fiscal years; (2) estimate theamount of tax expenditure for the credit, exclusion, or deduction for the current fiscal year andthe next two fiscal years; (3) determine whether the credit, exclusion, or deduction has achieved
and continues to achieve the purpose for which it was enacted by the Legislature; (4) determine
whether the credit, exclusion, or deduction is necessary to promote or preserve tax equity orefficiency; (5) determine whether an economic benefit has resulted, and if so, quantify theestimated benefit directly attributable to the credit, exclusion, or deduction; and (6) estimate theannual cost of the credit, exclusion, or deduction per low-income resident of the State.
Act 245 also requires the Auditor to recommend whether a credit, exclusion, or deduction
should be retained without modification, amended, or repealed.
Act 258: Organic Foods Production Tax Credit
Act 258 (House Bill 1689, H.D. 2, S.D. 2, C.D. 1) is effective July 12, 2016, applies totaxable years beginning after December 31, 2016 and is repealed on December 31, 2021. It
creates a nonrefundable income tax credit for qualified expenses associated with the productionor handling of organic foods. Qualified expenses include application fees, inspection costs, fees
related to arranging inspections, and costs for equipment, materials or supplies necessary fororganic certification or production of organic agricultural products.
To qualify for the tax credit, a taxpayer must be a producer, handler, or handling
operation as defined by federal regulations, must sell agricultural products in adherence to thefederal Organic Foods Production Act, must have applied for certification in accordance with theOrganic Foods Production Act, and must receive gross income from the sale of organically
produced agricultural products of no more than $500,000 in the most recently reported fiscalyear.
The Department of Agriculture is responsible for certifying all credit claims and may
charge a fee for certification. The credit amount is 100% of qualified expenses up to a maximumof $50,000 per taxpayer. The amount of tax credits certified in any given tax year cannot exceed$2,000,000.
Act 261: Requires the State Auditor to Periodically Review Exemptions, Exclusions, andCredits under the General Excise, Use, Public Service Company, and Insurance Premium
Tax Laws
Act 261 (Senate Bill 2547, S.D. 1, H.D. 1, C.D. 1) is effective July 1, 2017. It requires theAuditor to periodically review certain tax exemptions, exclusions, and credits under the GET anduse tax (chapters 237 and 238, HRS), public service company tax (chapter 239, HRS), andinsurance premium tax (chapter 431, HRS), beginning in 2018.

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Specifically, Act 261 requires the Auditor to: (1) determine the amount of tax expenditure
for the exemptions, exclusions, and credits for each of the previous three fiscal years; (2)estimate the amount of tax expenditure for the exemptions, exclusions, and credits for the current
fiscal year and the next two fiscal years; (3) determine whether the exemptions, exclusions, andcredits have achieved and continue to achieve the purpose for which they were enacted by theLegislature; (4) determine whether the exemptions, exclusions, and credits are necessary to
promote or preserve tax equity or efficiency; (5) determine whether an economic benefit has
resulted, and if so, quantify the estimated benefit directly attributable to the exemptions,exclusions, and credits; and (6) estimate the annual cost of the exemptions, exclusions, andcredits per low-income resident of the State.
Act 261 also requires the Auditor to recommend whether an exemption, exclusion, orcredit should be retained without modification, amended, or repealed.
For more information, please contact the Rules Office at 808-587-1530 or by email at
Tax.Rules.Office@hawaii.gov.

MARIA E. ZIELINSKI
Director of Taxation