Opinion ID: 1387085
Heading Depth: 2
Heading Rank: 1

Heading: Development of Tax Law Regarding Services

Text: In 1951, the Territorial Legislature of Hawai`i amended Revised Laws of Hawai`i (RLH) § 5455.02 (1945), which was subsequently renumbered § 117-16 in 1955, by adding a subsection that introduced the term intermediary services to the general tax laws of Hawai`i. RLH § 5455.02(c) (1945, as amended) provided in pertinent part that: [w]here a tire recapper, photoprinter, auto paint shop or the like, renders services upon the order of or at the request of another taxpayer who, by reason of constituting an intermediary between the person rendering such services and the ultimate recipient of the benefits of such services, is required to include the rendering of the same services in the measure of the tax levied on him under subsection (f) of section 117-14, so much gross income as is derived from the rendering of such services and shall be subjected to a tax on the person rendering such service.... (Emphasis added.) [12] As amended in 1963, the renumbered provision, RLH § 117-16(c), provided that: [w]here a photoprinter (or the like), tire recapper, auto painter or any other person engaged in the business of cleaning, repairing or otherwise restoring to useful service tangible personal property renders services upon the order of or at the request of another taxpayer who, by reason of constituting an intermediary between the person rendering such services and the ultimate recipient of such services, is required to include the rendering of the same services in the measure of the tax levied on him under subsection (f) of section 117-14, or levied on him as a retailer of services under section 117-14.6, so much gross income as is derived from the rendering of such services at the rate of one-half of one per cent and shall be subjected to a tax on the aforesaid intermediary at the rate of three and one-half per cent. (Emphasis added.) [13] Section 117-16(c) was renumbered once again in 1968. See HRS § 237-18(c) (1968). According to the Tax Director, [i]n 1970, by Act 180, the renumbered HRS § 237-18(c), was integrated into HRS § 237-13(6). Act 180 essentially incorporated the intermediary services provisions of H.R.S. § 237-18(c) into the regular service provisions of HRS § 237-13(6).  (Emphases added.) However, the legislature specifically amended HRS § 237-13(6) to apply the lower tax rate of one-half percent to all businesses that rendered services through an intermediary. [14] See infra section II.A.2. (discussing this court's decision in In re Taxes, Busk Enterprises, Inc., 53 Haw. 518, 497 P.2d 908 (1972)). Although HRS § 237-13(6) eliminated reference to photoprinters (or the like) as engaging in a service business for the purposes of intermediary service taxation, the Department of Taxation did not change the tax treatment of this activity.
Shortly after the 1970 amendment, this court observed that the legislature's action ma[de] the lower rate applicable to all service businesses where an intermediary ordered or requested the service. In re Taxes, Busk Enterprises, Inc., 53 Haw. 518, 520 n. 3, 497 P.2d 908, 910 n. 3 (1972) (citing Hse.Stand.Comm.Rep. No. 108, in 1970 House Journal, at 3) (emphasis added). [15] In other words, Busk holds that the legislature expanded the previously limited category of service businesses beyond the enumerated categories. See HRS § 237-18(c) (1968). Almost ten years later, this court observed, in dictum, that [t]he use of the term photo-printer in provisions that preceded HRS § 237-13(6) (1976) probably referred to photo-finishing services performed for drug stores which served as retail outlets.  In re Photo Management, Inc., 63 Haw. 579, 583-84, 633 P.2d 535, 538 (1981) (citing R. Kamins and Y. Leong, Hawaii's General Excise Taxes 11 (1963)) (footnote omitted) (emphasis added). [16] Nevertheless, Photo Management did not expressly hold that the legislature had already classified photofinishers (and photoprocessors) as being engaged, for tax purposes, in a service business as opposed to manufacturing. Considering the nature of Fuji's photoprocessing operation, see supra section I.A., there is evidence in the record to support the conclusion that the industry has undergone a substantial change from a predominantly service-oriented business to a manufacturing enterprise. Nonetheless, the Tax Director argues that its long-standing interpretation of the state's tax laws and the legislature's failure to amend these statutes means that photofinishing (i.e., photoprocessing) should remain classified as a service business or calling under HRS § 237-7. See supra note 8. However, at least since 1970, Fuji's photoprocessing operations have constituted manufacturing activities.