REPORT TITLE:
Taxation


DESCRIPTION:
Provides relief from GET for medical joint ventures and the
purchase by or sale to health care facilities of prescription
drugs and prosthetic devices.  (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        47
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO TAXATION.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that the health care
 
 2 industry in Hawaii is regularly taking measures to introduce new
 
 3 products and services such as telemedicine, and to restructure
 
 4 itself in order to deliver modern, efficient, and cost effective
 
 5 health care services to the public.  In part, these changes are a
 
 6 response to market conditions, and, in part, they are a response
 
 7 to cost containment policies instituted by the state and federal
 
 8 governments.  The legislature further finds that the application
 
 9 of the general excise tax to the health care industry in Hawaii
 
10 has not been reviewed or updated for over thirty years.
 
11      The legislature finds that by not reviewing the general
 
12 excise tax the ferment in the health care industry has led to
 
13 inordinately complex structuring and restructuring in order to
 
14 avoid the general excise tax.  In many instances, efficiencies
 
15 and cost savings have been lost, and the delivery of new products
 
16 and services has been hampered.  The general excise tax causes
 
17 problems and penalties which seldom occur in other states and
 
18 Hawaii's health care industry cannot compete on an even playing
 
19 field.
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1      An example of formerly tax exempt income becoming subject to
 
 2 the general excise tax can be found in the formation of joint
 
 3 ventures.  In many instances, a nonprofit entity, such as a
 
 4 hospital that is exempt from the general excise tax, may find it
 
 5 necessary or advisable to enter into a joint venture with a for
 
 6 profit entity.  For example, it may be advisable for a nonprofit
 
 7 hospital and an attached physician group to form a joint venture
 
 8 to service capitated health plans.  The problem in Hawaii is that
 
 9 all of the income of mixed nonprofit and for profit entities in a
 
10 joint venture is subject to the four per cent general excise tax,
 
11 including that portion that would have been paid to the nonprofit
 
12 entity for tax exempt health care services.  This offsets the
 
13 viability of the joint venture.  It also reduces or eliminates
 
14 the lower service costs to the patients that might result.  
 
15 If Hawaii is to become the medical center of the Pacific, the
 
16 legislature finds that an effort must be initiated to eliminate,
 
17 reduce, or alleviate general excise tax problems. 
 
18      In addition, health care costs in Hawaii should be kept at
 
19 the lowest level possible.  In order to assist in keeping the
 
20 cost of medical services low, the legislature believes that sale
 
21 or prescription drugs and prosthetic devices to health care
 
22 facilities should no longer be taxed.
 
23      The purpose of this Act is to address certain aspects of
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 Hawaii's tax structure by clarifying the general excise taxation
 
 2 of joint ventures in the health care field.  In addition this Act
 
 3 eliminates the taxation of the sale of prescription drugs and
 
 4 prosthetic devices to health care facilities.  The legislature
 
 5 finds that these changes will reduce the cost of health care in
 
 6 Hawaii, with little loss of revenue, will be good for Hawaii's
 
 7 economy, and will place Hawaii's health care industry on an equal
 
 8 footing with its mainland equivalents.
 
 9      SECTION 2.  Chapter 237, Hawaii Revised Statutes, is amended
 
10 by adding a new grouping to be appropriately designated and to
 
11 read as follows:
 
12            "TREATMENT OF CERTAIN HEALTH CARE SERVICES
 
13      237-A  Definitions.  For sections 237-A and 237-B the
 
14 definitions contained in this section shall control.
 
15      "Health" includes physical and mental health.
 
16      "Health care facility" includes any program, institution,
 
17 place, building, or agency, or portion thereof, private or
 
18 public, whether organized for profit or not, used, operated, or
 
19 designed to provide medical diagnosis, treatment, nursing,
 
20 rehabilitative, or preventive care to any person or persons, that
 
21 is subject to chapter 323D, is owned or operated by the federal
 
22 or state government, or is affiliated with the John A. Burns
 
23 school of medicine at the University of Hawaii.  The term
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 includes, but is not limited to, health care facilities commonly
 
 2 referred to as hospitals, extended care and rehabilitation
 
 3 centers, nursing homes, skilled nursing facilities, intermediate
 
 4 care facilities, hospices for the terminally ill that require
 
 5 licensure or certification by the department of health or are
 
 6 owned or operated by the federal or state government, kidney
 
 7 disease treatment centers including freestanding hemodialysis
 
 8 units, outpatient clinics, organized ambulatory health care
 
 9 facilities, emergency care facilities and centers, home health
 
10 agencies, residency programs, faculty practice programs, health
 
11 maintenance organizations, and other similar facilities where
 
12 health care services are provided.
 
13      "Health care plan" means a written agreement under which
 
14 health care providers will provide health care services to
 
15 patients who either pay a monthly payment or premium to a health
 
16 plan provider or directly to health care providers in return for
 
17 which:
 
18      (1)  The health plan provider or the health care providers
 
19           assume all or a portion of the risk for the cost of the
 
20           health care services, without regard to type, value, or
 
21           frequency of the services provided; or
 
22      (2)  The health care services are provided under a written
 
23           agreement in which the health care providers are paid
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1           either directly, or through a health plan provider, for
 
 2           all or part of their services by a mutual benefit
 
 3           society or health maintenance organization or under an
 
 4           insurance contract.
 
 5      "Health care provider" means a Hawaii health care facility,
 
 6 physician, nurse, or any combination thereof.
 
 7      "Health care services" means those services which health
 
 8 care providers may legally provide to patients under federal and
 
 9 state law.
 
10      "Health plan provider" means a person, including a
 
11 corporation, partnership, limited liability company, mutual
 
12 benefit society, health maintenance organization, or insurance
 
13 carrier, that offers the health care services of one or more
 
14 health care facilities and one or more physicians under a health
 
15 care plan to members of the public, employers, employee
 
16 organizations, government agencies, or other health plan
 
17 providers.
 
18      "Nurse" means:
 
19      (1)  An individual licensed under chapter 457;
 
20      (2)  A professional corporation incorporated under
 
21           chapter 415A;
 
22      (3)  A Hawaii general or limited liability partnership
 
23           formed under chapter 425;
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1      (4)  A Hawaii limited partnership formed under chapter 425D;
 
 2           or
 
 3      (5)  A Hawaii limited liability company formed under chapter
 
 4           428;
 
 5 engaged in the practice of nursing in Hawaii.
 
 6      "Physician" means:
 
 7      (1)  An individual licensed under chapter 453 or 460;
 
 8      (2)  A professional corporation incorporated under
 
 9           chapter 415A;
 
10      (3)  A Hawaii general or limited liability partnership
 
11           formed under chapter 425; or
 
12      (4)  A Hawaii limited partnership formed under chapter 425D;
 
13 engaged in the practice of medicine or osteopathic medicine and
 
14 surgery in Hawaii.
 
15      237-B  Treatment of gross income or gross proceeds of a
 
16 health plan provider.(a)  Where a health plan provider receives
 
17 gross proceeds or gross income that is taxable under this
 
18 chapter, that is received from a health care plan or from another
 
19 health plan provider, and all or part of which is paid to a
 
20 Hawaii health care provider or to another health plan provider
 
21 under a health care plan, the health plan provider shall deduct
 
22 from the gross income or gross proceeds an amount equal to the
 
23 payment to the Hawaii health care provider or to the other health
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 plan provider under the health care plan.
 
 2      If the health plan provider is a joint venture, the joint
 
 3 venture may deduct from the gross proceeds or gross income that
 
 4 is taxable under this chapter and that is received from a health
 
 5 care plan or from another health plan provider, an amount equal
 
 6 to the amount paid by the joint venture to a Hawaii health care
 
 7 provider or to another health plan provider under a health care
 
 8 plan, including payments to those health care providers or health
 
 9 plan providers who may be partners, members, or managers of the
 
10 joint venture.  All these payments made to partners, members, or
 
11 managers shall be gross proceeds or gross income taxable under
 
12 this chapter to the receiving partner, member, or manager, but
 
13 may be deducted and become nontaxable under this section if:
 
14      (1)  The receiving partner, member, or manager is a person
 
15           exempt from taxation under this chapter; and
 
16      (2)  These payments are made for activities engaged in by
 
17           the receiving partner, member, or manager and the
 
18           activities are exempt from taxation under this chapter.
 
19      (b)  As used in this section, "joint venture" means a
 
20 domestic partnership or limited liability company, with at least
 
21 one partner, member, or manager who is a Hawaii health care
 
22 provider under a health care plan to which the joint venture is a
 
23 party."
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1      SECTION 3.  Section 237-24.3, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "237-24.3  Additional amounts not taxable.  In addition to
 
 4 the amounts not taxable under section 237-24, this chapter shall
 
 5 not apply to:
 
 6      (1)  Amounts received from the loading, transportation, and
 
 7           unloading of agricultural commodities shipped for a
 
 8           producer or produce dealer on one island of this State
 
 9           to a person, firm, or organization on another island of
 
10           this State.  The terms "agricultural commodity",
 
11           "producer", and "produce dealer" shall be defined in
 
12           the same manner as they are defined in section 147-1;
 
13           provided that agricultural commodities need not have
 
14           been produced in the State;
 
15      (2)  Amounts received from sales of:
 
16           (A)  Intoxicating liquor as the term "liquor" is
 
17                defined in chapter 244D;
 
18           (B)  Cigarettes and tobacco products as defined in
 
19                chapter 245; and
 
20           (C)  Agricultural, meat, or fish products grown,
 
21                raised, or caught in Hawaii, to any person or
 
22                common carrier in interstate or foreign commerce,
 
23                or both, whether ocean-going or air, for
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1                consumption out-of-state on the shipper's vessels
 
 2                or airplanes;
 
 3      (3)  Amounts received by the manager or board of directors
 
 4           of:
 
 5           (A)  An association of apartment owners of a
 
 6                condominium property regime established in
 
 7                accordance with chapter 514A; or
 
 8           (B)  A nonprofit homeowners or community association
 
 9                incorporated in accordance with chapter 415B or
 
10                any predecessor thereto and existing pursuant to
 
11                covenants running with the land,
 
12           in reimbursement of sums paid for common expenses;
 
13      (4)  Amounts received or accrued from:
 
14           (A)  The loading or unloading of cargo from ships,
 
15                barges, vessels, or aircraft, whether or not the
 
16                ships, barges, vessels, or aircraft travel between
 
17                the State and other states or countries or between
 
18                the islands of the State;
 
19           (B)  Tugboat services including pilotage fees performed
 
20                within the State, and the towage of ships, barges,
 
21                or vessels in and out of state harbors, or from
 
22                one pier to another; and
 
23           (C)  The transportation of pilots or governmental
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1                officials to ships, barges, or vessels offshore;
 
 2                rigging gear; checking freight and similar
 
 3                services; standby charges; and use of moorings and
 
 4                running mooring lines;
 
 5      (5)  Amounts received by an employee benefit plan by way of
 
 6           contributions, dividends, interest, and other income;
 
 7           and amounts received by a nonprofit organization or
 
 8           office, as payments for costs and expenses incurred for
 
 9           the administration of an employee benefit plan;
 
10           provided that this exemption shall not apply to any
 
11           gross rental income or gross rental proceeds received
 
12           after June 30, 1994, as income from investments in real
 
13           property in this State; and provided further that gross
 
14           rental income or gross rental proceeds from investments
 
15           in real property received by an employee benefit plan
 
16           after June 30, 1994, under written contracts executed
 
17           prior to July 1, 1994, shall not be taxed until the
 
18           contracts are renegotiated, renewed, or extended, or
 
19           until after December 31, 1998, whichever is earlier.
 
20           For the purposes of this paragraph, "employee benefit
 
21           plan" means any plan as defined in section 1002(3) of
 
22           title 29 of the United States Code, as amended;
 
23      (6)  Amounts received for purchases made with United States
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1           Department of Agriculture food coupons under the
 
 2           federal food stamp program, and amounts received for
 
 3           purchases made with United States Department of
 
 4           Agriculture food vouchers under the Special
 
 5           Supplemental Foods Program for Women, Infants and
 
 6           Children;
 
 7      (7)  Amounts received by a hospital, infirmary, medical
 
 8           clinic, health care facility, pharmacy, or a
 
 9           practitioner licensed to administer the drug to an
 
10           individual for selling prescription drugs or prosthetic
 
11           devices to an individual[;], and amounts received from
 
12           sales of prescription drugs or prosthetic devices to a
 
13           health care facility as defined in section 237-A;
 
14           provided that this paragraph shall not apply to any
 
15           amounts received for services provided in selling
 
16           prescription drugs or prosthetic devices.  As used in
 
17           this paragraph:
 
18           (A)  "Prescription drugs" are those drugs defined under
 
19                section [[]328-1[]] and dispensed by filling or
 
20                refilling a written or oral prescription by a
 
21                practitioner licensed under law to administer the
 
22                drug and sold by [a]:
 
23                (i)  A licensed pharmacist under section 328-16
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1                     [or practitioners];
 
 2               (ii)  A practitioner licensed to administer drugs;
 
 3                     [and] or
 
 4              (iii)  A licensed taxpayer who sells to a health
 
 5                     care facility as defined in section 237-A;
 
 6                     and
 
 7           (B)  "Prosthetic device" means any artificial device or
 
 8                appliance, instrument, apparatus, or contrivance,
 
 9                including their components, parts, accessories,
 
10                and replacements thereof, used to replace a
 
11                missing or surgically removed part of the human
 
12                body, which is prescribed by a licensed
 
13                practitioner of medicine, osteopathy, or podiatry
 
14                and which is sold by [the]:
 
15                (i)  A practitioner [or which is dispensed and
 
16                     sold by a];
 
17               (ii)  A dealer [of] that dispenses or sells
 
18                     prosthetic devices; or
 
19              (iii)  A licensed taxpayer who sells to a health
 
20                     care facility as defined in section 237-A;
 
21                provided that "prosthetic device" shall not mean
 
22                any auditory, ophthalmic, dental, or ocular device
 
23                or appliance, instrument, apparatus, or
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1                contrivance;
 
 2      (8)  Taxes on transient accommodations imposed by chapter
 
 3           237D and passed on and collected by operators holding
 
 4           certificates of registration under that chapter;
 
 5      (9)  Amounts received as dues by an unincorporated merchants
 
 6           association from its membership for advertising media,
 
 7           promotional, and advertising costs for the promotion of
 
 8           the association for the benefit of its members as a
 
 9           whole and not for the benefit of an individual member
 
10           or group of members less than the entire membership;
 
11           and
 
12     (10)  Amounts received by a labor organization for real
 
13           property leased to:
 
14           (A)  A labor organization; or
 
15           (B)  A trust fund established by a labor organization
 
16                for the benefit of its members, families, and
 
17                dependents for medical or hospital care, pensions
 
18                on retirement or death of employees,
 
19                apprenticeship and training, and other membership
 
20                service programs.
 
21           As used in this paragraph, "labor organization" means a
 
22           labor organization exempt from federal income tax under
 
23           section 501(c)(5) of the Internal Revenue Code, as
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1           amended."
 
 2      SECTION 4  Section 238-3, Hawaii Revised Statutes, is
 
 3 amended to read as follows:
 
 4      "238-3 Application of tax, etc.(a)  The tax imposed by
 
 5 this chapter shall not apply to any property, or to any use of
 
 6 the property, which cannot legally be so taxed under the
 
 7 Constitution or laws of the United States, but only so long as,
 
 8 and only to the extent to which the State is without power to
 
 9 impose the tax.
 
10      Any provision of law to the contrary notwithstanding,
 
11 exemptions or exclusions from tax under this chapter allowed on
 
12 or before April 1, 1978, under the provisions of the Constitution
 
13 of the United States or an act of the Congress of the United
 
14 States to persons or common carriers engaged in interstate or
 
15 foreign commerce, or both, whether ocean-going or air, shall
 
16 continue undiminished and be available thereafter.
 
17      (b)  The tax imposed by this chapter shall not apply to any
 
18 use of property the transfer of which property to, or the
 
19 acquisition of which by, the person so using the same, has
 
20 actually been or actually is taxed under chapter 237.
 
21      (c)  The tax imposed by this chapter shall be paid only once
 
22 upon or in respect of the same property; provided that nothing in
 
23 this chapter contained shall be construed to exempt any property
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 or the use thereof from taxation under any other law of the
 
 2 State.
 
 3      (d)  The tax imposed by this chapter shall be in addition to
 
 4 any other taxes imposed by any other laws of the State, except as
 
 5 otherwise specifically provided herein; provided that if it be
 
 6 finally held by any court of competent jurisdiction, that the tax
 
 7 imposed by this chapter may not legally be imposed in addition to
 
 8 any other tax or taxes imposed by any other law or laws with
 
 9 respect to the same property or the use thereof, then this
 
10 chapter shall be deemed not to apply to the property and the use
 
11 thereof under such specific circumstances, but such other laws
 
12 shall be given full effect with respect to the property and use.
 
13      (e)  The tax imposed by this chapter shall not apply to any
 
14 use of property exempted by section 238-4.
 
15      (f)  The tax imposed by this chapter shall not apply to any
 
16 use or consumption of aircraft and vessels, the transfer of which
 
17 aircraft or vessel to, or the acquisition of which by, the person
 
18 so using or consuming the same, or the rental for the use of the
 
19 aircraft or vessel, has actually been or actually is taxed under
 
20 chapter 237.
 
21      (g)  The tax imposed by this chapter shall not apply to any
 
22 intoxicating liquor as defined in chapter 244D and cigarettes and
 
23 tobacco products as defined in chapter 245, imported into the
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 State and sold to any person or common carrier in interstate
 
 2 commerce, whether ocean-going or air, for consumption out-of-
 
 3 state by the person, crew, or passengers on the shipper's vessels
 
 4 or airplanes.
 
 5      (h)  The tax imposed by this chapter shall not apply to any
 
 6 use of vessels constructed under section 189-25 prior to July 1,
 
 7 1969.
 
 8      (i)  Each taxpayer liable for the tax imposed by this
 
 9 chapter on tangible personal property shall be entitled to full
 
10 credit for the combined amount or amounts of legally imposed
 
11 sales or use taxes paid by the taxpayer with respect to the same
 
12 transaction and property to another state and any subdivision
 
13 thereof, but such credit shall not exceed the amount of the use
 
14 tax imposed under this chapter on account of the transaction and
 
15 property.  The director of taxation may require the taxpayer to
 
16 produce the necessary receipts or vouchers indicating the payment
 
17 of the sales or use tax to another state or subdivision as a
 
18 condition for the allowance of the credit.
 
19      (j)  The tax imposed by this chapter shall not apply to any
 
20 use of property exempted by section 237-26 or [section] 237-29.
 
21      (k)  The tax imposed by this chapter shall not apply to any
 
22 use of an air pollution control facility exempted by section
 
23 237-27.5.
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1      (l)  The tax imposed by this chapter shall not apply to any
 
 2 use of prescription drugs or prosthetic devices, as defined in
 
 3 section 237-24.3(7), by a health care facility as defined in
 
 4 section 237-A."
 
 5      SECTION 5.  In codifying the new sections added by section 2
 
 6 and referred to in other sections of this Act, the revisor of
 
 7 statutes shall substitute appropriate section numbers for the
 
 8 letters used in designating the new sections in this Act.
 
 9      SECTION 6.  Statutory material to be repealed is bracketed.
 
10 New statutory material is underscored.
 
11      SECTION 7.  This Act shall take effect on July 1, 1999;
 
12 provided that sections 2 and 3 shall apply to gross income or
 
13 gross proceeds received after June 30, 1999, and provided that
 
14 section 4 shall apply to amounts paid or incurred after June 30,
 
15 1999.