RELATING TO TAXATION.

SB2362

THE SENATE

S.B. NO.

2362

THIRTY-THIRD LEGISLATURE, 2026

STATE OF HAWAII

A BILL FOR AN ACT

relating
to taxation
.

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

����
SECTION 1.
�
The
legislature finds that the majority of income received from real estate
investment trusts by corporate entities doing business in Hawaii is not taxed
at the state level.
�
They enjoy a
preference that exempts them from paying taxes on dividends paid on revenues
generated in Hawaii.
�
According to the department
of taxation, the estimated amount of income tax revenues that will be foregone
in the 2026 taxable year may be as much as $26,800,000.

����
The legislature also finds that, in
September 2016, the department of business, economic development, and tourism,
through its research and economic analysis division, commissioned a report to
evaluate the recovery of income tax revenues from real estate investment trusts
within the State.
�
The findings revealed
that Hawaii received only $954,842 from in-state residents paying taxes on
dividend income associated with Hawaii real estate investment trusts.
�
In contrast, the majority of the real estate
investment trust income taxes were paid to other states by out-of-state
shareholders receiving dividends, meaning that Hawaii did not benefit from the
bulk of the income generated by real estate investment trusts operating within
its borders.
�
The legislature further
finds that real estate investment trust income generated through the use of
state resources should be taxed in Hawaii to benefit the State.

����
Accordingly, the purpose of this Act is to disallow
the dividends paid deduction for real estate investment trusts.

����
SECTION
2
.
�
Section 235-2.3, Hawaii Revised Statutes, is
amended by amending subsection (b) to read as follows:

����
"(b)
�

The following Internal Revenue Code subchapters, parts of subchapters,
sections, subsections, and parts of subsections shall not be operative for the
purposes of this chapter, unless otherwise provided:

����
(1)
�
Subchapter
A (sections 1 to 59A) (with respect to determination of tax liability), except
section 1(h)(2) (relating to net capital gain reduced by the amount taken into
account as investment income), except sections 2(a), 2(b), and 2(c) (with
respect to the definition of "surviving spouse" and "head of
household"), except section 41 (with respect to the credit for increasing
research activities), except section 42 (with respect to low-income housing
credit), except sections 47 and 48, as amended, as of December 31, 1984 (with
respect to certain depreciable tangible personal property), and except section
48(d)(3), as amended, as of February 17, 2009 (with respect to the treatment of
United States Department of Treasury grants made under section 1603 of the
American Recovery and Reinvestment Tax Act of 2009).
�
For treatment, see sections 235-110.91,
235-110.7, and 235-110.8;

����
(2)
�
Section
78 (with respect to dividends received from certain foreign corporations by
domestic corporations choosing foreign tax credit);

����
(3)
�
Section
86 (with respect to social security and tier 1 railroad retirement benefits);

����
(4)
�
Section
91 (with respect to certain foreign branch losses transferred to specified
10-percent owned foreign corporations);

����
(5)
�
Section
103 (with respect to interest on state and local bonds).
�
For treatment, see section 235-7(b);

����
(6)
�
Section
114 (with respect to extraterritorial income).
�

For treatment, any transaction as specified in the transitional rule for
2005 and 2006 as specified in the American Jobs Creation Act of 2004 section
101(d) and any transaction that has occurred pursuant to a binding contract as
specified in the American Jobs Creation Act of 2004 section 101(f) are
inoperative;

����
(7)
�
Section
120 (with respect to amounts received under qualified group legal services
plans).
�
For treatment, see section
235-7(a)(9) to (11);

����
(8)
�
Section
122 (with respect to certain reduced uniformed services retirement pay).
�
For treatment, see section 235-7(a)(3);

����
(9)
�
Section
135 (with respect to income from United States savings bonds used to pay higher
education tuition and fees).
�
For
treatment, see section 235-7(a)(1);

���
(10)
�
Section
139C (with respect to COBRA premium assistance);

���
(11)
�
Subchapter
B (sections 141 to 150) (with respect to tax exemption requirements for state
and local bonds);

���
(12)
�
Section
151 (with respect to allowance of deductions for personal exemptions).
�
For treatment, see section 235-54;

���
(13)
�
Section
179B (with respect to expensing of capital costs incurred in complying with
Environmental Protection Agency sulphur regulations);

���
(14)
�
Section
181 (with respect to special rules for certain film and television
productions);

���
(15)
�
Section
196 (with respect to deduction for certain unused investment credits);

���
(16)
�
Section
199 (with respect to the U.S. production activities deduction);

���
(17)
�
Section
199A (with respect to qualified business income);

���
(18)
�
Section
222 (with respect to qualified tuition and related expenses);

���
(19)
�
Sections
241 to 247 (with respect to special deductions for corporations).
�
For treatment, see section 235-7(c);

���
(20)
�
Section
250 (with respect to foreign-derived intangible income and global intangible
low-taxed income);

���
(21)
�
Section
267A (with respect to certain related party amounts paid or accrued in hybrid
transactions or with hybrid entities);

���
(22)
�
Section
280C (with respect to certain expenses for which credits are allowable).
�
For treatment, see section 235-110.91;

���
(23)
�
Section
291 (with respect to special rules relating to corporate preference items);

���
(24)
�
Section
367 (with respect to foreign corporations);

���
(25)
�
Section
501(c)(12), (15), (16) (with respect to exempt organizations); except that
section 501(c)(12) shall be operative for companies that provide potable water
to residential communities that lack any access to public utility water
services;

���
(26)
�
Section
515 (with respect to taxes of foreign countries and possessions of the United
States);

���
(27)
�
Subchapter
G (sections 531 to 565) (with respect to corporations used to avoid income tax
on shareholders);

���
(28)
�
Subchapter
H (sections 581 to 597) (with respect to banking institutions), except section
584 (with respect to common trust funds).
�

For treatment, see chapter 241;

���
(29)
�
Section
642(a) and (b) (with respect to special rules for credits and deductions
applicable to trusts).
�
For treatment,
see sections 235-54(b) and 235-55;

���
(30)
�
Section
646 (with respect to tax treatment of electing Alaska Native settlement
trusts);

���
(31)
�
Section
668 (with respect to interest charge on accumulation distributions from foreign
trusts);

���
(32)
�
Subchapter
L (sections 801 to 848) (with respect to insurance companies).
�
For treatment, see sections 431:7-202 and
431:7-204;

���
(33)
�
Section
853 (with respect to foreign tax credit allowed to shareholders).
�
For treatment, see section 235-55;

���
(34)
�
Section
853A (with respect to credits from tax credit bonds allowed to shareholders);

���
(35)
�
Section
857(b)(2)(B) (with respect to the dividends paid deduction for real estate
investment trusts);

��
[
(35)
]

(36)
�
Subchapter N (sections 861 to 999) (with
respect to tax based on income from sources within or without the United
States), except sections 985 to 989 (with respect to foreign currency
transactions).
�
For treatment, see
sections 235-4, 235-5, and 235-7(b), and 235-55;

��
[
(36)
]

(37)
�
Section 1042(g) (with respect to sales of
stock in agricultural refiners and processors to eligible farm cooperatives);

��
[
(37)
]

(38)
�
Section 1055 (with respect to redeemable
ground rents);

��
[
(38)
]

(39)
�
Section 1057 (with respect to election to
treat transfer to foreign trust, etc., as taxable exchange);

��
[
(39)
]

(40)
�
Sections 1291 to 1298 (with respect to
treatment of passive foreign investment companies);

��
[
(40)
]

(41)
�

Subchapter Q (sections 1311 to 1351) (with respect to readjustment of
tax between years and special limitations), except for section 1341 (with
respect to computation of tax where taxpayer restores substantial amount held
under claim of right);

��
[
(41)
]

(42)
�

Subchapter R (sections 1352 to 1359) (with respect to election to
determine corporate tax on certain international shipping activities using per
ton rate);

��
[
(42)
]

(43)
�

Subchapter U (sections 1391 to 1397F) (with respect to designation and
treatment of empowerment zones, enterprise communities, and rural development
investment areas).
�
For treatment, see
chapter 209E;

��
[
(43)
]

(44)
�

Subchapter W (sections 1400 to 1400C) (with respect to District of
Columbia enterprise zone);

��
[
(44)
]

(45)
�

Section 1400O (with respect to education tax benefits);

��
[
(45)
]

(46)
�

Section 1400P (with respect to housing tax benefits);

��
[
(46)
]

(47)
�

Section 1400R (with respect to employment relief);

��
[
(47)
]

(48)
�

Section 1400T (with respect to special rules for mortgage revenue
bonds);

��
[
(48)
]

(49)
�

Section 1400U-1 (with respect to allocation of recovery zone bonds);

��
[
(49)
]

(50)
�

Section 1400U-2 (with respect to recovery zone economic development
bonds); and

��
[
(50)
]

(51)
�

Section 1400U-3 (with respect to recovery zone facility bonds).
"

����
SECTION
3
.
�
Section 235-71, Hawaii Revised Statutes, is
amended by amending subsection (d) to read as follows:

����
"(d)
�

In the case of a real estate investment trust there is imposed on the
taxable income, computed as provided in sections 857 and 858 of the Internal
Revenue Code but with the changes and adjustments made by this chapter (without
prejudice to the generality of the foregoing,
for the taxable years
beginning before January 1, 2026,
the deduction for dividends paid is
limited to [
such
]
the
amount of dividends as is attributable to
income taxable under this chapter[
),
]
and, for taxable years
beginning after December 31, 2025, no deductions for dividends paid shall be
allowed),
a tax consisting in the sum of the following:
�
4.4 per cent if the taxable income is not
over $25,000, 5.4 per cent if over $25,000 but not over $100,000, and on all
over $100,000, 6.4 per cent.
�
In addition
to any other penalty provided by law any real estate investment trust whose tax
liability for any taxable year is deemed to be increased pursuant to section
859(b)(2)(A) or 860(c)(1)(A) after December 31, 1978, (relating to interest and
additions to tax determined with respect to the amount of the deduction for
deficiency dividends allowed) of the Internal Revenue Code shall pay a penalty
in an amount equal to the amount of interest for which the trust is liable that
is attributable solely to the increase.
�

The penalty payable under this subsection with respect to any
determination shall not exceed one-half of the amount of the deduction allowed
by section 859(a), or 860(a) after December 31, 1978, of the Internal Revenue
Code for the taxable year.

����
Notwithstanding the foregoing, beginning
January 1, 2022, the department shall require a real estate investment trust
subject to this chapter to:

����
(1)
�
Notify
the department, in the manner prescribed by the department, of its operation as
a real estate investment trust in the State no later than fifteen days from the
first day of operation in the State; provided that, for real estate investment
trusts operating in the State as of July 1, 2021, the department shall be
notified no later than January 15, 2022;

����
(2)
�
Properly
designate on its tax return that it is a real estate investment trust, as
required by the department;

����
(3)
�
Complete
its tax return in the specific manner required by the department, including
following line‑by-line instructions; and

����
(4)
�
Submit
a copy of the real estate investment trust's federal tax return covering the
same period with each state tax return that the real estate investment trust
files with the department under this chapter.

Any real estate
investment trust that fails to comply with these requirements shall be assessed
a penalty of $50 per day.
"

����
SECTION 4.
�

Statutory material to be repealed is bracketed and stricken.
�
New statutory material is underscored.

����
SECTION 5.
�

This Act, upon its approval, shall apply to taxable years beginning
after December 31, 2025.

INTRODUCED BY:

_____________________________

Report Title:

Income
Tax; Real Estate Investment Trusts; Dividends Paid Deduction

Description:

Disallows
the dividends paid deduction for real estate investment trusts.

The summary description
of legislation appearing on this page is for informational purposes only and is
not legislation or evidence of legislative intent.