HomeMy WebLinkAboutRES 035 Draft 01 2004-2006 t~ 66
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SOLU'T'ION NO. ~
A RESOLUTION RELATING TO A BILL AMENDING CIIAPTER 239, ILR.S., FOR INCLUSION
IN TIIE 2005 IIAWAI`I STATE ASSOCIATION OF COUNTIES LEGISLATIVE PACKAGE
WHEREAS, HSAC Secretary Romy Cachola, Councilmember of the City & County of Honolulu, has
requested that member counties of the Hawai` i State Association of Counties consider a proposed bill, set forth
as Exhibit "A" and attached to this resolution, for inclusion in the 2005 Hawaii State Association of Counties
(HSAC) legislative package, as follows:
RELATING TO THE PUBLIC SERVICE COMPANY TAX -Amends Section 239-2, H.R.S., to
expressly levy and assess the public service company tax derived from the operation of a private
sewer company or private sewer facility; Act shall supercede the Tax Appeal Court decision, In the
lbdatter of the Tax Appeal of the Director of Taxation, State of IIavvaii v. Laie Treatanent
Works, Ine., Tax Appeal Court, Case No. 02-0067.
NOW, THEREFORE, BE IT RESOLVED IiY TIIE COUNCIL OF TILE COUNTY OF IIAWAI`I
that it approves the foregoing proposal for inclusion in the 2005 Hawaii State Association of Counties
Legislative Package as set forth in the attached exhibit; and
BE IT FURTHER RESOLVED that a copy of this Resolution be transmitted by the County Clerk to the
President of the Hawai` i State Association of Counties.
Dated at Hilo , Hawaii, this 21st day of January , 2005.
INTRODUCED B
COUNCIL MEMBER, CO Y OF HAWAII
GS/rf
COUNTY COUNCIL ROLL CALL VOTE
County of Hawaii AYES NOES ABS EX
Hilo, Hawaii ARAKAKI X
HIGA X
I hereby certify that the foregoing RESOLUTION was by HOFFMANN X
the vote indicated to the right hereof adopted by the COUNCIL of the HOLSCHUH X
County ofHawai`ion Jariuar~ 21, 2005
IKEDA X
ISBELL X
ATTEST: JACOBSON
P 1 LAGO
~
SAFARIK
~ 9 0 0 0
~~~3' ~y~~ ~ l~lr
~ Reference: C-55.4/Waived PWIRC
COUNTY CLERK CHAIRMAN & PRESIDING OFFICER RESOLUTION NO.
EXHIBIT A
.B. NO.
A BILL FOR AN ACT
RELATING TO THE PUBLIC SERVICE COMPANY TAX.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
1 SECTION 1. The purpose of this Act is to expressly levy and assess the public
2 service company tax upon the gross income derived from the operation of a private
3 sewer company or private sewer facility. The Legislature intends that this Act
4 supersede the Tax Appeal Court's decision, In the Matter of the Tax Aaaeal of the
5 Director of Taxation. State of Hawaii v. Laie Treatment Works. Inc., Tax Appeal Court,
6 Case No. 02-0067. The Legislature further intends that a "private sewer company" or
7 "private sewer facility" be a company or facility that is deemed a "public utility" under
8 paragraph (1) of the definition of that term in section 269-1, Hawaii Revised Statutes.
9 SECTION 2. Section 239-2, Hawaii Revised Statutes, is amended by amending
10 the definition of "gross income" to read as follows:
11 ""Gross income" means the gross income from public service company business
12 as follows:
13 (1) Gross income from the production, conveyance, transmission, delivery, or
14 furnishing of light, power, heat, cold, water, gas, or oil;
15 (2) Gross income from the transportation of passengers or freight, or the
16 conveyance or transmission of telephone or telegraph messages other
OCS/010605/03: 25/mg pscreso.05
Page 2
.B. NO.
1 than mobile telecommunications services, or the furnishing of facilities for
2 the transmission of intelligence by electricity, by land or water or air:
3 (A) Originating and terminating within the State;
4 (B) By means of vessels or aircraft having their home port in the State
5 and operating between ports or airports in the State, with respect to
6 the transportation so effected; or
7 (C) By means of plant or equipment located in the State, between
8 points in the State; or
9 (3) Gross income from the transportation of freight by motor carriers (other
10 than as stated in paragraph (2)), or the conveyance or transmission of
11 messages or intelligence through wires or cables located or partly located
12 in the State (other than as stated in paragraph (2) or
13 (4) Gross income from the operation of a private sewer company or private
14 sewer facility: or
15 [(4)] ~ With respect to a home service provider of mobile telecommunications
16 services, "gross income" includes charges billed for mobile
17 telecommunications services provided by a home service provider to a
18 customer with a place of primary use in this State when the mobile
19 telecommunications services originate and terminate within the same
20 state; provided that all such charges for mobile telecommunications
21 services that are billed by or for the home service provider are deemed to
pscreso.05
Page 3 , ~ . ~ O .
1 be provided by the home service provider at the customer's place of
2 primary use, regardless of where the mobile telecommunications services
3 originate, terminate, or pass through. Gross income shall not include:
4 (A) Any charges for or receipts from mobile telecommunications
5 services provided to customers of the home service provider whose
6 place of primary use is outside the State;
7 (B) Any receipts of a home service provider acting as a serving carrier
8 providing mobile telecommunications services to another home
9 service provider's customer; and
10 (C) Any receipts specifically from interstate or foreign mobile
11 telecommunications services taxable under Section 237-13(6)(E),
12 as determined by the home service provider's books and records
13 kept in the ordinary course of business.
14 For the purposes of this paragraph, "customer", "home service provider',
15 "mobile telecommunications services", "place of primary use', and "serving
16 carrier" have the same meaning as in section 239-22.
17 The words "gross income" and "gross income from public service company
18 business" shall not be construed to include dividends (as defined by section 235-1) paid
19 by one member of an affiliated public service company group to another member of the
20 same group; or gross income from the sale or transfer of materials or supplies, interest
21 on loans, or the provision of engineering, construction, maintenance, or managerial
pscreso.05
Page 4 . ~ . ~ O .
1 services by one member of an affiliated public service company group to another
2 member of the same group. "Affiliated public service company group" means an
3 affiliated group of domestic corporations within the meaning of chapter 235, all of the
4 members of which are public service companies. "Member of an affiliated public service
5 company group" means a corporation (including the parent corporation) which is
6 included within an affiliated public service company group.
7 Where the transportation of passengers or property is fumished through
8 arrangements between motor carciers, and the gross income is divided between the
9 motor carriers, any tax imposed by this chapter shall apply to each motor carrier with
10 respect to each motor [sarfier-s] carrier's respective portion of the proceeds.
11 Where tourism related services are furnished through arrangements made by a
12 travel agency or tour packager and the gross income is divided between the provider of
13 the services on the one hand and the travel agency or tour packager on the other hand,
14 any tax imposed by this chapter shall apply to each person with respect to each
15 person's respective portion of the proceeds.
16 Accounts found to be worthless and actually charged off for income tax
17 purposes, at corresponding periods, may be deducted from gross income as specified
18 under this chapter so far as they reflect taxable sales, but shall be added to gross
19 income when and ff subsequently collected.
20 As used in this paragraph "tourism related services" means motor carriers of
21 passengers regulated by the public utilities commission."
pscreso.05
Page 5 . ~ . ~ ¦ O .
1 SECTION 3. This Act shall apply to gross income derived from operation as a
2 private sewer company or private sewer facility that is accrued from July 1, 2005.
3 SECTION 4. Statutory material to be repealed is bracketed and struck through.
4 New material is underscored.
5 SECTION 5. This Act shall take effect on July 1, 2005.
6 INTRODUCED BY:
7
8
pscreso.05
CITY COUNCIL n
I CITY AND COUNTY OF HONOLULU ~O ~ ~ V O 9
HONOLULU, HAWAII NO.
RESOLUTION
APPROVING FOR INCLUSION IN THE 2005 HSAC LEGISLATIVE PACKAGE A
PROPOSAL TO EXPRESSLY IMPOSE THE PUBLIC SERVICE COMPANY TAX ON
THE GROSS INCOME OF EACH PRIVATE SEWER COMPANY AND PRIVATE
SEWER FACILITY.
WHEREAS, Chapter 239, Hawaii Revised Statutes (HRS), establishes two
alternative formulas for the imposition of the State public service company tax upon a
public utility; and
WHEREAS, under one alternative, the public service company tax is imposed at
the four percent rate on the gross income of a public utility, and the proceeds are
realized by the State in lieu of the State general excise tax; and
WHEREAS, the second alternative becomes operative if a county exempts the
real property of a public utility from the real property tax; and
WHEREAS, if the county enacts such an exemption by ordinance, the public
service company tax is imposed at a minimum 5.885 percent rate on the gross income
of each public utility operating within the boundaries of that county, and:
(1) The portion of the proceeds representing a four percent rate is realized by
the State as a substitute for the State general excise tax; and
(2) The portion of the proceeds in excess of the four percent rate is
transmitted to the county as a substitute for the county real property tax;
and
WHEREAS, every county of the State has chosen to (1) exempt public utilities
operating within the boundaries of the county from the real property tax and (2) receive
instead a share of the public service company tax proceeds pursuant to the second
alternative; and
WHEREAS, the State Department of Taxation had imposed the public service
company tax on every private sewer company and facility because they are considered
to be "public utilities" under Section 269-1, HRS, which is part of the State public utility
regulation law, and Chapter 239, HRS; and
1
OCS/010605/03: 25/mg
CITY COUNCIL (l
• 1 CITY AND COUNTY OF HONOLULU Q 5- O Q y
HONOLULU, HAWAII NO.
RESOLUTION
WHEREAS, the Tax Appeal Court, however, has recently rendered a decision
finding that the gross income of a particular private sewer is taxable under the general
excise tax instead of the public service company tax (See In the Matter of the Tax
Appeal of Director of Taxation, State of Hawaii, Tax Appeal Court, Case No. 02-0067,
judgment entered August 19, 2004); and
WHEREAS, the Court's decision rests on an omission of express language in
Chapter 239, HRS, that the public service company tax is to be imposed on the gross
income derived from the operation of a private sewer company; and
WHEREAS, the State Director of Taxation has not appealed the decision; and
WHEREAS, one effect of the decision is to stop the counties from receiving a
share of the public service company tax proceeds derived from a private sewer
company or facility; and
WHEREAS, to rectify the situation, the Council finds that the State law should be
amended to expressly provide that the gross income derived from the operation of a
private sewer company or private sewer facility is subject to the public service company
tax; and
WHEREAS, the amendment will enable a county to again receive a share of the
public service company tax proceeds from every private sewer company and facility if
the county continues to exempt them from the real property tax; and
WHEREAS, the Council finds that, from an administrative standpoint, the receipt
of a share of the public service company tax proceeds is preferable to the imposition of
the real property tax on a private sewer company or facility; now, therefore,
BE IT RESOLVED by the Council of the City and County of Honolulu that this
body approves for inclusion in the 2005 HSAC Legislative Package a proposal, attached
as Exhibit A, to expressly impose the public service company tax upon the gross
income of each private sewer company or private sewer facility; and
2
CITY COUNCIL /n~
I CITY AND COUNTY OF HONOWLU Q ~ ~ y U y
HONOLULU, HAWAII NO.
RESOLUTION
BE IT FINALLY RESOLVED that the Clerk is directed to transmit a certified copy
of this Resolution to the President of the Hawaii State Association of Counties.
INTRODUCED BY:
DATE OF INTRODUCTION:
Honolu u, awau ounce mem ers
3
LINDA LINGLE ° ~ KURT KAWAFUCHI
GOVERNOR ~~aM~ ~ DIRECTOR OF TAXATION
JAMES R. AIONA, JR. ~ - ~ MARIE C. LADERTA
LT. GOVERNOR DEGUTV DIRECTOR
~ `
S„O
STATE OF HAWAII
DEPARTMENT OF TAXATION
0 0. eox ~5s
HONOLUW,HAWAl1 aGa06 = _
PHONE NO: (808) Sal-7570 ~
FAX NO: (906)58'7-1560 ~ r Z
m on
n r-t
January 5, 2005 rr7 Uo rc-'`
w ct:
m (p r'
The Honorable Romy M. Cachola ~ s. n~
City & County of Honolulu ~ n x
Councilmember, District VII v°~I =
530 S. King Street, Room 202
Honolulu, HI 96813
Dear Cotmcilmember Cachola:
Deputy Director Marie Laderta and I were pleased to meet with you yesterday to discuss
important tax issues that affect the counties. I am writing to follow up on those discussions,
specifically with regazd to the recent Tax Appeal Court decision, In the Matter of the Tax Appeal
of Director of Taxation, State of Hawaii v. Laie Treatment Works, Inc., in the Tax Appeal Court
of the State of Hawaii, Case No. 02-0067. The taxpayer in this case is Laie Treatment Works,
Inc, aprivately-owned company that operates a sewage treatment plant in Laie.
At issue in the case was whether income received by the taxpayer for sewer and/or
wastewater treatment services was subject to the public service company ("PSC") tax or, in the
alternative, the general excise tax ("GET"). Because such sewage companies aze classified as
"public utilities" under Hawaii Revised Statutes 239-2 and 269-1, the Department of Taxation
("Department") azgued that the income derived from the taxpayer's public utility business was
subject to the PSC tax, which is generally imposed at the rate of 5.885%7 (as compazed to the 4%
GET). Because the definition of "gross income" in HRS § 239-2 does not specifically identify
gross income generated by a private sewer company, the Tax Appeal Court rendered a decision
in favor of the taxpayer. The result is that the taxpayer was found to be subject to the GET
instead of the PSC tax.
Under Act 64, Session Laws of Hawaii 2001, the counties were allowed to receive a
portion of the PSC tax revenues as part of the counties' assertion that they lose real property tax
revenues when public utilities pay the PSC tax in lieu of real property taxes. Pursuant to Act 64,
the PSC tax revenue is divided between the State and the counties, whereby the State receives
revenues attributable to 4% (of the 5.885% tax rate) and the counties receive the remaining
1.885% (in excess of the 4% state portion). Therefore, the Laie case has a fiscal impact on the
counties, rather than the State as of July 1, 2001.
' The PSC tax rate ranges from 5.885% to 8.2%, depending upon the profitability of the taxpayer. See HRS § 239-5.
Z Act 64 codified a settlement between the State and the counties to divide the 5.885% PSC tax revenues collected
by the 5.885% tax rate. Under the settlement, the State received 4% of the public service company gross receipts
The Honorable Romy Cachola
January 5, 2005
Page 2
Our deputies attorney general working on the case have previously contacted the
corporation counsels of each county to inform them of the case developments. Because of the
potential fiscal impact on the counties, you may wish to consider a legislative fix to amend the
definition of "gross income" in HRS § 239-2 to preserve the counties' 1.885% portion of the PSC
tax revenues for the sewage treatment industry.3
Our current data shows that the counties received approximately $45 million in PSC tax
revenue in Fl' 2004. We do not have the data that shows how much of this $45 million is
attributable to privately-owned sewage andlor wastewater treatment companies in Hawaii. In
addition, we also note that if such companies report their income under the GET system (instead
of the PSC tax), the real property tax exemption in HRS § 239-3 no longer applies, and the
counties may impose the real property tax on such public utilities, which may help to offset the
revenue loss resulting from the Laie case.
If you have any questions regarding the case, please call me at 587-1513 or Marie
Laderta at 587-1527. We have enclosed a copy of
judgment and our motion for summary
judgment for your information.
ry truly u
K T KAWAFiJCHI
Director of Taxation
Enclosures
rcachola-Ieie.ltr
reported by taxpayers and the counties received 1.885%. The PSC tax is imposed in lieu of the GET (collected by
the State) and the real property tax (collected by the counties). Because the GET is imposed at the rate of 4%, it was
thought that the State was entitled to the 4%portion of the PSC tax, while the counties share in the 1.885% portion
to compensate them for the loss of real property tax revenues.
' Additionally, the counties may have exposure for the back years (for which the statute of Limitations has not
expired) as they may have to refund such portion of the 1.885% since July 1, 2001, when the counties began
receiving such portion from the sewage treatment industry.
MARK J. BENNETT, #2672
Attorney General of Hawaii
MARY H.Y. BAHNG, #6454
Deputy Attomey General ' ' '
Department of the Attorney
General, State of Hawaii C;.~=. r.
Hale Auhau Building
425 Queen Street
Honolulu, Hawaii 96813
Telephone: (808) 586-1470
Attorneys for Appellant
DIRECTOR OF TAXATION,
STATE OF H~,WAII
IN THE TAX APPEAL COURT OF THE
STATE OF HAWAII
1N THE MATTER OF THE TAX APPEAL CASE NO.02-0067
of JUDGMENT
DIRECTOR OF TAXATION,
STATE OF HAWAII,
Appellant,
vs.
LAIE TREATMENT WORKS, INC,
Taxpayer-Appellee.
TRIAL DATE: November 29, 2004
JUDGMENT
Taxpayer-Appellee LAIE TREATMENT WORKS, INC. ("Taxpayer"), filed Taxpayer-
Appellee's Motion for Summary Judgment on Mazch 31, 2004 ("Taxpayer's Motion'.
Appellant DIRECTOR OF TAXATION, STATE OF HAWAII ("Director', filed Appellant
Director of Taxation, State of Hawaii's Motion for Pariial Summary Judgment Finding That
] 03119_ LDOC
- . -
Taxpayer Was a "Public Utility" and Consequently a "Public Service Company" During the
Relevant Period on June 23, 2004 ("Public Utility Motion', and Appellant Director of Taxation,
State of Hawaii's Motion for Partia] Summary Judgment Finding That Taxpayer's Income
Generated from its Public Utility Business is Gross Income Subject to Public Service Company
Tax on June 23, 2004 ("Gross Income Motion'. The Taxpayer's Motion, the Public Utility
Motion and the Gross Income Motion all came on for hearing before the Honorable Gary W.B.
Chang on July 12, 2004 at 9:00 a.m.
By separate orders filed on ,the Court granted the Taxpayer's
Motion and denied the Public Utility Motion and the Gross Income Motion.
Pursuant to Rule 58, Hawaii Rules of Civil Procedure, Judgment is hereby entered in
favor of Taxpayer and against the Director.
DATED: Honolulu, Hawaii, "~O 1 ~ 2U04
PpPFJ~( Co
GARY W.B. CFiAh1G `N ~ ~ A l s~
JUDGE OF THE ABOVE COURT
In the Matter of the Tax Appeal of Director of Taxation. State of Hawaii v. Laie Treatment
Works, ]nc.; Case No. 02-0067; Tax Appeal Court, State of Hawaii; Judgment
103 ] 19 ].DOC 2
,r '
r` ^ n:pcA~
i ~-(i' r r
MARK J. BENNETT, #2672 _
Attorney General of Hawaii i"°.' E,!J~ I Fi': C~ 23
MARY H.Y. BAHNG, #6454 , ,
Deputy Attorney General
Department of the Attomey
General, State of Hawaii
Hale Auhau Bui]ding
425 Queen Street
Honolulu, Hawaii 96813
Telephone: (808) 586-1470
Attorneys for Appellant
DIRECTOR OF TAXATION,
STATE OF H~IWAII
IN THE TAX APPEAL COURT OF THE
STATE OF HAWAII
IN THE MATTER OF THE TAX APPEAL CASE N0.02-0067
of ORDER GRANTING TAXPAYER-
APPELLEE'S MOTION FOR SUMMARY
DIRECTOR OF TAXATION, JUDGMENT FILED MARCH 31, 2004
STATE OF HAWAII,
Appellant,
vs. HEARING
DATE : July 12, 2004
LAIE TREATMENT WORKS, INC., TIME : 9:00 a.m.
JUDGE: Hon. Gary W.B. Chang
Taxpayer-Appellee.
TRIAL DATE: November 29, 2004
ORDER GRANTING TAXPAYER-APPELLEE'S
MOTION FOR SUMMARY JUDGMENT FILED MARCH 31.2004
Taxpayer-Appellee's Motion for Summary Judgment, filed March 31, 2004 ("Motion',
came on for hearing before the Honorable Gary W.B. Chang on July ] 2, 2004 at 9:00 a.m. Alan
J. Ma, Esq. and Owen H. Matsunaga, Esq. appeared on behalf of Taxpayer-Appellee LAIE
TREATMENT WORKS, INC. ("Taxpayer"). Deputy Attomey General Mary H.Y. Bahng
103140_1.DOC
appeared on behalf of Appellant DIRECTOR OF TAXATION, STATE OF HAWAII
("Director").
The Court having reviewed the records and files herein, having heazd the azguments and
representations of counsel for Taxpayer and the Director, and being apprised of the premises
herein, and good cause appearing therefor, IT I5 HEREBY ORDERED, ADJUDGED AND
DECREED that the Motion is hereby GRANTED. t L~,`
DATED: Honolulu, Hawaii,
}paP~t CMG
GARY W.B. CNANr N ~ ~ ~ l
P
JUDGE OF THE ABOVE- D COURT
In the Matter of the Tax Appea] of Director of Taxation, State of Hawaii v. Laie Treatment
Works, Inc.; Case No. 02-0067; Tax Appeal Court, State of Hawaii; Order Granting Taxpayer-
Appellee's Motion for Summary Judgment filed Mazch 31, 2004
103 ] 40 l .DOC 2
+:~X APPEAI CO+~?'
i
GERSON & HIENEMAN
?P44 AUG 19 P?; 2~ 20
ALAN J. MA 5580-0 ;„(;~~~~;,,„,.;~,,,c:;+~
BRUCE D. HIENEMAN 6044-0
OWEN H. MATSUNAGA 5087-0
American Savings Bank Tower, Suite 780 C~ERIi
1001 Bishop Street _
Honolulu, Hawaii 96813 ~ ~ ~ O ~
Telephone: (808) 524-4800 I! it
Facsimile: (808) 537-1420 Ali ~ ~ 2 3 ~ ~~J
I.
Attorneys for Taxpayer-Appellee LAIE
TREATMENT WORKS INC. ~ attorney Gunere~s onic~
> ~ Tex DWfsinn•Le al Sectbn
r'
IN THE TAX APPEAL COURT OF THE
STATE OF HAWAII
IN THE MATTER OF THE TAX APPEAL ) CASE NO. 02-0067
OF )
ORDER DENYING APPELLANT
DIRECTOR OF TAXATION, STATE OF ) DIRECTOR OF TAXATION, STATE OF
HAWAII, )HAWAII'SM0170NFORPARTIAL
SUMMARY JUDGMINT FINDING THAT
Appellant, ) TAXPAYER'S INCOME GENERATED
FROM ITS PUBLIC UTILITY BUSINESS IS
v. ) GROSS INCOME SUBJECT TO PUBLIC
SERVICE COMPANY TAX, FILED JUNE
LAIE TREATMENT WORKS, INC., ) 23, 2004
Taxpayer-Appellee. )HEARING:
Date: July ] 2, 2004
Time: 9:00 a.m.
Judge: Honorable Gary W.B. Chang
TRIAL DATE: November 29, 2004
Ordo Denyug GI M9.wpd
r
ORDER DENYING APPELLANT DIRECTOR OF TAXATION, STATE OF.HAWAH'S
MOTION FOR PARTIAL SUMMARY JUDGMENT FINDING THAT TAXPAYER'S
INCOME GENERATED FROM ITS PUBLIC UTILITY BUSINESS IS GROSS INCOME
SUBJECT TO PUBLIC SERVICE COMPANY TAX, FILED .TUNE 23,2004
Appellant Director of Taxation, State of Hawaii's Motion for Partial Summary Judgment
Finding That Taxpayer's Income Generated from its Public Utility Business Is Gross Income
Subject to Public Service Company Tax, filed June 23, 2004 ("Motion', came on for hearing
before the Honorable Gary W.B. Chang on July ] 2, 2004. Alan J. Ma, Esq. and' Owen H.
Matsunaga, Esq. appeaeed on behalf ofTaxpayer-Appellee LAZE TREATMENT WORKS, INC.
("Taxpayer"). Mary H.Y. Bahng, Esq. appeared on behalf of Appellant DIRECTOR OF
TAXATION, STATE OF HAWAII ("Appellant").
The Court having reviewed the records and files herein, having heazd the arguments and
representations of counsel for Taxpayer and Appellant, and being apprised of the premises
herein, and good cause appeazing therefor,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Motion is hereby
denied.
DATED: Honolulu, Hawaii, Ally j G ~~U4
p~ C
O
GARY W.B. CHANG v~~ ~ ~ L
JUDGE OF THE ABOVE-EN OURT
Order Dcnying GI M51 wpd 2
r
APPROVED AS TO FORM:
MARY H.Y B;AHNG
Attorney for Appellant DIRECTOR
OF TAXATION, STATE OF HAWAII
In the Matter of the Tax Appeal of Director of Taxation State of Hawaii v Laie Treatment
Works, Inc.; Case No. 02-0067; Tax Appeal Court, State of Hawaii; Order Denying Appellant
Director of Taxation, State of Hawaii's Motion for Partial Summary Judgment Finding That
Taxpayer's Income Generated from its Public Utility Business Is Gross Income Subject to Public
Service Company Tax, filed June 23, 2004
Order OrnyinE Gl M4wpd 3
nF tiau,
GERSON & HIENEMAN if!!~~ AUG 14 PPI 2~ 19
ALAN J. MA 5580-0 ;~P1L~E~ ~.k,?.;~AR~'tE
BRUCE D. HIENEMAN 6044-0
OWEN H. MATSUNAGA 5087-0
American Savings Bank Tower, Suite 780 CLEFsY
1001 Bishop Street ri 1 C r ~ O r~ c, -
Honolulu, Hawan 96813 i ~ r7 (r'
iC,
Telephone: (808) 524-4800 I
Facsimile: (808) 537-1420 I~~ t~ 2 3 ~ '
i~
_._-J
Attorneys for Taxpayer-Appellee LAIE r c^' `
TREATMENT WORKS, INC.
~P
IN THE TAX APPEAL COURT OF THE
STATE OF HAWAII
IN THE MATTER OF THE TAX APPEAL ) CASE NO. 02-0067
OF )
ORDER DENYING APPELLANT
DIRECTOR OF TAXATION, STATE OF )DIRECTOR OF TAXATION, STATE OF
HAWAII, )HAWAII'S MOTION FOR PARTIAL
SUMMARY JUDGMENT FINDING THAT
Appellant, ) TAXPAYER WAS A "PUBLIC UTILITY"
AND CONSEQUENTLY A "PUBLIC
v. ) SERVICE COMPANY" DURING THE
RELEVANT PERIOD FILED ON JUNE 23,
LAIE TREATMENT WORKS, INC., ) 2004
Taxpayer-Appellee. )HEARING:
Date: July 12, 2004
Time: 9:00 a.m.
Judge: Honorab]e Gary W.B. Chang
TRIAL DATE: November 29, 2004
Ober DenyinE PU MSI wpd
ti ORDER DENYING APPELLANT DIRECTOR OF TAXATION, STATE OF HAWAII'S
MOTION FOR PARTIAL SUMMARY JUDGMENT FINDING THAT TAXPAYER WAS
A "PUBLIC UTILITY" AND CONSEQUENTLY A "PUBLIC SERVICE COMPANY"
DURING THE RELEVANT PERIOD FILED ON JUNE 23, 2004
Appellant Director of Taxation, State of Hawaii's Motion for Partial Summary Judgment
Finding That Taxpayer Was a "Public Utility" and Consequently a "Public Service Company"
During the Relevant Period, filed on June 23, 2004- ("Motion', came on for hearing before the
Honorable Gary W.B. Chang on July 12, 2004. Alan J. Ma, Esq. and Owen H. Matsunaga, Esq.
appeared on behalf of Taxpayer-Appellee LAIE TREATMENT WORKS, INC. ("Taxpayer").
Mary H.Y. Bahng, Esq. appeared on behalf of Appellant DIRECTOR OF TAXATION, STATE
OF HAWAII ("Appellant").
The Court having reviewed the records and files herein, having heard the azguments and
representations of counsel for Taxpayer and Appellant, and being apprised of the premises
herein, and good cause appearing therefor,
IT IS HEREBY ORDERED, ADJUDGED'AND DECREED that the Motion is hereby
denied.
AUG 1 9 2004
DATED: Honolulu, Hawaii,
rt PPp~< iCiO~a
GARY W.B. CHAI`iG m ~ ~ A 6
r
JUDGE OF THE ABOVE- '~T COURT
Order Denying PU MSJ.wpd 2
APPROVED AS TO FORM:
J Ss/~i. Q _
MARY H.Y AHNG
Attorney for Appellant DIRECTOR
OF TAXATION, STATE OF HAWAII
In the Matter of the Tax Appeal of Director of Taxation. State of Hawaii v. Late Treatment
Works. lnc.; Case No. 02-0067; Tax Appeal Court, State of Hawaii; Order Denying Appellant
Director of Taxation, State of Hawaii's Motion for Partial Summary Judgment Finding That
Taxpayer Was a "Public Utility" and Consequently a "Public Service Company" During the
Relevant Period filed on June 23, 2004
Ordn Omyng PU MSI wpd 3
MARK J. BENNETT, #2672 n' x o
Attorney General of Hawaii T~ _ ~ ~h
x m r ~D
DIARY H.Y. BA}iNG, #6454 i N ='~v
Deputy Attorney Genera] ~ ~ ~ -''a
Department of the Attorney ' xr-
I ~ ~
General, State of Hawaii I = w _
Hale Auhau Building i rn ~
425 Queen Street
Honolulu, Hawaii 96813
Telephone: (808) 586-1470
Attorneys for DIRECTOR OF TAXATION,
STATE OF HAWAII
IN THE TAX APPEAL COURT OF THE
STATE OF HAWAII
1N THE MATTER OF THE TAX APPEAL CASE NO. 02-0067
of APPELLANT DIRECTOR OF TAXATION,
STATE OF HAWAII'S MOT]ON FOR
DIRECTOR OF TAXATION, PARTIAL SUMMARY JUDGMENT
STATE OF HAWAII, FINDJNG THAT TAXPAYER'S INCOME
GENERATED FROM ITS PUBLIC
Appellant, UTILITY BUSINESS IS GROSS INCOME
SUBJECT TO PUBLIC SERV]CE
vs. COMPANY TAX; MEMORANDUM 1N
SUPPORT OF MOT]ON; NOTICE OF
LA]E TREATMENT WORKS, INC., HEARING OF MOT]ON AND
CERT]F]CATE OF SERVICE
?axpayer-Appellee.
HEARING
DATE :July 12, 2004
TIME :9:00 a.m.
JUDGE: Hon. Gary W.B. Chang
='8 9518? 2.DOC
APPELLANT 1~IRECTOR OF TAXATION, STATE OF HAWAII'S MOTION FOR PARTIAL
SUMMARY JUDGMENT FINDING THAT TAXPAYER'S INCOME GENERATED FROM
]TS PUBLIC UTILITY BUSINESS ]S GROSS INCOME SUBJECT TO
PUBLIC SERVICE COMPANY TAX
Appellant Director of Taxation, State of Hawaii ("Director"),t pursuant to Rule 29 of the
Rules of the Tax Appeal Court and Rules 7 and 56 of the Hawaii Rules of Civil Procedure, moves
this Court for pariia] summary judgment finding as a matter of law that income from the core of
Taxpayer-Appellee Laie Treatment, Int.'s private sewer company/facility business is "gross
income" subject to public service company tax on public utilities under Hawaii Revised Statutes
Annotated chap~er 239 (Michie 2003).
This Motion is based upon the memorandum attached hereto in support of the Motion,
the records and files herein, and any further evidence and argument as may be presented upon
the hearing of this Motion and related motions.
DATED: Honolulu, Hawaii, June 23, 2004.
MARK J. BENNETT
Attorney General
By:
MARY H. . BAHNG
Deputy Attorney General
Kun Kawafuchi is the new Directcr of Taxation and is subsimted for former Director of Taxation Marie Y.
Okamura, pursuant to Rule 25(d) of the Hawaii Rules of Civil Procedure.
95182 2.DOC 2
IN THE TAX APPEAL COURT OF THE
STATE OF HAWAII
1N THE MATTER OF THE TAX APPEAL CASE N0.02-0067
of MEMORANDUM IN SUPPORT OF
MOTION
DIRECTOR OF TAXATION,
STATE OF HAWAII,
Appellant,
vs.
LAZE TREATMENT WORKS, INC.,
Taxpayer-Appellee.
95182_2.DOC
TABLE OF CONTENTS
I. INTRODUCTION ]
II. PROCEDURAL BACKGROUND 2
Ill. STANDARD OF REVIEW ..............................................................................................2
IV. GENERAL RULES OF STATUTORY CONSTRUCTION 3
V. TAXPAYER'S GROSS 1NCOA9E FROM 1TS PUBLIC UTILITY BUSINESS IS
"GROSS INCOA9E" FOR PSC TAX PUR.POSES ........................................................4
A. The History and Structure of the PSC Tax Requires the Inclusion of Gross Income
~ Generated From Private Sewer Company Business Within the Term "Gross
income" Under HRS § 239-2 5
B. Taxpayer's Reading of the Statute Must be Avoided Because it Requires the
Department of Taxation to Favor Private Sewer Companies and Potentially
Violate the Equal Protection C]ause 7
I. All Public Utilities, Including Private Sewer Companies, are Within the
Same Class far Tax Purposes 8
2. There is a Rational Basis for the Public Utility Classification I D
3. Taxpayer's Reading of the Statute Does not Give Equal Protection to
Public Utilities 10
4. Unconstitutional Reoding of a Statute Must be Avoided I
C. incompatibility Within HRS § 239-2 May be Reconci]ed 12
D. ]n re Hawaiian Telephone Co. is not Inconsistent With the Director's Position.. ]4
E. The Rules of Construction on Which Taxpayer Relies do not Resolve the
Incompatibility in the Present Case and Their Application is Limited ] 6
VI. CONCLUSION I7
95182 2.DOC jj
TABLE OF AUTHORITIES
Federal Cases
A]]eehenv PitisburQ Coal Co. v. Countv Comm'n of Webster Countv W. V ,
488 U.S. 336, 109 S.Ct. 633 (]989) 8
Com¢an v. City ofNewaveo,.55 F.3d 12l l (6t° Cir. ]995) l0
Edward J. Debartolo Coro. v. Florida Gulf Coast Blde. & Constr.
485 U.S. 568, 108 S.Ct. 1392 (1988) ..................................................................................11, 12
Hawaii Consolidated Railwav v. Borthwick, 105 F.2d 286 (9`~ Cir. 1939) 8
Matsuda v. Wada, 128 F. Supp. 2d 659 (D. Haw. 2000) 11, ]2
State Cases
Dines v. Pac. Ins. Co., Ltd., 78 Hawaii 325, 893 P.2d ] 76 (1995) 3
Hawaii Consolidated Railwav v. Borthwick, 34 Haw. 269 (1937) 5, 8
In re Gardens at West Maui Vacation Club v. County ofMaui,
90 Hawaii 334, 978 P.2d 772 999) ] 0
In re Hawaiian Telephone Co., 61 Haw. 572, 608 P.2d 383 (]980) 6, 14, I5, 16
in re ]stand Airlines, Inc., 47 Naw. 87, 384 P.2d 536 (1963) 6
in re Pac. Marine & Suuplv Co.. Ltd., 55 Haw. 572, 524 P.2d 890 (1974) ]0
in re Swann, 7 Haw. App. 390, 776 P.2d 395 (I989) 8
International Savines and Loan Association. Limited v. Wii2,
82 Hawaii 197, 92] P.2d l17 (1996) 76
Jones v. Hawaiian Elec. Co.. Inc., 64 Haw. 289, 639 P.2d 1103 (1982) 12
Kapiolani Park Preservation Soc. v. Citv and Countv ofllonolulu,
69 Haw. 569, 75] P.2d 1022 (1988) 11
Keliipu]eole v. Wilson, 85 Nawai'i 217, 221, 941 P.2d 300, 304 (]997) 7
Pan American Airways Co. v. Godbold, 36 Haw, l70 (1942) 1 l
Pancakes of Hawaii. inc. v. Pomare Properties Corp 85 Hawaii 286, 944 P.2d 83 (App. 1997).2
Richardson v. City and Countv ofNonolulu, 76 Hawaii 46, 868 P.2d 1 ]93 (1994) 12, l3
95182 2.DOC jjj
Sato v. Tawata, 79 Nawai'i 14, 897 P.2d 94l (1995) 3, 7
State
v.
Ogata, 58 Haw. 514, 572 P.2d 1222 (1977) 3
State v. Yan, 44 Naw. 370, 355 P.2d 25 960) ] 3
Cases
Sandy Springs Water Co. v. Department of Health and Environmental Control,
324 S.C. 177, 478 S.E.2d 60 (1996) ]b
State Statutes
HRS § 1-16 (Michie 2003) 6
HRS § 232-1~1{Michie 2003) 2
HRS § 239-2 (Michie 2003) passim
HRS § 239-4 (Michie 2003) 6, 7
HRS § 239-5 (Michie 2003) 1 4 7
, ,
HRS § 239-9 (Michie 2003) 6, ] 0
HRS § 269-1 (Michie 2003) 1, 9
Other Authorities
N. 2-478, 15' Sess., at 7l ] (Haw. 7 963) 8
H. 2-792, 151 Sess., at 799 (Haw. 1963) 9, 10
H. 7-640, 151 Sess., at 800 (Haw. 7974) 9
N. Singer 2A Sutherland Statutory Construction, § 47.17 (6t° ed. 2000) 12, l3
N. Singer 2A Sutherland Statutory Construction, § 47.18 (6`" ed.2000) 13
S. 16-6, 2"" Sess., at 34-35 (Haw. 1932) 5
' S. 7-587, ]S1 Sess., at 978 (Naw. 1974) 9
S. 7-777, 151 Sess.; at 1048 (Haw. 1974) 9
95 t 82_2.DOC jp
MEMORANDUM IN SUPPORT OF MOT10N
la INTRODUCTION
Hawaii Revised Statutes Annotated ("HRS") § 239-5 (Michie 2003) imposes a public
service company ("PSC") tax upon "each" public utility on its "gross income" from its public
utility business. Although a private sewer company or facility ("private sewer company") is a
"public utility" under HRS 239-2 and 269-] (Michie 2003), the definition of "gross income"
in HRS § 239-2 does not specifically identify gross income generated from a private sewer
company. HRS § 239-2, however, is prefaced with the caveat "unless otherwise required by
context." In the present case, the conext, the history and the structure of the PSC tax requires
that the gross income from Taxpayer's core public utility business be included within the term
"gross income." To construe the definition otherwise would mean that the PSC tax on public
utilities does not apply to a member of the public utilities classification (private sewer
companies) under any circumstances while it applies to all other public utilities. This is an
absurd and unjust result that (1) is inconsistent with and illogical given the history and structure
of PSC tax on public utilities and (2) requires the Department of Taxation to treat private sewer
companies more favorably than other public utilities and potentially violate the Equal Protection
Clause. ~
Accordingly, Appellant Director of'Taxation, State of Hawaii ("Director"), respectfully
moves this Court for partial summary judement finding that, as a matter of law, gross income
~ The Hawaii State Constitution, Article 1, Section 5, in pertinent pan provides:
No person shall be denied the equal protection of the laws.
Section 1 ofthe Fourteenth Amendment of the United States Constitution in peninem pan provides:
No State shall deny to any person within itsjurisdiction the equal protection of the laws.
95182_2.DOC
generated from~the core of'faxpayer-Appellee Laie Treatment Works, Inc.'s ("Taxpayer'?
.private sewer company business is "gross income" subject to PSC tax under HRS chapter 239.
Il. PROCEDURAL BACKGROUND
Taxpayer filed its motion for summary judgment on March 31, 2004 arguing in essence
that: (l) the income generated from Taxpayer's public utility business is not "gross income"
under HRS § 239-2 and (2) Taxpayer was not a "public utility" solely because it did not obtain a
certificate of public convenience and necessity.
The isstf,e of whether the income generated from Taxpayer's public utility business is
"gross income" depends on whether Taxpayer is a "public utility." Accordingly, "Appellant
Director of Taxation, State of Hawaii's Motion for Partial Summary Judgment Finding that
Taxpayer is a `Public Utility' and Consequently a 'Public Service Company"'("Director's Public
Utility MPSJ") is concurrently filed with this Motion. Rather than repeat the content thereof, the
Director incorporates by reference herein the Director's Public Utility MPSJ (including related
papers) in its entirety.
The Director files this Motion without awaiting the resolution of the Director's Public
Utility MPSJ because Taxpayer has raised this "gross income" issue in Taxpayer's MSJ, for
which the hearing has already been scheduled.
111. STANDARD OF RE\'lE\\'
'The hearing before the tax appeal court shall be a hearing de novo. HRS § 232-13
(1`9ichie 2003). Further, irrespective of which party prevails in proceedings before a state board
of review. the assessment as made by the assessor shat] be "deemed prima facie correct." Id.
Summary judgment is proper where the moving parry demonstrates that there are no
eenuine issues of material fact and it is entitled to judgment as a matter of law. Pancakes of
Hawaii ]nc. v Pomare Pronenies Corp 85 Hawaii 286, 291, 944 P.2d 83, 86 (App, 1997).
95182 2.DOC 2
Assuming that Taxpayer is a "public utility" and consequently a PSC, the issue raised in this
N
Motion is strictly a matter of Jaw and there are no genuine issues of material fact. Thus, partial
summary judgment finding that, as a matter of law, Taxpayer's gross income from its core
private sewer company business,is "gross income" subject to PSC tax is appropriate.
IV. GENERAL RULES OF STATUTORY CONSTRUCTION
Where the language of a statute is ambiguous or of doubtful meaning, or where literal
construction of the statute would produce an absurd or unjust result, clearly inconsistent with the
purposes and policies the statute was designed to promote, judicial construction and
interpretation are warranted and also the court may resort to extrinsic aids to construction. State
v. Oeata, 58 Haw. 514, 5] 8, 572 P.2d ]222 (1977). Rejection of even unambiguous language
may be justified if there is "urunistakable support in the history and structure of the legislation."
See Dines v Pac. Ins. Co., Ltd., 78 Hawaii 325, 332, 893 P.2d 776, 183 995). ]ndeed, the
Hawaii Supreme Court has found:
Our urimarv duty in interoretine and applyine statutes is to
ascertain and eive effect to the leeislature's intention to the fullest
decree. Although the intention of the legislature is to be obtained
primarily from the language of the statute itself, we have reiected
an a4proach to statutory construction which limits us to the words
of a statute) 1 for when aid to construction of the meanine of
words as used in the statute is available. there certainly can be no
rule of law which forbids its use however clear the words may
appear on superficial examination.
Thus the plain laneuaee rule of statutory construction. does
not preclude an examination of sources other than the laneuaee of
the statute itself even when the lanauaee aupears clear upon
nerfunctorv review. Were this not the case, a court maybe unable
fo adequately discern the underlying policy which the legislature
seeks to promulgate and, thus, would be unable to determine if a
literal construction would produce an absurd or unjust result;
inconsistem with the policies of the statute. [Citations, brackets,
internal quotations marks, and ellipses points omined] [Emphases
added.]
Sato v. Tawata, 79 Hawaii 14, 17, 897 P.2d 941, 944 995).
951 s2 2.DOC 3
V. TAXPAYER'S GROSS 1NC0)\9E FRO)\9 1TS PUBLIC UTILITY BUSINESS IS
"GROSS INCO)\9E" FOR PSC TAX PURPOSES
HRS § 239-5 in pertinent part provides:
§ 239-5. Public utilities, generally. (a) There shall be levied and
assessed upon each }iublic utility, a tax of such rate per cent of
its gross income each year from its public utility business as shall
be determined in the manner hereinafter provided " [Emphasis
added.]
HRS § 239-2 in pertinent part provides:
§ 139-1. DeTinitions.
~h,s used in this chapter unless otherwise required by context:.. .
I1 "Gross income" means the gross income from public
service company business as follows:
(1) Gross income from the production, conveyance,
transmission, delivery, or famishing of light, power, heat, cold,
water, gas, or oil;
(2) Gross income from the transportation of passengers or
freight, or the conveyance or transmission of telephone or
telegraph messages other than mobile telecommunications
services, or the furnishing of facilities for the transmission of
intelligence by electricity, by land or water or air or
(3) Gross income from the transportation of freight by motor
carriers (other than as stated in paragraph (2)), or the conveyance
or transmission of messages or intelligence through wires or cables
located or partly located in the State (other than as stated in
paragraph (2) or (4)); or
(4) With respect to a home service provider of mobile
telecommunications services, "gross income" includes charges
billed for mobile telecommunications services provided by a home
service provider to a customer with a place of primary use in this
State when the mobile telecommunications services originate and
terminate within the same state:... (Emphasis added.]
Taxpayer argues that none of its Bross income from its public utility business is subject to
PSC tax because gross income of private sewer companies is not specifically identified within
this definition. Taxpayer, however, ignores the fact that the definition of"gross income" is
prefaced with the caveat "unless aherwise required by context" and the language "'Gross
income' means the gross incomefi~onr public Bernice company business (emphasis added).
95182 2.DOC 4
Under Taxpayer's reading of the statute, the PSC tax on public utilities could not apply to
a private sewer company, a public utility, under any circumstances. This is an absurd and
unjust result that (1) is inconsistent with and illogical given the history and structure of PSC tax
on public utilities and (2) requires the Department of Taxation to favor private sewer companies
over the other public utilities and potentially violate the Equal Protection Clause. In the present
case, context requires the inclusion of the gross income generated from Taxpayer's private sewer
company business.
A. The Nistory and Structure of the PSC Tax Requires the Inclusion of Gross
Income Generated From Private Sewer Company Business Within the Term
"Gross Income" Under HRS § 239-2
PSC tax on public utilities was established in 1932 when the tax system in Hawaii was
being restructured. S. ] 6-6, 2"d Sess., at 34-35 (Haw. 1932). The Hawaii Supreme Court
explained:
The earning capacity of properly devoted to the utility
business as reflected by gross income from utiiiN business and
the ability to pay as reflected by net income from the same source,
in other words; "yroTrs"from utility business, are the sole
considerations in determining the amount of the tax....
Hawaii Consolidated Railway v. Bonhwick, 34 Haw. 269, 279-82 (1937).
Act ]47, Hawaii Session Laws (]963); amended the definition of "gross income" to
include the examples of types of gross income. Act 147 also added a new section requiring the
allocation and separate accountings but only with respect to certain types of gross income
identified in the new definition of Bross income. The examples of types of gross income appear
to have been necessary to address the allocation requirement.
`Act 14 i required the allocation of the following types of gross income:
95182_2.DOC 5
The intefrt to impose PSC tax on "each" public utility is still reflected within HRS chapter
239. As discussed in Director's Public Utility MPSJ, under NRS § 239-2, a "public utility" by
definition is a "public service company," which is referred as "PSC" herein.
HRS § 239-4 (Michie 2003) provides in relevant pari:
§ 239-4. Returns. Each public service companv shall file with the
ofTce of the department of taxation a return in such for as the
department may prescribe, showing its taxable gross income for the
preceding taxable year.... (Emphasis added.]
This language in HRS § 239-4 illustrates that the legislature intended for "each" PSC to have
"gross income."~1'
HRS § 239-9 (Michie 2003) in provides in relevant part:
§ 239-9. Time of application of tax and other provisions.
(a) In genera]. The tax in~osed by this chapter applies
ro every publfc service cornpany [Emphasis added.]
The language could not be clearer: the PSC tax was intended to apply to "every" PSC.
Laws in pari materio, or upon the same subject matter, shall be construed with reference
to each other. HRS § I-] 6 (Michie 2003). 1f certain public utilities were not meant to be subject
to PSC tax, the word "every" and "each" would be surplus language. ]t is a cardinal rule of
statutory constmction that significance and effect shall, if possible, be accorded to every word.
]n re Hawaiian Telephone Co., 6] Haw. 572, 580 n.5, 608 P.2d 383, 388 n. 5 (1980) citing ]n re
]sland Airlines. ]nc., 47 Haw. 87, ] ] 2, 384 P.2d 536, 565 (1963). Courts are bound to give effect
to all pans of a statute. and that no clause, sentence; or word shall be construed as supernuous,
void; or insignificant if a construction can be legitimately found which will give force to an
(2) Gross income from the transponation of pa<_sengers or freight. or the conveyance or transmission of
telephone or telegraph messages, or the furnishing of facilities for the transmission of intelligence by
electricity, by lands or air
(3) Gross income from the ttansponation of freight by mover carriers (other than as stated in paragraph
(2) of this subsection). or the conveyance or transmission of messages or intelligence through wires or
cables located or partly located in the State (other than as stated in paragraph (2) of this subsection).
95782 2.DOC 6
preserve all words of the statute. Keliinuleole v. Wilson, 85 Hawaii 217, 221, 94] P.2d 300,
304 (1997).
In accord, HRS § 239-4 provides in part:
]n case any public service company engages in lines of business
other than its public service company business, the receipts
therefrom shall not be subject to tax under this chapter, but the
same tax liabilities shall attach to the public service company on
account of the other lines of business as would exist if no public
service company business were engaged in....
]f the examples of "gross income" in HRS § 239-2 were intended to be exhaustive; this language
in HRS § 239-4 would not be necessary.
Indeed, Taxpayer itself asserts: "HRS § 239-5 subjects all public utilities to the PSC tax."
See "Taxpayer's Mem. in Support of its MSJ, p. 10. It would be inconsistent and illogical with
the history and structure of PSC tax to subject all public utilities to PSC tax without any
possibility of actually subjecting the public utility to the tax. The court's "primary duty in
interpreting and applying statutes is to ascertain and give effect to the legislature's intention to
the fullest degree" Sato v. Tawata, 79 Hawaii l4, ] 7, 897 P.2d 94 944 (1995). In the present
case, the legislature's intention was to subject all public utilities to PSC tax and that intention
must be given effect to the fullest degree by including the gross income of'Taxpayer's core
public service company business within the definition of "gross income" under HRS § 239-2.
Taxpayer's Reading of the Statute Must be Avoided Because it Requires the
Department of Taxation to Favor Private Sewer Companies and Potentially
\~iolate the Equal Protection Clause
The Taxpayer's reading of the definition of "gross income" requires the Department of
Taxation to favor private sewer companies over all other public utilities and potentially violate
the Equal Protection Clause and. therefore, must be avoided.
95182 2.DOC 7
] . All Public Utilities. Includine Private Sewer Companies are Within the Same
Class for Tax Purposes
The Equal Protection Clause "applies only to taxation which in fact bears unequally on
persons or property of the same class." ]n re Swann, 7 Haw. App. 390, 401, 776 P.2d 395, 399
(1989) citing Alleehenv Pittsburg Coal Co v County Comm'n of Webster County W V , 488
U.S. 336, 343, 109 S.Ct. 633, 637-38 (1989).
When the legislature created the PSC tax back in ] 932, it put all public utilities into one
classification:
I•,
~W]e believe, the tax imposed by this Act is a substitute for ad
valorem taxes.... By the Act utilities are put in a special class by
themselves.... As ro the class affected the Act should Qperate
uniformly and asideLom anv ineaualiN that Federal or local law
might condemn it is reasonable to assume that the legislature
intended complete eaualiN as to all utilities subiect to the Act.
[Emphasis added.)
Hawaii Con=olidated Railway v. Bonhwick, 34 Haw. 269, 281-82 (]937). The Ninth Circuit
Court of Appeals affirmed this decision of the Hawaii Supreme Court and stated that "[iJt was
reasonable to assume that the legislature intended to treat alike al] utilities subject to the act."
Hawaii Con=o]idated Railwav v Bonhwick, ] OS F.2d 286, 287 (9'h Cir. 1939).
]n 1963; the PSC tax chapter v,~as amended by House Bill No. 57, which ultimately was
enacted as Act ]47; Hawaii Session Laws (]963). Nouse Standing Committee ReportNo. 478,
provides in pan that:
The purpose of this bit] is to bring under one chapter the taxation
of all businesses which are regulated by the public utilities
commission....
H. 2-478, ]s' Sess.. at 711 (Haw. ] 963). House Standing Committee Report No. 792, in accord.
provides in pan:
Another purpose of this bill is to group businesses possessing those
certain common characteristics of public utilities under one taxing
95]82 2.DOC $
chapter. It is felt that this type of grouping makes for better
administration of the tax laws.
H. 2-792, I S' Sess., at 799 (Naw. 1963).
Private sewer companies were added to the definition of a "public utility" in HRS § 269-
1 in ] 974. Legislative committee reports stated the purpose of including private sewer
companies and facilities in the definition as follows:
The purpose of the bill is to include private sewerage
disposal companies under the Public Utilities Commission thereby
regulatine ilte rates that these companies charge for seweraee
services.
The bill accomplishes the purpose by amending section
269(-]], H. R. S., to include a person who operates a sewer
company within the definition of a utility This will permit the
commission to reeulate the rates chareed by such person and afford
the consumer an opportunity to be heard with regard to such
charges.... [Emphases added.)
H. 7-640, ] s' Sess-, at 800 (Haw. ] 974).
The purpose of this Bill is to reeulate the rates-and charees
for seweraee services provided by private companies by_placing
them under the control of the Public Utilities Commission.
At the present time, the consumer affected has no
alternative; but to accept the decisions of the private companies
that own and operate sewer disposal plants. Presently, there is no
regulation as to the amount a private company may charge for
services. The proprietor of such companies need not justify or gain
approval of any increases in rates.
This Bill paces private seweraee disposal companies under
the Public Utilities Commission thereby regulatine the rates that
these companies charge. Under this new system. the consumers
will be given reasons for any rate increases.... [Emphases added.]
S. 7-587. Sess., at 978 (Haw. 1974): S. 7-777, ] r Sess.. at ] 048 (Haw. 1974).
By including private sewer companies within the definition of "public utility," the
legislature classified private sewer companies as a "public utility."
95 ] 82_ 2.DOC 9
2 There is a Rational Basis for the Public Utility ClassiTcation
In analyzing tax classifications under the Equal Protection Clause, the Hawaii Supreme
Court has stated that where discrimination is of a "non-suspect" or "non-invidious" variety, such
discrimination is not unconstitutional if there is any rational basis for such classification. In re
Gardens at West Maui Vacation Club v. Couniv of Maui, 90 Hawaii 334, 342, 978 P.2d 772,
780 (1999) citing In re Pac. Marine & Sunoly Co td , 55 Haw. 572, 581', 524 P.2d 890, 896
(1974).
In the p~esent case, the legislature expressed that it believed that grouping all public
utilities together in HRS chapter 239 "makes for better administration of the tax laws." H. 2-
792, 1~' Sess., at 799 (Haw. 1963). Bever tax administration is a rational basis for Equal
Protection Clause analysis. See Sandy Sprines Water Co. v. Department of Health and
Environmental Control, 324 S.C. 177, 182, 478 S.E.2d 60, 62 996)("administrative concerns
may provide a rational basis for a legislative classification"); Comean v. Citv ofNewavao, 55
F.3d l21 (6t° Cir. 1995)("laws are rationally related to the administration of the tax system.
Hence, the ordinance is not an arbitrary restriction, and the plaintiffs' Equal Protection rights
have not been violated"). Thus, in the present case, there is a rational basis for the public utility
classification.
3 Taxpayer's Reading ofrhe Stature Does nor Give Eaual Praecrion ro Public
Uri/fries
'fhe PSC tax rate on public utilities depends on the ratio of the net income of the public
utility company to its gross income. HRS § 239-9. During the Relevant Period, the public utility
rate could not be less than 5.885 per cent, unless it was the public utility business' first year.' ]d.
' 1f the operation and the business commenced after the commencement of a calendar year, the PSC tax rate v.~as 4
per cent but only for that year. HRS b 239-9.
95182 2.DOC ] 0
]f'Taxpayer's reading of the term "gross income" in HRS § 239-2 is given effect,
"Paxpayer would be subject to a lower 4.0% genera] excise tax despite the fact that it, too, is a
"public utility." Under the Taxpayer's reading of the statute, the Department of Taxation must
treat private sewer companies moreSavorably than all the other public utilities and potentially
violate the Equal Protection Clause.
4 Unconstitutional Reading o(a Stature Must be Avoided
Legislative acts are not to be held invalid; unconstitutional, or unconscionable, if such
construction can be reasonably be avoided. Kauio]ani Park Preservation Soc. v. City and County
of Honolulu, 69 Haw. 569, 578, 751 P.2d 1.022, 1028 (]988).
When a statute is susceptible of two constructions, one of
which supports it and gives it effect, and the other renders its
unconstitutional and void, the former is to be adopted, even though,
the latter maybe the more natural interpretation of the language
used; for an act is never to be construed as unconstitutional if a
reasonable construction can be placed upon it which will render it
valid.
Pan American Airways Co. v. Godbold, 36 Haw. 170, ] 82 (1942). Where an otherwise
acceptable construction of a statute would raise serious constitutional problems, the court will
construe the statute to avoid such problems unless such construction is plainly contrary to the
intent of Congress. Matsuda v. VJada, ]28 F. Supp. 2d 659. 665 (D. Haw. 2000) quoting dward
J. Debartolo Corp. v. Florida Gulf Coast Blde. & Constr., 485 U.S. 568, 575, 108 S.Ct. ] 392
(1988).
This approach not only reflects the prudential concern that
constitutional issues not be needlessly confronted, but also
recognizes that Congress, like this Court, is bound by and swears
an oath to uphold the Constitution. The courts will therefore not
lightly assume that Congress intended to infringe constitutionally
protected liberties or usurp power constitutionally forbidden it.
95182 2.DOC ] I
1d. This "cardinal principle has for so long been applied by this Couri that it is beyond
,debate." ]d.
in the present case, the constitutional problem maybe reasonably avoided if Taxpayer, a
public utility, is subject to the same tax treatment as al] other public utilities. As discussed
above, such construction of the statute is in accord with the intent of the legislature.
C. ]ncompatibility \O~ithin HRS § 239-2 May be Reconciled
Taxpayer argues that the teen "gross income" is limited to the specified examples of
gross income 9ontained in HRS § 239-2. However, the definition is prefaced with the following
1.'
genera] language:
§ 239-2. Definitions.
As used in this chapter unless otherwise required by
context:...
"Gross income" means the gross income from public
service company .
Under the rule of statutory construction of ejusdem generis, where words of general
description follow the enumeration of certain things, those words of general description aze
restricted in their meaning to objects of like kind and character with those specified. Richardson
v City and County of Honolulu, 76 Hawaii 46, 74, 868 P.2d 7193, 1221 (1994) citing Jones v.
Hawaiian Elec. Co.. Inc., 64 Haw. 289, 294, 639 P.2d 1 ] 03, ] ] 08 (1982). Where the opposite
sequence is found, i.e., specific words following genera] ones, the doctrine is equally applicable,
and restricts application of the genera] term to Chines that are similar to those enumerated. N.
Singer 2A Sutherland Statutory Construction, § 47.] 7 at 274-8] (6'" ed. 2000) .
The doctrine of ejusdem generis is an attempt to reconcile
an incompatibility between specific and general words so that all
words in a statute and other legal instruments can be given effect,
all parts of a statute can be construed together and no words will be
superfluous. ]f the general words are given their full and natural
meaning, they would include the objects designated by the specific
words, making the latter superfluous. If, on the other hand, the
95152_2 ]2
series of specific words is given its fu]] and natural meaning, the
general words are partially redundant. (Citations omitted.)
]d. at 283-85. The purpose of the rule is to give effect to both the particular and general words,
by treating the particular words as indicating the class, and the genera] words as extending the
provisions of the statute to everything embraced in that class, though not specifically named by
the particular words. Richardson at 74, 868 P.2d at 1221 citing State v. Yan. 44 Haw. 370, 376-
77, 355 P.2d 25, 29 (1960).
The rule of ejusdem generis applies when the following conditions exist: (1) the statute
contains an enumeration by specific words; (2) the members of the enumeration constitute a
class; (3) the class is not exhausted by the enumeration;° (4) a general term follows the
enumerations and (5) there is not clearly manifested an intent that the general term be given a
broader meaning than the doctrine requires. Id.
These conditions are met in the present case: (1) HRS § 239-2 includets specific
examples of "gross income"; (2) these specific examples of"gross income" represent the gross
income generated by the core public utility businesses for PSC tax purposes; (3) the specific
examples do not exhaust all the Bross income generated by the public utility businesses (i.e., it
does not include the gross income of private sewer companies or public utilities operating its
business for "the storage and ti~arehousing of goods"); (4) the eeneral phrase "`Gross income'
means the gross income from public service company business as follows precedes the
specific examples of "gross income" in HRS § 239-2; and (5) given the phrase "as follows"
preceding the specific examples of gross income, an intent that the general term be given a
' A "class" is a conceptual creation encompassing numerous items with similar characteristics. N. Singer 2A
Sutherland Statutorv Construction, § 47.] 8 (6'" ed. 2000). Thus, s "class" is a generalization that associates items
for a panicular purpose. 1d.
5 As discussed above, this condition maybe met if the opposite is true (i.e., where the specific enumerations follow
the general term). See N. Singer 2A Sutherland Statutorv Construction, § 47.17 at 274-81 (6ih ed. 2000) .
951sz 2 13
meaning than the doctrine requires does not appear to be "clearly manifested." Thus, the
doctrine of ejusdem generis maybe applied to reconcile the incompatibility within the definition
of "gross income" in HRS § 239-2.
]n the present case, the specific types of gross income in HRS § 239-2 correspond with
the core public utility businesses. For example, public utilities operating its business for "the
production, conveyance, transmission, delivery, or famishing of light, power, heat, cold, water,
gas, or oil" are taxed on gross income generated from "the production, conveyance,
transmission, d~hivery, or furnishing of light, power, heat, cold, water, gas, or oil"; public utilities
operating its business for "the transponation of passenger or freight" is taxed on gross income
generated from "the transponation of passenger or freight"; etc. Based on the rule of ejusdem
generis, public utilities operating its business for the disposal of sewage must similarly be taxed
on the gross income generated from the disposal of sewage, its core public utility business.
]n Hawaiian Telephone, the Hawaii Supreme Coun rejected the Director's argument that
the examples of gloss income "in no way restricts or limits" the preceding phrase "'Gross
income' means the gross income from public service company business" contained in HRS
§ 239-2. The application of the doctrine of ejusdem generis in the present case does not conflict
with Hawaiian Telephone because it; in fact, restricts and limits the genera] phrase to objects of
like kind and character with the specific examples of gross income within the statute.
D. ]n re Hawaiian Telephone Co. is not inconsistent \\~ith the Director's
Position
Taxpayer heavily relies on ]n re Hawaiian Telephone Co., 6l Naw. 572, 608 P.2d 383
(1980). Hawaiian Teleohone does deal with the definition of"eross income"; however; it is
clearly distinguishable from the present case.
- 95 ] 82 ?.DOC 14
]n Hav~~aiian Telephone, Hawaiian Telephone paid PSC tax on revenue from the
transmission of telephone messages, but did not pay PSC tax on certain telephone directory
revenues. The court framed the resolution of the case on "whether the definition of 'gross
income from ...the conveyance or transmission of telephone messages or the furnishing of
facilities for the transmission of intelligence by electricity' includes, or can be reasonably
construed to include Hawaiian Telephone's directory revenues." Hawaiian Telephone at 579-80,
608 P.2d at 388. The court found the directory revenue non-taxable under the PSC tax. The
court's opinion includes the following reasoning:
~t does not follow absent speciTc statutory authorirv shot revenues
earned by Dublic service companies should be taxable under Chonter 239
merely because the activities from which they were Qenerated are Hart of
or incident to Dublic service company business. Furthermore, it would
not, in the case at bar, be proper for this court to venture beyond the plain
language of the statute to determine whether it can reasonably be
construed to include the receipts in controversy, since we fail ro discern
any ambi2uirv in the Iangua¢e and we are not convinced that a literal
oDDlication would lead to an absurd result. (Emphases added.]
Hawaiian 7elenhone at 584, 608 P.2d at 391.
]n the present case; the issue is not a matter of whether income generated as apart ojor
incident" to public utility business is subject to PSC tax; rather, the issue is a matter of whether
the income generated from the core of the public utility business is subject to public utility
business. Unlike Taxpayer, Hawaiian Telephone filed and remitted payment for PSC tax for
income generated by its core public utility business (telephone services).
Further, HRS § 239-2 expressly provides "unless otherwise required by context." In
Hawaiian Telephone; context did not require a different result. The Hawaii Supreme Court in
Hawaiian Telephone specifically found that there was no ambiguity and the literal reading did
not lead to an absurd result in Hawaiian Telephone. ]n Hawaiian Telephone, it was undisputed
that the income generated from the core public utility business was subject to PSC tax. ]n the
95]82 2.DOC 15
present case, none of the income generated from a public utility would be subject to PSC tax. ]t
is this crucial difference that leads to the absurd result in the present case.
Thus, Hawaiian Telephone is not inconsistent with the Director's position.
E. The Rules of Construction on Which Taxpayer Relies do not Resolve the
Incompatibility in the Present Case and Their Application is Limited
Taxpayer argues that the fact that gross income of private sewer companies is not
specifically identified within the definition of gross income illustrates that the legislature
intended that it be excluded. This rule of construction (maxim of expressio unius esi exclusio
alterius), on wh~Ch Taxpayer relies, however, exists only as an aid to statutory interpretation and
its application is limited to ascertaining legislative intent that is not otherwise apparent.
International Savines and Loan Association. Limited v. Wiie, 82 Hawaii ] 97, 201, 921 P.2d
117, 121 (1996). In the present case, as discussed above, legislative intent is otherwise apparent.
Quoting Hawaiian Telephone, Taxpayer also argues that the rule of strict construction
requires that statutes imposing taxes must be read in the taxpayer's favor. Taxpayer's Mem. in
Support of its MSJ, pp. 6-8. Although not emphasized, Taxpayer's own quotation includes the
following language of the court in Hawaiian Telephone:
]t is important to note, however, that the rule of strict
construction with regard to taxing statutes should only be resorted
to "as an aid to construction when ambiguity or doubt is apparent
on the fact of the statute; and then only after other possible
extrinsic aids of construction available to resolve the ambiguity has
been exhausted." [Citations omitted.]
See Taxpayer's 1`9emorandum in Support of its MSJ; p. 7; Hawaiian Telephone at 578-79, 608
P.2d 388. ]n the present case, other extrinsic aids of construction available resolves the
ambiguity of the statute and it is unnecessary to resort to the rule.
Even if these rules applied, they are inconsistent with the expressed history and structure
of the PSC tax and fail to resolve the potential violation of the Equal Protection Clause.
95]82 2.DDC ]6
VI. CONCLUSION
~ ,Taxpayer generated income from its public utility business and cannot escape PSC tax
liability based on a technical ambiguity in the statute. The gross income generated from
Taxpayer's core private sewer company business is "gross income" subject to PSC tax. To
construe the applicable statutes otherwise would mean that PSC tax on public utilities is not
applicable to a member of the public utility classification. This is an absurd that (1) is
inconsistent with and illogical given the history and structure of PSC tax and (2) requires the
Department of ?axation to treat private sewer companies more favorably than the other public
utilities and potentially violate the Equal Protection Clause.
Based on the Motion, the memorandum in suppon of the Motion, and the record herein,
Appellant respectfully requests that this Court grants this Motion finding that, as a matter of law,
that Taxpayer's income generated from its public utility business is gross income subject to PSC
tax, and/or any other relief it deems just.
DATED: Honolulu, Hav.~aii, June 23, 2004.
MARK BENNETT
Attomey Gener(al/'~J
By. ~ 2 ~s
MARY H.Y. BAHNG
Deputy Attomey Genera]
Attomey for Appellant
DIRECTOR OF TAXAT]ON,
STATE OF HAWAI]
95182 2.DOC ] 7
IN THE TAX APPEAL COURT OF THE
~ STATE OF HAWAll
IN THE MATTER OF THE TAX APPEAL CASE NO.02-0067
of NOTICE OF HEARING OF MOT10N AND
CERTIFICATE OF SERVICE
DIRECTOR OF TAXATION,
STATE OF HAWAII,
Appellant,
vs.
LA]E TREATMENT WORKS, INC.,
Tax a er-A ellee.
NOTICE OF HEARING OF MOT10N
TO: ALAN J. MA, ESQ.
BRUCE D. H]ENEMAN, ESQ.
Gerson & Hieneman
American Savings Bank Tower, Suite 780
1001 Bishop Street
Honolulu, Hawaii 96813
NOTICE 1S HEREBY GIVEN that APPELLANT D1REC?OR OF 7AXAT10N, STATE
OF HAWAII'S MOTION FOR PARTIAL SUMMARY JUDGMENT FINDING THAT
TAXPAYER'S INCOME GENERATED FROM ]TS PUBLIC UTILITY BUSINESS 1S GROSS
INCOME SUBJECT TO PSC TAX shall come on for hearing before the Honorable Gary W.B.
Chang, Judge of the Tax Appeal Court, Circuit Court of the First Circuit, in his courtroom at 777
Punchbowl Street, Honolulu. Hawaii on July ]2, 2004 at 9:00 o'clock a.m, or as soon as counsel
maybe heard.
95 7 82_2. DOC
CERTIFICATE OF SERVICE
1 hereby certify that on June 23, 2004, a copy of the foregoing was duly served by HAND
DELIVERY addressed as follows:
ALAN MA, ESQ.
BRUCE D. HIENEMAN, ESQ.
Gerson & Hieneman
American Savings Bank Tower, Suite 780
1001 Bishop Street
Honolulu, Hawaii 96813
Attorneys for Taxpayer-Appellee
LAZE TREATMENT WORKS, INC.
DATED: Honolulu, Hawaii, June 23, 2004.
MARY H. Y. BAHNG
Deputy Attorney Genera]
Attorney for Appellant
DIRECTOR OF TAXATION, STATE OF HAWAII
~siez z.DOC 2