The Real Estate Investment Trusts taxation bill, Senate Bill 301, has advanced this far into the legislative session because a grassroots movement had a simple message: Some of the largest landowners in our state — including the Ala Moana and Pearl Ridge Shopping Centers and the Hilton Hawaiian Village — do not pay Hawaii corporate income tax, while these grassroots citizens as well as other corporations and property owners pay their fair share.

REITs own about $18 billion worth of properties in Hawaii, and DBEDT estimates that the corporate tax on income earned from these REITs properties would total in the tens of millions of dollars annually.

As a retired Hawaii tax attorney with 45 years of corporate tax law experience and five years working at the IRS, I’d like to point out that the REITs’ argument that they shouldn’t have to pay Hawaii corporate income tax because they also pay general excise tax and property tax is absurd and disingenuous at best.

That’s as if the REIT executives stated they should not be paying Hawaii personal income tax because they already pay property tax on their houses and GET on every purchase from Longs.

Hilton Hawaiian Village entrance. 29 july 2015. photograph Cory Lum/Civil Beat

The Hilton Hawaiian Village in Waikiki is owned by a company that does not pay corporate income tax.

Cory Lum/Civil Beat

Moreover, property tax and GET on commercial properties are effectively paid by the tenants and merely collected and passed on to the Hawaii tax authorities by REITs or any other real estate owner.

Federal law provides that REIT shareholders pay income tax on REIT earnings when distributed as dividends. And as a practical matter, close to 100% of REIT earnings are distributed annually as dividends to their shareholders. States with income taxes receive a tax on the dividends paid to their resident shareholders on REIT income.

Other States Do It

Hawaii’s problem is that we have the largest amount of REIT investment in the country per capita, but a minuscule portion of REIT shareholders — only about 3% of Hawaii REIT shareholders reside in this state. Thus, the income tax from Hawaii real estate that clearly deserves to be paid to Hawaii is in fact being paid to other states.

The federal government has a similar problem with respect to non-U.S. resident REIT shareholders. The federal government simply applies a withholding tax to REIT dividends, which the REITs then pay over to the Treasury.

This is basically identical to the withholding we all see in our paychecks, and is currently collected for some smaller Hawaii real estate companies with nonresident shareholders and being considered by the legislature for real estate partnerships.

Like payroll withholding, REIT shareholders would receive a credit in their home state for tax already withheld for them in Hawaii. It would just put the income tax dollars into the coffers of the State where the services were provided to earn the income.

It’s hard for me to understand why the REITs have not been willing to simply accept this alternative, rather than risking a direct corporate income tax, as proposed in SB 301.

“Hawaii has many problems that could be addressed with this revenue.”

Wouldn’t it be nice if some local REITs that have otherwise been such outstanding Hawaii corporate citizens would say something like, “It’s fair that the state of Hawaii collect GET, property, and income tax for the services it provides to those owning prime Hawaii real estate.”

“Hawaii has many problems that could be addressed with this revenue. Hawaii is suffering more from this REITs tax situation than any other state in the country, so naturally should be a leader in rectifying the inequity.”

Only in the land of aloha would this even be a possibility.

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