SB 2741: GET; Agricultural Inputs; Exemption

A BILL FOR AN ACT

RELATING TO THE GENERAL EXCISE TAX.

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

     SECTION 1.  The legislature finds that recent statewide research on food insecurity indicates that the State continues to experience one of the highest household food insecurity rates in the nation, with approximately one-third of households reporting difficulty obtaining enough food and significantly higher rates in certain counties.  Farmers and ranchers throughout the State face extraordinarily high operating costs, including costs associated with inputs, land, transportation, energy, and labor.  The structure of the general excise tax (GET) imposes additional burdens on Hawaii's agricultural producers because the GET is pyramided, meaning it is applied at multiple stages of production, processing, distribution, and retail.

     The legislature further finds that although direct farm‑gate sales of certain raw agricultural products may be exempt under existing law, most producers who participate in modern supply chains incur GET at several points along the path from seed to final sale, including purchases of seeds, soil amendments, fertilizer, feed, equipment, supplies, packaging, and contracted services; sales to processors, distributors, or wholesalers; and retail sales to consumers.  As a result, products grown in the State may carry an effective tax burden significantly higher than the nominal four per cent rate, with cumulative GET impacts sometimes reaching five to eight per cent or more of the final retail price.  This places locally grown products at a competitive disadvantage relative to imported goods that benefit from lower production costs and do not experience the State's GET structure.

     The legislature believes that these cumulative tax effects hinder growth in the State's agricultural sector, limit farmers' ability to reinvest in their operations, constrain expansion of diversified agriculture, and impede the State's goals for food security, agricultural resilience, and reduced dependence on imported food.  Removing the GET from all agricultural inputs will reduce production and distribution costs for all farmers and value-added food producers; improve price competitiveness for locally grown foods; strengthen rural economies and small farms; reduce grocery costs for households statewide; and advance statewide food security, resilience, and self-sufficiency goals.

     Therefore, the purpose of this Act is to provide a general excise tax exemption for agricultural inputs used in commercial agricultural production.

     SECTION 2.  Chapter 237, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

     "§237-    Exemption for agricultural inputs.  (a)  Beginning July 1, 2026, there shall be exempted from, and excluded from the measure of, the taxes imposed by this chapter, all of the value or gross proceeds arising from any agricultural inputs used in commercial agricultural production.

     (b)  The department may adopt rules pursuant to chapter 91 necessary to effectuate the purposes of this section.

     (c)  For the purposes of this section, "agricultural inputs" means any action, cost, or material, or other input used to produce an agricultural commodity, including but not limited to chemicals, feed, fertilizer, fuel, seeds, plants, supplies, equipment parts, and other inputs."

     SECTION 3.  New statutory material is underscored.

     SECTION 4.  This Act shall take effect on July 1, 2050.

Report Title:

GET; Agricultural Inputs; Exemption

Description:

Exempts agricultural inputs from the general excise tax.  Effective 7/1/2050.  (SD1)

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

A BILL FOR AN ACT

relating to the general excise tax.

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

     SECTION 1.  The legislature finds that recent statewide research on food insecurity indicates that the State continues to experience one of the highest household food insecurity rates in the nation, with approximately one-third of households reporting difficulty obtaining enough food and significantly higher rates in certain counties.  Farmers and ranchers throughout the State face extraordinarily high operating costs, including costs associated with inputs, land, transportation, energy, and labor.  The structure of the general excise tax (GET) imposes additional burdens on Hawaii's agricultural producers because the GET is pyramided, meaning it is applied at multiple stages of production, processing, distribution, and retail.

     The legislature further finds that although direct farm‑gate sales of certain raw agricultural products may be exempt under existing law, most producers who participate in modern supply chains incur GET at several points along the path from seed to final sale, including purchases of seeds, soil amendments, fertilizer, feed, equipment, supplies, packaging, and contracted services; sales to processors, distributors, or wholesalers; and retail sales to consumers.  As a result, products grown in Hawaii may carry an effective tax burden significantly higher than the nominal four per cent rate, with cumulative GET impacts sometimes reaching five to eight per cent or more of the final retail price.  This places locally grown products at a competitive disadvantage relative to imported goods that benefit from lower production costs and do not experience the State's general excise tax structure.

     The legislature believes that these cumulative tax effects hinder growth in the State's agricultural sector, limit farmers' ability to reinvest in their operations, constrain expansion of diversified agriculture, and impede the State's goals for food security, agricultural resilience, and reduced dependence on imported food.  Removing the GET from Hawaii-grown food at all stages of the supply chain will reduce production and distribution costs for farmers and value-added food producers; improve price competitiveness for locally grown foods; strengthen rural economies and small farms; reduce grocery costs for households statewide; and advance statewide food security, resilience, and self-sufficiency goals.

     Therefore, the purpose of this Act is to phase in a general excise tax exemption for locally grown food.

     SECTION 2.  Chapter 237, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

     "§237-    Exemption for locally produced food.  (a)  Beginning July 1, 2026, there shall be exempted from, and excluded from the measure of, the taxes imposed by this chapter, all of the value or gross proceeds arising from:

     (1)  The sale of fresh, unprocessed produce by farmers, ranchers, or agricultural producers;

     (2)  The sale of fresh, unprocessed local proteins, including beef, pork, poultry, seafood, aquaculture products, eggs, and dairy products, by farmers, ranchers, fishers, aquaculture operations, or agricultural producers;

     (3)  The sale of fresh, unprocessed produce and fresh, unprocessed local proteins by processors, wholesalers, and distributors; and

     (4)  The retail sale for home consumption of fresh, unprocessed produce and fresh, unprocessed local proteins.

     (b)  Beginning July 1, 2028, in addition to all products exempted from this chapter by subsection (a), there shall be exempted from, and excluded from the measure of, the taxes imposed by this chapter all the value or gross proceeds arising from all locally produced food, including:

     (1)  All locally produced proteins, including beef, pork, poultry, seafood, aquaculture products, eggs, and dairy products, regardless of form or level of processing;

     (2)  All locally grown fruits, vegetables, and staple crops;

     (3)  Other foods grown, raised, caught, or produced within the State; and

     (4)  Value-added local food products; provided that the majority of agricultural inputs by weight or volume are locally grown, raised, or caught.

     (c)  Taxpayers claiming the exemption shall maintain records as required by the department demonstrating compliance.

     (d)  The department, in consultation with the department of agriculture and biosecurity, shall adopt rules pursuant to chapter 91 to:

     (1)  Certify producers and qualifying products pursuant to subsections (a) and (b);

     (2)  Establish standards for determining the local content of value-added products;

     (3)  Implement labeling or disclosure requirements to ensure consumer transparency; and

     (4)  Establish procedures to verify wholesale, processing, and retail compliance.

     (e)  The department may adopt rules pursuant to chapter 91 necessary to effectuate the purposes of this section.

     (f)  For the purposes of this section:

     "Fresh, unprocessed local proteins" means locally produced beef, pork, poultry, seafood, aquaculture products, eggs, or dairy products that:

     (1)  Contain no added salt, sugar, oils, fats, marinades, brines, or preservatives;

     (2)  Have not been cooked, cured, smoked, canned, or otherwise processed; and

     (3)  Are in their raw, whole, or minimally handled state.

     "Fresh, unprocessed produce" means whole fruits and vegetables grown in Hawaii that contain no added salt, sugar, oils, fats, or other additives and that have not been cooked, canned, pickled, preserved, or subjected to value-added processing.  "Fresh, unprocessed produce" shall align with the standards described pursuant to section 141-13.

     "Locally produced food" means any food or agricultural product grown, raised, caught, produced, or cultivated within the State, including but not limited to fruits, vegetables, staple crops, beef, pork, poultry, seafood, aquaculture products, eggs, and dairy products.

     "Retail sale for home consumption" means the sale of food intended for off-premises consumption and does not include prepared foods taxed under section 237-13(2)(C).

     "Value-added local food product" means a food item primarily composed of locally produced agricultural ingredients and processed, milled, packaged, or otherwise prepared within the State."

     SECTION 3.  New statutory material is underscored.

     SECTION 4.  This Act shall take effect on July 1, 2026.

Report Title:

GET; Locally Produced Food; Exemption

Description:

Phases in exemptions of locally produced food from the general excise tax.

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

STAND. COM. REP. NO. 2677

Honolulu, Hawaii

RE:     S.B. No. 2741

        S.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2026

State of Hawaii

Sir:

     Your Committee on Agriculture and Environment, to which was referred S.B. No. 2741 entitled:

"A BILL FOR AN ACT RELATING TO THE GENERAL EXCISE TAX,"

begs leave to report as follows:

     The purpose and intent of this measure is to phase in exemptions of locally produced food from the general excise tax.

     Your Committee received testimony in support of this measure from the Department of Agriculture and Biosecurity; Hawaiʻi Farm Bureau; Hawaiʻi Farmers Union United; Hawaii Food Industry Association; Hawaii Cattlemen's Council, Inc.; Hawaiʻi Food Bank; Hawaiʻi Food+ Policy; and two individuals.

     Your Committee received comments on this measure from the Department of the Attorney General, Department of Taxation, and Tax Foundation of Hawaii.

     Your Committee finds that farmers and ranchers throughout the State face extraordinarily high costs, including costs associated with inputs, land, transportation, energy, and labor.  The multistep process for local agricultural production has led to the State's general excise tax being applied at each producer, processor, distributor, and retail level, a burden that imported products are capable of avoiding by completing the production and processing out-of-state.  Your Committee further finds that lowering food costs for food insecure households throughout the State and assisting local producers is essential to increasing economic stability in the State.  By reducing pyramided general excise tax burdens agricultural inputs will strengthen the State's food security and encourage value-added production.

     Your Committee acknowledges the concerns raised in testimony by multiple testifiers that economic protectionism may conflict with the Commerce Clause of the United States Constitution due to excluding out-of-state produce and food from the general excise tax exemption.  Therefore, amendments to this measure are necessary to address this concern.

     Your Committee has amended this measure by:

     (1)  Deleting language that would have phased in exemptions for locally produced food from the general excise tax;

     (2)  Inserting language that exempts all agricultural inputs used in commercial agricultural production from the general excise tax;

     (3)  Amending section 1 to reflect its amended purpose;

     (4)  Inserting an effective date of July 1, 2050, to encourage further discussion; and

     (5)  Making technical, nonsubstantive amendments for the purposes of clarity and consistency.

     As affirmed by the record of votes of the members of your Committee on Agriculture and Environment that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2741, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 2741, S.D. 1, and be referred to your Committee on Ways and Means.

Respectfully submitted on behalf of the members of the Committee on Agriculture and Environment,