HAR §18-235-12.2. Energy conservation devices for hot water heaters; income tax credit

(a) Limitation of credit. Section 235-12.2, HRS, provides a tax credit against the tax imposed by chapter 235, HRS, to resident individuals and corporations who have installed energy conservation devices for hot water heaters. (b) Claim for credit. (1) Credit shall be claimed for the year the insulation material was purchased and installed in this State. Hence, where the insulation material is purchased in one year and installed in another, the credit shall be allowed in the year of installation. (After 12/31/77 but before 12/31/84.) (2) The claim for tax credit, not to exceed $30.00 shall be claimed against the income tax liability and any remaining credit shall be carried forward and used in subsequent taxable years until exhausted. The claim shall contain the necessary information provided for on the form and shall be attached to the income tax return in the year first installed and subsequent taxable years for which a tax credit is claimed. The forms provided are: N-159 Individual taxpayer; N-159-A Taxpayers who are members of a partnership, estate or trust, or small business corporation; and N-307 Corporation (3) Taxpayer shall maintain proper supporting documents to substantiate the cost of the energy conservation device for the period the claim remains valid and upon request shall submit such documents to the department of taxation. [Eff 2/16/82] (Auth: HRS §§231-3(9), 235- 12.2, 235-118) (Imp: HRS §235-12.2) HRS §235-12.2 §18-235-12.5-01 INCOME TAX LAW 235- 42 (Unofficial Compilation as of 12/31/2025) §18-235-12.5-01 Definitions. (a) As used in section 235-12.5, HRS, and sections 18-235-12.5-01 through 18-235-12.5-05: (1) “Actual cost” means the amounts incurred or paid for renewable energy technology systems under section 235-12.5(a), HRS, including peripheral equipment ordinarily and necessarily required for system operation and installation. Actual cost shall not include any consumer incentive payments or premiums offered with the system, regardless of when such payment or premium is made to the customer, and shall not include any amount for which another credit is claimed under chapter 235, HRS. Any amounts incurred or paid for the repair, construction, or reconstruction of a structure or building in conjunction with the installation and placing in service of a solar or wind energy system shall not constitute a part of actual cost for the purposes of section 235-12.5, HRS. (2) “Commercial property” means a property which cannot be properly characterized as residential or mixed-use property. A hotel, or any other place in which lodgings are regularly furnished to transients for consideration, in which all of the rooms, apartments, suites, or the like are occupied by a transient for less than one hundred eighty consecutive days for each letting will be considered commercial property to the extent of that use. (3) “Installed and placed in service” means that the system is ready and available for its specific use. With respect to systems installed for residential property, all requirements will be completed and a system will be deemed to be installed and placed in service when: (1) The actual cost has been incurred; (2) all installation, including all related electrical work, has been completed; and (3) any required requests for inspection of the installation has been received by the appropriate government agency. However, if the residential installation fails to pass all the required inspections the credit is properly claimed in the taxable year in which the system passes such inspection. (4) “Mixed-use property” means a property on which at least one residence exists and commercial activity takes place. (5) “Multi-family residential property” means a property on which more than one residence is located. The determination that property is multi-family residential property is fact specific, but in general and in the absence of other relevant facts to the contrary, multi-family residential property will be real property that is described in a recorded title and that has more than one mailing address or separate entrances to separate living areas. The following exceptions may apply: (A) The Ohana House Exception: If a single property has two separate residences, each occupied by members of a family as defined in the Internal Revenue Code, section 267(b)(1), then each residence will be considered a separate single-family residential property if the system services both residences. Partners in a civil union will also be considered members of a family for the purpose of this exception; or (B) The Directed Use Exception: If a system only services one residence on a multi- family residential property, then the system will be treated as servicing a single-family residential property. (6) “Property” means a single, definable portion of real property located in the State as described in a title recorded with the Bureau of Conveyances or Land Court of the state of Hawaii and that the applicable law allows to be sold in fee simple separately from any other real property located in the State. For purposes of the Renewable Energy Technologies Income Tax Credit under section 235-12.5, HRS, all such titled property in the State is to be characterized as commercial, residential, or a mix of the two (mixed-use). When special circumstances exist, the department, at its discretion, may determine whether an interest qualifies as a “property” for the purposes of the credit on a case-by-case basis. (7) “Renewable energy technology system” means a new system that captures and converts a renewable source of energy, such as solar or wind energy, into a usable source of thermal or mechanical energy, electricity, or fuel. (8) “Residence” means dwelling place or place of habitation, an abode. (9) “Single-family residential property” means a property on which one residence is located. (10) “Standard Test Conditions” means 25 degrees Celsius cell/module temperature, 1,000 watts per square meter (W/m2) irradiance, air mass 1.5 (AM 1.5) spectrum. (11) “Total output capacity” means the combined individual output capacities (maximum power) of all identifiable facilities, equipment, apparatus or the like that make up the renewable energy technology system installed and placed in service during a taxable year measured in kilowatts. The total output capacity of a solar energy system shall be calculated using HRS §235-12.5 INCOME TAX LAW §18-235-12.5-03 235- 43 (Unofficial Compilation as of 12/31/2025) the manufacturer’s published specifications of the components of the solar energy system. Generally, for photovoltaic solar energy systems, total output capacity is the output capacity (maximum power) of each cell, module or panel at Standard Test Conditions in kilowatts multiplied by the number of cells, modules or panels installed and placed into service during a taxable year. The amount of energy actually produced is not relevant to calculating total output capacity. [Eff 1/02/14] (Auth: HRS §§231-3(9), 235-12.5, 235-118) (Imp: HRS §235- 12.5) §18-235-12.5-02 (Reserved) §18-235-12.5-03 Other Solar Energy Systems. (a) “Solar energy system” means any identifiable facility, equipment, apparatus, or the like that converts solar energy to useful thermal or electrical energy for heating, cooling, or reducing the use of other types of energy that are dependent upon fossil fuel for their generation. Unless subsection (b) applies, each solar energy system installed and placed in service on or after January 1, 2013 shall have a total output capacity at Standard Test Conditions as follows: (1) Single-family residential property: For credits calculated under section 235-12.5(a)(1), HRS, and capped under section 235-12.5(b)(2)(A), HRS, each system for which a credit is claimed shall have a total output capacity of at least 5 kilowatts. (2) Multi-family residential property: For credits calculated under section 235-12.5(a)(1), HRS, and capped under section 235-12.5(b)(2)(B), HRS, each system for which a credit is claimed shall have a total output capacity of at least 0.360 kilowatts per unit per system. (3) Commercial property: For credits calculated under section 235- 12.5(a)(1), HRS, and capped under section 235-12.5(b)(2)(C), HRS, each system for which a credit is claimed shall have a total output capacity of at least 1,000 kilowatts. Example 1: Taxpayer installs and places into service solar energy equipment including 20 photovoltaic panels, each of which has an output capacity (maximum power) of 0.250 kilowatts on a single-family residential property. The installation has a total output capacity of 5 kilowatts (0.250 kilowatts times 20 photovoltaic panels). One system has been installed and placed into service for the purpose of calculating the credit. The actual cost of the system may not be divided in order to claim multiple credits because the solar energy system only meets the total output capacity requirement for one system. Example 2: Taxpayer installs and places into service solar energy equipment including 40 photovoltaic panels, each of which has an output capacity (maximum power) of 0.180 kilowatts on a multi-family residential property. The installation has a total output capacity of 7.2 kilowatts (0.180 kilowatts times 40 photovoltaic panels). If the installation serves 20 units, the total output capacity for each system must be at least 7.2 kilowatts (0.360 kilowatts times 20 units). One system has been installed and placed into service for the purpose of calculating the credit. Example 3: Taxpayer installs and places into service solar energy equipment including 4,000 photovoltaic panels, each of which has an output capacity (maximum power) of 0.250 kilowatts on a commercial property. The installation has a total output capacity of 1,000 kilowatts (0.250 kilowatts times 4,000 photovoltaic panels). Since each system must have a total output capacity of at least 1,000 kilowatts, one system has been installed and placed into service for the purpose of calculating the credit. Example 4: Taxpayer installs and places into service solar energy equipment including 40 photovoltaic panels, each of which has an output capacity (maximum power) of 0.250 kilowatts on a single-family residential property. The installation has a total output capacity of 10 kilowatts (0.250 kilowatts times 40 photovoltaic panels). Since each system must have a total output capacity of at least 5 kilowatts, two systems have been installed and placed into service for the purpose of calculating the credit. HRS §235-12.5 §18-235-12.5-04 INCOME TAX LAW 235- 44 (Unofficial Compilation as of 12/31/2025) Example 5: During March of a taxable year, Taxpayer installs and places into service solar energy equipment including 10 photovoltaic panels, each of which has an output capacity (maximum power) of 0.250 kilowatts on a single-family residential property. During August of the same taxable year, Taxpayer installs and places into service additional equipment including 10 photovoltaic panels, each of which also has an output capacity (maximum power) of 0.250 kilowatts on the same the single-family residential property. The total output capacity of both installations is 5 kilowatts [(0.250 kilowatts times 10 photovoltaic panels) + (0.250 kilowatts times 10 photovoltaic panels)] because the output capacity of both installations must be combined. Since each system must have a total output capacity of at least 5 kilowatts, one system has been installed and placed into service for the purpose of calculating the credit. (b) The credit may be claimed for one solar energy system installed and placed in service per property which fails to meet the applicable total output capacity requirement as set forth in subsections (a)(1) through (a)(3), where: (1) Only one solar energy system, for the purposes of the credit, has been installed and placed in service during a taxable year on a single property; or (2) More than one solar energy system, for the purposes of the credit, has been installed and placed in service during a taxable year on a single property and one of the systems fails to meet the applicable total output capacity requirement. Example 6: Taxpayer installs and places into service solar energy equipment including 10 photovoltaic panels, each of which has an output capacity (maximum power) of 0.250 kilowatts on a single-family residential property. The installation has a total output capacity of 2.5 kilowatts (0.250 kilowatts times 10 photovoltaic panels). Although the system does not meet the total output capacity requirement, subsection (b)(1) permits the claiming of the credit because only one system has been installed and placed into service on one property. Example 7: Taxpayer installs and places into service solar energy equipment on a single-family residential property which has a total output capacity of 7.5 kilowatts and an actual cost of $37,500. In order to calculate the credit, the actual cost per kilowatt must be determined by dividing the actual cost by the total output capacity. The actual cost per kilowatt is $5,000 ($37,500 divided by 7.5 kilowatts). Since a system installed and placed in service on a single­ family residential property must have a total output capacity of at least 5 kilowatts, the actual cost of the first system is $25,000 ($5,000 times 5 kilowatts). The credit for the first system is $5,000 because thirty-five percent of $25,000 exceeds the applicable cap of $5,000. A credit for the second system may also be claimed because subsection (b)(2) permits taxpayers to claim the credit for one system per property that fails to meet the total output capacity requirement. The actual cost of the second system is $12,500 ($5,000 times 2.5 kilowatts). The credit for the second system is $4,375 or thirty- five percent of $12,500. [Eff 1/02/14] (Auth: HRS §§231-3 (9), 235-12.5, 235-118) (Imp: HRS §235-12.5) §18-235-12.5-04 (Reserved) §18-235-12.5-05 Multiple Properties and Mixed­ use Property. (a) Property will be considered residential or mixed-use if any portion of the property is being used as a residence. If at the time of installation and placing in service of the system the property is not occupied, then property will be considered residential or mixed- use if any portion of the property is intended for use as a residence. (b) Allocation. Where a single system is installed and placed in service to serve more than one property or to service a mixed-use property the taxpayer shall apply a reasonable allocation method such as square footage or a measure of use as follows: (1) For a system installed and placed in service to serve more than one property, the actual cost of a single system servicing multiple properties is allocated among the properties. The actual cost of other solar energy systems shall be allocated in a manner consistent with section 18-235-12.5-03. With multiple properties, the appropriate cap is applied for each separate property. HRS §235-12.5 INCOME TAX LAW §18-235-12.5-05 235- 45 (Unofficial Compilation as of 12/31/2025) Example 1: Assume Taxpayer installs and places into service a wind farm that services one community of 50 single-family homes and 10 separate commercial properties. Each property is equal in size and use, the allocation of the actual cost would be made equally to each property. Further assume that a $600,000 wind­ powered system were installed and placed in service for these properties, the credit would be calculated as follows: Allocation of cost: The actual cost of $600,000 would be divided equally among the properties, allocating $10,000 to each property. Single-family residential: Each single­ family residential property would be treated independently. In each case, twenty percent of $10,000, or $2,000, would be compared against the $1,500 single-family residential property cap. Under the facts of this example, each single­ family residential property would generate a $1,500 credit, for a total of $75,000 (50 properties times $1,500). Commercial: Each commercial property would be treated independently. In each case, twenty percent of $10,000, or $2,000, would be compared against the $500,000 commercial property cap. Under the facts of this example, each commercial property would generate a $2,000 credit, for a total of $20,000 (10 properties times $2,000). The total credit for the $600,000 wind- powered system is $1,500 for each single-family residential property ($75,000) plus $2,000 for each commercial property ($20,000) for a total credit of $95,000. Example 2: Taxpayer, an independent energy provider installs and places into service a wind farm that does not service any particular property, but is entirely directed into the energy grid of the local electricity provider. The renewable energy technology system will be considered to be servicing commercial property only; no allocation is necessary. However, if an identifiable connection exists to customers situated on the property where the power is produced in addition to a connection to the energy grid of the local electricity provider, then the cost of the system must be allocated among and between the particular property or properties being serviced and the connection to the energy grid, which is treated as servicing a single commercial property. Example 3: Taxpayer installs and places into service solar energy equipment for a condominium that contains both residential and commercial units. Each condominium unit has a separate title, so each unit would be treated as a separate property. The taxpayer must reasonably allocate the actual cost of the system between the residential and commercial properties. The condominium contains 50 single-family units and 10 commercial units of equal size and use, and a $600,000 photovoltaic energy system that has a total output capacity of 60 kilowatts. The credit is calculated as follows: Allocation of cost: The actual cost per kilowatt is $10,000 ($600,000 divided by 60 kilowatts). Since there are 60 separate units that have equal energy use, the actual cost of a 1 kilowatt portion of the installation must be allocated to each unit. Thus, actual cost of $600,000 would be divided equally among the 60 properties, allocating $10,000 to each property. Single-family residential: Although each system does not meet the total output capacity requirement, subsection 18- 235-12.5-03(b)(1) allows a credit to be claimed for each system because only one system has installed and placed into service on each property. Each single-family residential condo unit would be treated independently. In each case, thirty-five percent of $10,000, or $3,500, would be compared against the $5,000 single­ family residential property cap. Under the facts of this example, each single-family residential property would generate a $3,500 credit, for a total of $175,000 (50 units times $3,500). Commercial: Each commercial condo unit would be treated independently. In each case, thirty-five percent of $10,000, or $3,500, would be compared against the $500,000 commercial property cap. Each commercial property would generate a $3,500 credit, for a total of $35,000 (10 properties times $3,500). The total credit for the $600,000 photovoltaic energy system is $3,500 for each single- family condo unit ($175,000) plus $3,500 for each commercial condo unit ($35,000) for a total credit of $210,000. (2) For a system installed and placed in service to service a mixed-use property, the actual cost of the system is allocated between the residential use (which may be single-family use or multiple­ family use) and the commercial use. For a photovoltaic energy system, thirty-five percent of the cost allocated to residential use is compared against either the single-family §18-235-12.5-05 INCOME TAX LAW 235- 46 (Unofficial Compilation as of 12/31/2025) residential cap or the multiple-family residential cap; and thirty-five percent of the cost allocated to commercial use is compared against the commercial property cap. Example 4: Taxpayer is a farmer and has a dwelling and barn on one of the lots which is considered to be a mixed-use property. Taxpayer installs and places into service a renewable energy technology system that only services the barn. Allocation by use results in the system being subject only to the commercial property limitations. (Note: This is not an example of the directed use exception; an allocation would still be made, but it would be a 0% residential/100% commercial allocation based upon use.) Example 5: Same facts as Example 4, but the system services both the barn and the dwelling. A portion of the system’s actual cost would be subject to the commercial property limitations and the rest would be subject to the single­ family residential property limitations. Example 6: Taxpayer installs and places into service renewable energy technology equipment for an apartment complex that contains both residential and commercial units. Each unit is not separately titled, so each unit would not be treated as separate property. Instead, the titled property is the entire apartment complex. Since the titled property is mixed-use, the taxpayer will have to reasonably allocate the actual cost of the system between the residential and commercial uses of the property. The complex contains 50 single-family units and 10 commercial units of equal size and use, and a $600,000 photovoltaic energy system that has a total output capacity of 60 kilowatts. The credit would be calculated as follows: Allocation of cost: The actual cost per kilowatt is $10,000 ($600,000 divided by 60 kilowatts). Since each of the units has an equal energy use, the actual cost of $600,000 would be divided between residential use of the property and the commercial use of the property, allocating $500,000 ($10,000 times 50 units) to the residential use and $100,000 ($10,000 times 10 units) to the commercial use. Residential Use: Since the property contains more than one residence, the proper characterization of this use is multi-family residential. Because the installation serves 50 residential units, the total output capacity of each system must be at least 18 kilowatts (0.360 kilowatts times 50 units). The total output capacity of the residential portion of the installation is 50 kilowatts. For the purpose of calculating the credit, two systems that meet the total output capacity requirement and one system that fails to meet the requirement have been installed and placed into service. The actual cost for each of the two systems which meet the 18 kilowatt total output capacity requirement is $180,000 ($10,000 times 18 kilowatts) each. Thirty-five percent of $180,000, or $63,000, would be compared against the multi-family residential property cap, or $17,500 ($350 times 50 units). Because the credit is capped at $17,500 per system, the total credit for the two systems that meet the total output capacity requirement is $35,000 ($17,500 plus $17,500). The third system has an actual cost of $140,000 ($10,000 times 14 kilowatts). Although the system does not meet the total output capacity requirement the credit may be claimed under subsection 18-235-12.5-03(b)(2). Thirty-five percent of $140,000, or $49,000, would be compared against the multi-family residential property cap, or $17,500 ($350 times 50 units). The credit for the third system is $17,500 due to the cap. The total credit for the three systems serving the multi-family residential portion of the property is $52,500 ($17,500 times 3 systems). Commercial Use: Each system serving commercial property must have a total output capacity of at least 1,000 kilowatts. The total output capacity of the installation serving the commercial portion of the property is 10 kilowatts and the actual cost is $100,000 ($10,000 times 10 kilowatts). Since the portion of the installation serving commercial property fails to meet the total output capacity requirement and the credit is already claimed for a system that does not meet the applicable total output capacity requirement on a single property, a credit may not be claimed for the installation that serves the commercial portion of the property. The total credit for the entire $600,000 solar energy installation is $52,500. Note: A credit for the commercial part of the installation may have been claimed if the credit for the third multi-family residential system had not been claimed. [Eff 1/02/14] (Auth: HRS §§231-3(9), 235-12.5, 235-118) (Imp: HRS §235-12.5) INCOME TAX LAW §18-235-17-02 235- 47 (Unofficial Compilation as of 12/31/2025) §18-235-12.5-06 Application of sections 18-235-12.5-01 through 18-235-12.5-05. Sections 18-235- 12.5-01 through 18-235-12.5-05 shall apply to renewable energy technology systems that are installed and placed in service on or after January 1, 2013. To the extent that sections 18-235-12.5-01 through 18-235-12.5-05 conflict with guidance issued by the department prior to January 1, 2013, these sections shall prevail. [Eff 1/02/14] (Auth: HRS §§231-3(9), 235-12.5, 235-118) (Imp: HRS §235-12.5) §18-235-13 (Reserved) §18-235-17-01 Definitions. For purposes of sections 18-235-17-01 through 18-235-17-19: “Aggregate cap” means the total amount of credits that may be claimed by all taxpayers claiming the credit in a particular tax year. The aggregate cap is $50,000,000 and applies to taxable years beginning after December 31, 2018. “Hawaii film office” means the office within the department of business, economic development, and tourism that is responsible for the administration of the department of business, economic, development, and tourism’s duties and responsibilities under section 235-17, HRS. “Initial claim year” means the first calendar year for which the credit is being applied for. “Initial claim year” includes the second year of a split-year production claim if the first taxable year of the claim started in 2018. “Kit or box” means the personal tools, accessories, or other equipment of a specialist or tradesperson that utilizes the instruments to complete their specialized tasks in the motion picture and television film industry and includes a makeup artist’s equipment and a set designer’s construction tools. “Loan-out company” or “loan-out” means a wholly owned entity formed on behalf of an actor, performer, director, producer, or other such “above the line” cast or crewmember of a qualified production, that constitutes an “above the line” cast or crewmember’s means of contracting with a qualified production for services rendered. A loan-out company may employ more than one person. “Per diem” means a reimbursement provided by a qualified production to an employee or contractor for lodging, meals, and incidental expenses of the employee or contractor while the individual is away from home during work-related travel in the State. “Preproduction registration” means the same as described in section 18-235-17-03(a). “Principal photography start date” means the first date of substantial and ongoing filming of significant portions of a qualified feature-length motion picture, short film, made-for-television movie, commercial, music video, interactive game, television series pilot, single season of a television series regularly filmed in the State, television special, single television episode that is not part of a television series regularly filmed or based in the State, national magazine show, or national talk show. “Production report” means the same as described in section 18-235-17-03(b). “Qualified certified public accountant” means a certified public accountant licensed to provide accounting services in the state of Hawaii that does not have an ownership or pecuniary interest in the taxpayer. “Related entities” means two or more entities that have: (1) Any common ownership or membership; or (2) Directly or indirectly any common control. “Split-year production” means a production that has submitted a preproduction registration to the Hawaii film office indicating that production will take place over a two-year period. “Timely production report” means a production report that has been physically received by the Hawaii film office or is deemed “filed and received” under section 231-8, HRS, after the end of the calendar year and on or before ninety days from the end of the calendar year as required under section 235-17(h), HRS. A production report received before the end of the calendar year shall be deemed to have been received on the first day following the end of the calendar year. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-02 Motion picture, digital media, and film production income tax credit; allowed. (a) Section 235-17, HRS, allows qualified taxpayers to claim a refundable income tax credit equal to the following percentages of qualified costs incurred for qualified productions being produced in the State: (1) Twenty per cent of qualified production costs incurred in any county in the State with a population of over seven hundred thousand (i.e., as of the date this rule became effective, the city and county of Honolulu); and (2) Twenty-five per cent of qualified production costs incurred in any county in the State with a population of seven hundred thousand or less (i.e., as of the date this rule became effective, Kauai, Maui, and Hawaii counties). (b) To qualify for the credit under section 235-17, HRS, a qualified production must be considered a taxpayer for purposes of chapter 235, HRS. Any qualified production that conducts business activities in the State HRS §235-12.5 HRS §235-17 HRS §235-17 §18-235-17-03 INCOME TAX LAW 235- 48 (Unofficial Compilation as of 12/31/2025) subject to chapter 235, HRS, is eligible to claim the credit under section 235-17, HRS. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-03 Claim for credit; procedures; production reports; multiple entities involved. (a) Every taxpayer claiming the credit is required to prequalify for the credit under section 235-17(f), HRS, by submitting a preproduction registration to the Hawaii film office. All taxpayers must submit a preproduction registration for each qualified production to the Hawaii film office no later than seven days before the principal photography start date. The preproduction registration shall include: (1) A proof of registration with every state agency requiring registration to do business in the State; (2) A detailed synopsis of the production; (3) An estimated budget; and (4) An estimated number of Hawaii resident and non-resident hires, including above-the-line, below-the-line, and extras. The Hawaii film office will review each request for preproduction registration and issue a letter to each production, notifying the production that it has successfully prequalified under section 235-17(f), HRS. This letter shall also state the amount of credits that were tentatively allocated under section 18-235-17-04(c). Failure to obtain preproduction registration approval and a tentative allocation of credit under section 18-235-17-04(c) from the Hawaii film office shall constitute a waiver of the credit. (b) The production report required under section 235-17(h), HRS, shall be made on a calendar year basis. Not later than ninety days following the end of each calendar year in which qualified production costs were incurred, all taxpayers must submit a production report to the Hawaii film office. Failure to file a timely production report shall constitute a waiver of the credit. The production report must include: (1) A sworn statement identifying qualified production costs incurred during the calendar year; (2) Data on the production as prescribed by the Hawaii film office; (3) A detailed expenditure report with summary by department and category made on the form prescribed by the Hawaii film office; (4) A list of vendors in the format prescribed by the Hawaii film office, including the general excise tax license number of each vendor that is engaged in business in the State; (5) A list of loan-out companies in the format prescribed by the Hawaii film office, including the general excise tax license number of each loan-out company that is engaged in business in the State; (6) A list of costs for which use tax was properly paid and substantiation of such payment in the format prescribed by the Hawaii film office; (7) Crew list; (8) Confirmation of efforts to hire local talent and crew as described in section 18-235-17-16; (9) Confirmation of educational or workforce development contributions as described in section 18-235-17-17; (10) Verification of compliance with section 18-235-17-18(a); (11) A verification review as described in section 18-235-17-14; and (12) Information necessary to estimate the benefit of the credit provided in section 235-17, HRS, including: (A) The number of Hawaii resident and non-resident hires: above-the-line, below-the-line, and extras; (B) Salary and wage information for resident actors, producers, directors, and other hires; (C) Salary and wage information for nonresident actors, producers, directors, and other hires; and (D) Any other information the Hawaii film office determines necessary to estimate the benefits of the credit provided in section 235-17, HRS. Example: Tommy Taxpayer is a fiscal year taxpayer whose tax year begins on April 1 and ends on March 31. Tommy Taxpayer submits his production report that covers production costs incurred from April 1, 2019 to December 31, 2019 to the Hawaii Film Office on April 20, 2020. Tommy Taxpayer’s production report is not timely because it was not submitted within ninety days from the end of the calendar year as required under section 18-235-17-03(b). (c) With respect to fiscal year taxpayers and the production report due on March 30, 2020, fiscal year taxpayers shall only report qualified production costs incurred from the first day of the taxpayer’s fiscal year to December 31, 2019. HRS §235-17 INCOME TAX LAW §18-235-17-03 235- 49 (Unofficial Compilation as of 12/31/2025) For production reports due on March 31, 2021, March 31, 2022, March 31, 2023, March 30, 2024, and March 31, 2025, fiscal year taxpayers shall report qualified production costs incurred from January 1 to December 31 of the preceding calendar year as if they were calendar year taxpayers. Fiscal year taxpayers shall be allowed to submit final production reports that report qualified production costs incurred from January 1, 2025 to the last day of the taxpayer’s fiscal year that began after January 1, 2024. This final report shall be due no later than ninety days following the end of the taxpayer’s fiscal year; provided that in no case shall any claims for credit be made after December 31, 2025. Example 1: FIS Productions is a fiscal year taxpayer whose tax year begins on April 1, 2019 and ends on March 31, 2020. FIS Productions may only report qualified production costs incurred from April 1, 2019 to December 31, 2019 because for fiscal year taxpayers’ production reports due on March 30, 2020, only qualified production costs incurred from the first day of the taxpayer’s fiscal year to December 31, 2019 may be reported. Example 2: Assume the same facts as Example 1. For the production report due on March 31, 2021, FIS Productions may report qualified production costs incurred from January 1, 2020 to December 31, 2020. Example 3: Assume the same facts as Example 1. FIS Productions may submit a final production report under section 18-235-17-03(c) reporting qualified production costs incurred from January 1, 2025 to March 31, 2025, the end of FIS Productions’ fiscal year. This final report is due June 29, 2025, ninety days from the end of FIS Productions’ fiscal year. (d) The Hawaii film office shall not certify the credit under section 18-235-17-04(d) if the production report is incomplete. In certifying the credit, the Hawaii film office may require any taxpayer to provide substantiation for any production costs. (e) The Hawaii film office shall issue a certificate to the taxpayer stating the amount of qualified production costs and the amount of credit that was certified under section 18-235-17-04(d). To properly claim the credit, the taxpayer must attach a copy of the certificate to the taxpayer’s income tax return, along with any other required forms. (f) If a taxpayer produces more than one qualified production in a calendar year, the Hawaii film office shall issue a separate certificate for each qualified production. (g) The Hawaii film office shall issue a single certificate per qualified production per calendar year. If multiple taxpayers participate in one qualified production, each taxpayer shall attach a copy of the certificate issued to the qualified production to the taxpayer’s income tax return; provided that the amount of credit claimed shall not exceed the amount to which the taxpayer is entitled. (h) The $15,000,000 cap shall be applied per qualified production, not per taxpayer. If a taxpayer produces multiple qualified productions in one calendar year, the taxpayer may receive total credit for that calendar year in excess of $15,000,000. (i) Claims for credit under section 235-17, HRS, must correspond with the taxpayer’s accounting method, except as provided in section 18-235-17-03(c). In general, a cash method taxpayer must claim all qualified production costs in the calendar year in which the costs were paid, as provided in section 461 of the Internal Revenue Code of 1986, as amended. Costs that remain unpaid at the time the production report is submitted to the Hawaii film office are not qualified production costs. Any unpaid costs at the time the production report is submitted will not be considered incurred. An accrual method taxpayer must claim all qualified production costs in the year in which the costs were properly incurred under section 461 of the Internal Revenue Code of 1986, as amended. (j) Subsection (i), relating to the claiming of qualified production costs in the year the costs are properly accounted for based upon a taxpayer’s accounting method, is not intended to conflict with the definitional requirement of a qualified production contained in section 18-235-17-07. A taxpayer must independently satisfy the $200,000 qualified production cost definitional requirement to qualify for the tax credit under section 235-17, HRS. For additional discussion on the definitional requirement of a qualified production, see section 18-235-17-07. (k) Fiscal year taxpayers shall claim the credit for the fiscal year during which the calendar year ends. Example: FYT Productions is a taxpayer with a fiscal tax year that begins on April 1 and ends on March 31. FYT Productions incurs qualified production costs during calendar year 2019 and receives a certificate from the Hawaii film office for these costs. FYT Productions must claim the credit for the tax year that begins on April 1, 2019 and ends on March 31, 2020 because the §18-235-17-04 INCOME TAX LAW 235- 50 (Unofficial Compilation as of 12/31/2025) end of calendar year 2019 falls within this fiscal year. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-04 Claim for credit; aggregate cap; tentative allocation and certification of credit. (a) The aggregate cap applies to taxable years beginning after December 31, 2018. If the total amount of credits applied for in any particular year exceeds the aggregate cap, the excess shall be treated as applied for in the subsequent year and shall be claimed in such year; provided that no credit shall be claimed after December 31, 2025. (b) For purposes of applying the aggregate cap, tentatively allocating the credit under subsection (c), and certifying the credit under subsection (d), the Hawaii film office shall consider the year’s claims for credits to be the total amount of credits applied for based on production costs incurred during the preceding calendar year. Credits applied for in production reports that cover tax years beginning before January 1, 2019 shall not be counted against the aggregate cap for any year. (c) The Hawaii film office shall tentatively allocate credits based on the production costs reported in the estimated budget provided by taxpayers as part of the preproduction registration submitted to the Hawaii film office. Tentative allocation of credits is subject to the following rules: (1) Credits shall be tentatively allocated in the order of the date and, if necessary, the time that the preproduction registration required under section 18-235-17-03(a) and section 235-17(f), HRS, is received by the Hawaii film office; (2) The principal photography start date shall be within ninety days of the date of the letter sent by the Hawaii film office approving the preproduction registration and tentatively allocating the credit. Each production shall provide written notice of the actual principal photography start date to the Hawaii film office within thirty days of starting principal photography. If the principal photography start date is after the ninety-day period described in this paragraph, the tentative allocation of credit shall be void; provided that a new preproduction registration may be submitted to the Hawaii film office in order to receive a new tentative allocation of credit; (3) Credits that cannot be tentatively allocated pursuant to paragraph (5) or (6) or because the aggregate cap is exceeded in any year, shall be allocated in the subsequent year in the manner described in paragraph (1); (4) Credits of $500,000 or less described in subsection (e) shall have priority in tentative allocation before initial claim year claims and after any credits that were allocated under paragraph (3); (5) If the amount of credit applied for by a qualified production is $2,500,000 or more, these credits shall be tentatively allocated over a two-year period; provided that no more than one- half of the credits applied for shall be allocated to the initial claim year, except as allowed under subsection (f); provided further that this paragraph shall not apply if the initial claim year is the last year that the credit is available under section 235-17, HRS; (6) For split-year productions, credits shall be tentatively allocated to the initial claim year and the subsequent year upon the approval of the preproduction registration for the initial claim year; provided that the requirements of this subsection are met for the initial claim year as if the production was not a split-year production; provided further that this paragraph shall not apply to qualified productions that are subject to paragraph (5); and (7) If the amount of credit applied for in a production report exceeds the amount of credit that was tentatively allocated under this subsection, the difference shall be tentatively allocated in the subsequent year in the manner described in paragraph (1). Tentative allocation required under this subsection shall not be interpreted to guarantee the amount of credit that is certified or may be claimed. (d) The Hawaii film office shall certify credits in the same order that the credits were tentatively allocated under subsection (c). The amount of credits certified shall be based on the qualified production costs reported in the verification review of the qualified production. Except as allowed under subsection (f), the amount of credit certified under this subsection shall not exceed the amount of tentative allocation under subsection (c). Credits shall only be certified for taxpayers that have: (1) Received a letter from the Hawaii film office approving the preproduction registration; (2) Received a tentative allocation of credit under subsection (c); and (3) Submitted a timely production report. Example 1: LAT Productions is a calendar year taxpayer who submits a timely production report to the Hawaii film office but has not submitted a preproduction registration and has therefore not received a letter from the Hawaii film office tentatively allocating the credit. HRS §235-17 INCOME TAX LAW §18-235-17-07 235- 51 (Unofficial Compilation as of 12/31/2025) Although LAT Productions submitted a timely production report, the Hawaii film may not allocate any credits to LAT Productions because it did not receive a preproduction registration approval letter which would have contained the tentative credit allocation. LAT Productions has waived its right to claim the credit under section 18-235-17-03(a). Example 2: CAL Productions is a calendar year taxpayer and submits its production report to the Hawaii film office on May 1, 2020. FIS Productions is a fiscal year taxpayer whose fiscal year begins on April 1 and ends on March 31. FIS Productions also submits its production report on May 1, 2020. The production report was due on March 30, 2020, ninety days after the end of the calendar year, for both taxpayers. Because a timely production report was not submitted by either taxpayer, both CAL Productions and FIS Productions have waived their right to the credit for the qualified production costs reported on the 2020 production report. If the amount of credit applied for in a production report is twenty or more percent less than the amount of credit tentatively allocated under subsection (c) for that year, the Hawaii film office shall certify no more than one-half of the credit applied for in that year; provided that for credits subject to paragraph (c)(5), the Hawaii film office shall certify no more than one-fourth of the credit applied for in that year. The credits that were not certified pursuant to this provision shall be tentatively allocated in the subsequent year in the manner described in paragraph (c)(1). The Hawaii film office may waive the applicability of this provision if it finds that the estimated budget was made in good faith and that the reduction in the actual production costs was due to circumstances beyond the taxpayer’s control. For the calendar year ending December 31, 2019, the Hawaii film office shall certify credits under this subsection based on the production report as if each taxpayer received a tentative allocation of credit. Credits shall be certified in the order that the preproduction registration was received by the Hawaii film office. (e) Qualified productions that have a credit claim of $500,000 or less shall have priority over initial claim year claims in tentative allocation under subsection (c) and certification under subsection (d); provided that such credits shall not have priority over credits allocated under paragraph (c)(3). (f) The amount of credits certified for a taxpayer under subsection (d) shall not exceed the amount of credits tentatively allocated to that taxpayer under subsection (c); provided that if the aggregate cap is not reached for the calendar year, the remaining credits for the year may be certified for taxpayers who were not tentatively allocated the full amount of credits for the initial claim year pursuant to paragraph (c)(5) or (c)(7). Credits shall be certified under this subsection in the manner described in paragraph (c)(1). For the calendar year ending December 31, 2019, the Hawaii film office and the department shall have discretion to determine the most efficient and appropriate method of allocation under this subsection. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-05 Claim for credit; costs incurred in more than one calendar year. (a) The credit under section 235-17, HRS, is based on the qualified production costs incurred during each calendar year. A taxpayer with qualified production costs for one production that incurs qualified production costs in more than one calendar year must submit a production report as described in section 18-235-17-03(b) to the Hawaii film office for each calendar year in which qualified production costs are incurred. (b) If a qualified production incurs qualified production costs in two separate calendar years, then the credit under section 235-17, HRS, for each taxable year will be based upon the qualified production costs incurred in each respective calendar year. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-06 Claiming the credit; timing; twelve-month rule. Section 235-17(c), HRS, requires all claims for the credit, including amended claims, be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the twelve-month filing requirement constitutes waiver of the right to claim the credit. The department has no authority to suspend or waive this provision. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-07 Qualified productions; $200,000 threshold determination. (a) Section 235-17(d) (2), HRS, requires that a production have qualified production costs totaling at least $200,000. (b) Each production must independently meet the $200,000 qualified production cost threshold imposed by section 235-17(d)(2), HRS. A taxpayer may not combine the qualified production costs of separate productions to meet the $200,000 qualified production cost threshold. However, a taxpayer may combine the qualified production costs of multiple taxpayers associated with a single production to meet the $200,000 qualified production costs threshold. HRS §235-17 HRS §235-17 HRS §235-17 §18-235-17-08 INCOME TAX LAW 235- 52 (Unofficial Compilation as of 12/31/2025) Example 1: J3T Productions is a calendar year taxpayer and begins producing its film in the State on January 1, 2020. During the tax year, the production incurs qualified production costs totaling $75,000. Because the $200,000 qualified production costs threshold has not been met, J3T Productions does not qualify for the tax credit and cannot claim the tax credit. Example 2: J3T Productions produces four productions throughout the taxable year, with each production incurring qualified production costs of $75,000. For the entire taxable year, J3T Productions has incurred qualified production costs in excess of $200,000 for all productions. Because no individual production incurred qualified production costs of at least $200,000, J3T Productions cannot claim the credit. This is true even though J3T Productions incurred qualified production costs in excess of $200,000 in the aggregate during the taxable year. (c) If in one tax year a production does not meet the $200,000 qualified production costs threshold imposed by section 235-17(d)(2), HRS, but incurs qualified production costs in a subsequent tax year for the same production that when combined with qualified production costs in the previous tax year satisfy the $200,000 threshold, the taxpayer may claim the credit under section 235-17, HRS, for the production. To claim the credit, the taxpayer must submit a production report to the Hawaii film office as described in section 18-235-17-03(b). The Hawaii film office will issue a certificate to the taxpayer certifying the amount of the qualified production costs for the prior year. To properly claim the credit for the prior year, the taxpayer must amend its income tax return for that year and attach the certificate to its amended tax return, along with any other required forms. Example 1: Assume the same facts as Example 1 under subsection (b), except that in June of 2021, the same production incurs qualified production costs totaling $250,000. Total qualified production costs associated with the production now exceed $200,000. Because the production now has qualified production costs totaling at least $200,000, J3T Productions can file an amended return for 2020 taking into account the $75,000 in qualified production costs incurred during 2020; provided a timely amended return is filed within twelve months following the close of the taxable year for which the credit may be claimed. Example 2: Assume the same facts as Example 1 under subsection (b), except that in June of 2021, the same production incurs qualified production costs totaling $75,000. Total qualified production costs associated with the production total only $150,000. Because the $200,000 qualified production costs threshold has not been met, J3T Productions cannot claim the tax credit. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-08 Distribution of credit. Section 235-17(a), HRS, provides that the cost upon which the tax credit is computed is determined at the entity level for partnerships, S corporations, estates, and trusts. However, the credit cannot be claimed at the entity level for a partnership, S corporation, estate, or trust unless such entity has elected to be taxed as a corporation under relevant federal tax law. Distributions of the credit under section 235-17, HRS, shall be made in accordance with Subchapter K, Subchapter J, Subchapter S, or other relevant passthrough entity allocation laws of the Internal Revenue Code of 1986, as amended, to which the State conforms. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-09 Prorating qualified production costs between counties in Hawaii; airfare and shipping costs. (a) Section 235-17(a), HRS, provides that a taxpayer claiming the credit may prorate its qualified production costs based upon the amount spent in each county if the population bases differ enough to change the percentage of tax credit. Qualified production costs cannot be prorated between other states or countries and the State. (b) Proration is not necessary if costs are incurred solely in counties with a population of seven hundred thousand or less. The county where the goods or services are consumed determines where the cost is incurred for the purposes of this tax credit. (c) Qualified production costs may be prorated amongst the counties by any reasonable method, taking into account the specific facts and circumstances in any particular case. Example 1: J3T Productions rents a camera from Oahu Camera Company located in Honolulu county, for use on its movie set located in both Honolulu county and Kauai county. Oahu Camera Company is headquartered in Honolulu county and has no business operations in HRS §235-17 HRS §235-17 INCOME TAX LAW §18-235-17-10 235- 53 (Unofficial Compilation as of 12/31/2025) Kauai county. Use of the camera was divided among the counties accordingly: one-fourth of the use occurred in Honolulu county; three-fourths of the use occurred in Kauai county. The cost of the camera rental may be prorated between the counties based upon the equipment’s use in each county because the respective county populations entitle J3T Productions to different tax credit rates. One-fourth of the cost (the use in Honolulu county) qualifies for the credit at the twenty per cent rate. Three-fourths of the cost (the use in Kauai county) qualifies for the credit at the twenty- five per cent rate. Time spent in transit while transporting or shipping the camera will not be taken into account in calculating use for purposes of this example. Example 2: Assume the same facts in Example 1, except that the cost of the camera rental, which includes the shipping cost, is paid for in Honolulu county and all use of the camera occurs in Kauai county. There is no prorating issue raised by this example because all use of the camera occurred in Kauai county. Therefore, the entire cost of the camera rental qualifies for the credit at the twenty-five per cent rate. (d) The department will not challenge the prorating of a qualified production cost for airfare, shipping, or other costs of a similar nature where two counties equally impact said cost; provided that to qualify for this safe harbor, the taxpayer must: (1) Divide the total cost in half; (2) Apply the twenty per cent tax credit rate to one-half of the cost; (3) Apply the twenty-five per cent tax credit rate to the other half of the cost; and (4) Claim the credit for the prorated qualified production cost in the amount of the sum of the twenty per cent rate product and the twenty-five per cent rate product. Example 1: J3T Productions purchases airfare to transport talent and crew from Honolulu to Kailua-Kona on the Island of Hawaii. Production activities occurred on both islands. Honolulu and Hawaii counties have disparate county populations with the former having a population of greater than seven hundred thousand and the latter having a population of less than seven hundred thousand. The cost of the total airfare is $1,000. To qualify for the safe harbor provided by section 18-235-17-09(d), J3T Productions must divide the total fare ($1,000) in half ($500 and $500). Then, J3T Productions must take the tax credit at the twenty per cent rate for half of the cost ($500 x 20% = $100), and take the credit at the twenty-five per cent rate for the other half of the cost ($500 x 25% = $125). J3T Productions’ total credit properly allocable for the airfare is $225. Example 2: Assume the same facts in Example 1, except that the cost is to transport talent and crew from Los Angeles to Kailua-Kona for a production occurring only in Hawaii county. The prorating safe harbor and this section do not apply to this example. The amount of credit for airfare costs to the State will be determined solely by the destination county. Based upon the facts in this example, the total cost of airfare to transport talent and crew to Kailua-Kona will qualify for the credit at the twenty-five per cent rate. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-10 Qualified production costs; generally. (a) Qualified production costs are production costs that are directly attributable to and incurred by a qualified production in the State that are subject to the: (1) General excise tax at the highest rate under chapter 237, HRS, if the payee is engaged in business in the State; or (2) Income tax under chapter 235, HRS, if the costs are not subject to tax under chapters 237 and chapter 238, HRS. Example 1: ABC Airlines is a commercial airline that flies from Los Angeles, California to Honolulu, Hawaii. ABC Airlines has business operations in the State; however, it also has business operations in other jurisdictions. ABC Airlines is subject to Hawaii income tax on an apportioned basis. J3T Productions contracts with ABC Airlines to transport its cast and crew from Los Angeles, California to Honolulu, Hawaii to shoot a motion picture. Although the cost of roundtrip airfare on ABC Airlines is not subject to general excise tax, it is a qualified production cost for HRS §235-17 §18-235-17-10 INCOME TAX LAW 235- 54 (Unofficial Compilation as of 12/31/2025) purposes of the credit under section 235-17, HRS, because ABC Airlines is subject to Hawaii income tax. Example 2: 123 Catering, a Hawaii limited liability company, is a vendor to local productions for catering services. 123 Catering is engaged in business in the State and is therefore subject to general excise tax. J3T Productions contracts with 123 Catering to provide plate lunches to its cast and crew for a production taking place in the State. The cost of catering services provided by 123 Catering to J3T Productions is a qualified production cost for purposes of the credit under section 235-17, HRS, because the amount paid to 123 Catering is subject to general excise tax at the highest rate. J3T Productions must submit 123 Catering’s general excise tax license number as part of the production report required under section 18-235-17-03(b). Example 3: J3T Productions, a California-based production company doing business in the State, ships filming equipment from California to the State to produce a commercial. J3T Productions contracts with two shipping companies: SlugShip, a same-day air travel parcel shipping company, to ship copies of the scripts, contracts, and costumes; and BugShip, a freight forwarder, to ship cameras, set materials, rigging, and other large objects. Both shipping companies have a presence in the State, as well as on the mainland, and are subject to Hawaii income tax on an apportioned basis and general excise tax. The shipping costs incurred from both SlugShip and BugShip are qualified production costs on an apportioned basis to the extent that those amounts are subject to Hawaii income or general excise taxes. Example 4: Gus Grip, a resident of California, is hired as an employee by J3T Productions to help film a movie in the State. Under state law, the wages of Gus Grip earned in the State are subject to Hawaii income tax under section 235-4(b), HRS, and section 18-235-4-03. Gus Grip’s wages, to the extent earned in the State, are a qualified production cost. Example 5: Sam Staff, a resident of California, is a full-time employee of J3T Productions working out of J3T’s California headquarters. J3T sends Sam Staff to work in the State temporarily. Sam Staff’s wages that are earned while working in the State are a qualified production cost because the wages are subject to Hawaii income tax. Example 6: Molly Makeup is hired as an employee by J3T Productions to perform for the filming of a movie in the State. J3T Productions also agrees to rent Molly Makeup’s kit box from her for $1,000 per month. Molly Makeup’s wages are qualified production costs because they are subject to Hawaii income tax to the extent they are earned in the State. The $1,000 per month paid to Molly Makeup for the rental of her kit box is a qualified production cost because it is subject to general excise tax at the highest rate. J3T Productions must submit Molly Makeup’s general excise tax license number as part of the production report required under section 18-235-17-03(b). Example 7: Assume the same facts as Example 6, except that J3T Productions treats the $1,000 per month to rent Molly Makeup’s kit box as additional wages to Molly Makeup and the amount is reported on Molly Makeup’s Form W-2. The $1,000 per month paid to Molly Makeup for the rental of her kit box is a qualified production cost because it is subject to Hawaii income tax to the extent it is earned in the State. Example 8: Lenny Loaner, a resident of California, agrees to film a movie in the State for J3T Productions through the contracting of Lenny Loaner’s loan-out company. J3T Productions pays fees to Lenny Loaner’s loan-out company for services provided in the State that represent wages or salary for Lenny Loaner. The amounts paid to Lenny Loaner’s loan-out company are qualified production costs to the extent that they are subject to general excise tax at the highest rate. J3T Productions must submit Lenny Loaner’s general excise tax license number as part of the production report required under section 18-235-17-03(b). INCOME TAX LAW §18-235-17-10 235- 55 (Unofficial Compilation as of 12/31/2025) Example 9: J3T Productions is filming on location at a church, owned by an Internal Revenue Code section 501(c)(3) tax-exempt religious organization the exempt purpose of which is to advance religious practices of its congregation. J3T Productions pays the church $1,000 in rent for the use of the church facility for one day of shooting. The rent’s primary purpose is the production of income, even if the rental income is later used for the church’s exempt purposes. The $1,000 rent payment is subject to general excise tax at the highest rate and therefore qualifies as a qualified production cost. J3T Productions must submit the church’s general excise tax license number as part of the production report required under section 18-235-17-03(b). (b) The cost of the verification review described in section 18-235-17-14 is a qualified production cost for the calendar year the verification review relates to regardless of the accounting method used by the taxpayer claiming the credit; provided that the cost is subject to general excise tax at the highest rate. (c) Per diem payments are a qualified production cost if the per diem payments are subject to Hawaii income tax if paid by an employer to an employee or to general excise tax at the highest rate if the payee is not an employee. Example 1: Gus Grip, a resident of California, is hired by EFG Productions as an employee to film a movie in the State. EFG Productions pays Gus Grip wages and gives Gus Grip a per diem allowance that is subject to Hawaii income tax while working in the State. The amounts paid as per diem are qualified production costs to the extent that Gus Grip is subject to Hawaii income tax on the amounts received. Example 2: Assume the same facts as Example 1, except EFG Productions gives Gus Grip a per diem allowance that is not subject to Hawaii income tax. The per diem that Gus Grip receives is not a qualified production cost because it is not subject to Hawaii income tax. Example 3: George Grip, a resident of California, is hired by EFG Productions as an independent contractor to film a movie in the State for a month. EFG Productions pays George Grip $100,000 to perform services and $30,000 per diem. George Grip’s income and per diem are qualified production costs because the $130,000 is subject to general excise tax at the highest rate. EFG Productions must submit George Grip’s general excise tax license number as part of the production report required under section 18-235-17-03(b). (d) Airfare is a qualified production cost subject to the following rules: (1) The airfare is to or from Hawaii or between the islands in the State; (2) The airfare does not include a scheduled layover that is twelve hours or longer; and (3) No more than $2,000 per person per way shall be a qualified production cost. (e) The credit may not be claimed for production costs if a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code of 1986, as amended. The basis for eligible property for depreciation of accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. (f) Qualified production costs shall not include any amounts paid to the taxpayer claiming the credit or any of taxpayer’s related entities. (g) Qualified production costs shall not include any amounts paid as gratuity or a tip. (h) Qualified production costs shall not include costs for which another state or county’s tax credit, rebate, or other incentive may be claimed. (i) Qualified production costs shall not include any government-imposed fines, penalties, or interest incurred by a qualified production. (j) No cost incurred shall qualify as a qualified production cost unless the cost is incurred for the specific production for which the credit under section 235-17, HRS, is being claimed. Example: XYZ Productions produced the feature film Papaya Dancing I in 2015 and filmed its sequel Papaya Dancing II in 2019. The main actor in both films is Richie Royal. During 2019, when Papaya Dancing II was being filmed, XYZ Productions pays Richie Royal residual income from Papaya Dancing I. The residual income paid to Richie Royal shall not be claimed as a qualified production cost of Papaya Dancing II because the residual income paid arises from Papaya Dancing I and is not incurred specifically for the production of Papaya Dancing II. [Eff 11/17/2019] (Auth: HRS §231- 3(9)) (Imp: HRS §235-17) §18-235-17-11 INCOME TAX LAW 235- 56 (Unofficial Compilation as of 12/31/2025) §18-235-17-11 Qualified production costs; credit calculation for certain equipment costs. (a) For equipment that is purchased for more than $25,000 and specifically for use for a qualified production in the State, the amount that may be claimed as a qualified production cost in the first year the equipment is used for a qualified production shall be limited to the cost incurred for the equipment divided by the applicable recovery period under the modified accelerated cost recovery system determined by the Internal Revenue Service; provided that a deduction has not been taken under section 179 of the Internal Revenue Code of 1986, as amended, with respect to the equipment. Example: XYZ Production Company purchased a camera to film an underwater scene of a feature film in Hawaii. The camera was purchased for $60,000 and has a recovery period under the modified accelerated cost recovery system determined by the Internal Revenue Service of 5 years. A deduction under section 179 of the Internal Revenue Code of 1986, as amended, was not taken with respect to the camera. The amount that may be claimed as a qualified production cost in the first year the equipment is used for a qualified production is $12,000, which is the $60,000 purchase price divided by the applicable recovery period of 5 years. (b) For equipment that a taxpayer owned prior to beginning production in the State or that a taxpayer has previously claimed qualified production costs for a qualified production in the State and that has an applicable recovery period under the modified accelerated cost recovery system determined by the Internal Revenue Service of 5 years or more, the taxpayer may claim the amount of the depreciation allowance as a qualified production cost. The amount claimed as a qualified production cost shall be prorated to reflect the amount of time that the equipment is actually used during the calendar year; provided that a deduction has not been taken under section 179 of the Internal Revenue Code of 1986, as amended, with respect to the equipment. The depreciation allowance under state law shall be utilized to calculate the credit amount under this section. Example 1: XYZ Production Company has cameras that it ships to the State to film a production for six months. All of these cameras were purchased by the production company prior to production in the State and have been utilized as equipment for the past few years on other film projects. These cameras are available on a checkout basis for all productions being created by XYZ Production Company. Assume that the cameras have an applicable recovery period under the modified accelerated cost recovery system determined by the Internal Revenue Service of 5 years and assume further that a deduction under section 179 of the Internal Revenue Code of 1986, as amended, was not taken with respect to the cameras and that depreciation deductions have been taken in prior years. If XYZ Production Company is entitled to take a $1,000 state depreciation allowance for the cameras for the calendar year, XYZ Production Company may claim $500 as a qualified production cost that represents the $1,000 depreciation allowance adjusted for the time the cameras were used in the State. Example 2: XYZ Production Company purchased a camera to film an underwater scene of a feature film in Hawaii. The camera was purchased for $60,000 and has a recovery period under the modified accelerated cost recovery system determined by the Internal Revenue Service of 5 years. A deduction under section 179 of the Internal Revenue Code of 1986, as amended, was not taken with respect to the camera. The amount that may be claimed as a qualified production cost in the first year the equipment is used for a qualified production is $12,000, which is the $60,000 purchase price divided by the applicable recovery period of 5 years. In the subsequent year XYZ Production uses the camera for the qualified production for six months of the year. XYZ Production is entitled to a $10,000 state depreciation allowance for the camera. XYZ Production may claim $5,000 as a qualified production cost that represents the $10,000 depreciation allowance adjusted for the time the camera was used in the State. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-12 Qualified production costs; imported goods, services, or contracting subject to the use tax; claim for products or services acquired outside of this State. (a) In order to avoid constitutionally infringing upon out-of-state taxpayers, and to complement the general excise tax as an overall excise tax regime, there is imposed in the State a tax on the use in the State of tangible personal property, services, and contracting imported into the State under Hawaii use tax law, codified at chapter 238, HRS. HRS §235-17 HRS §235-17 INCOME TAX LAW §18-235-17-14 235- 57 (Unofficial Compilation as of 12/31/2025) (b) Importation of goods, services, or contracting into the State from a seller that is not engaged in business in the State, for use in the State, is subject to chapter 238, HRS, capturing the general excise tax equivalent. Because chapter 238, HRS, is a substitute for Hawaii general excise tax, production costs incurred by a qualified production in the State that would otherwise qualify as qualified production costs if subject to the general excise tax at the highest rate, are considered “qualified production costs” under section 235-17(m), HRS, and section 18-235-17-10; provided that the production costs are subject to use tax at the highest rate. Example: Steve Screenwriter, a resident of California with no physical presence in the State, is an author and screenplay writer. EFG Productions, a Hawaii limited liability company, intends to shoot a movie in the State. Steve Screenwriter sells his screenplay to EFG Productions for $99,999. Assuming that Steve Screenwriter has no other Hawaii sourced business income and is therefore not engaged in business in the State, the cost of Steve Screenwriter’s screenplay is subject to use tax. The amount paid to Steve Screenwriter is a qualified production cost provided that it is subject to use tax at the highest rate, the cost is incurred in the calendar year for which EFG Productions is claiming the credit, and EFG Productions is able to substantiate the payment of the use tax due as required by section 18-235-17-03(b)(6). (c) This section shall not apply to any costs incurred by a qualified production and paid to a seller that is engaged in business in the State and therefore subject to general excise tax. (d) Section 235-17(d)(5), HRS, requires that a production provide to the department of business, economic development, and tourism evidence that reasonable efforts were unsuccessful to secure and use comparable products or services within the State when making any claim for products or services acquired outside of the State. To satisfy section 235-17(d)(5), HRS, the department of business, economic development, and tourism may accept from a taxpayer a sworn statement, under the penalties set forth in section 231-36, HRS, that reasonable efforts to secure and use products and services within the State were unsuccessful. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-13 Qualified production costs; premiums paid to insurers subject to tax under chapter 431, HRS. Not all taxpayers conducting business transactions occurring in the State are subject to chapter 235, HRS. In recognition of its unique business structure and place within the community, authorized insurers are subject to tax on insurance premium income under chapter 431, HRS, in lieu of tax under chapter 235, HRS. Insurance premiums paid to insurance companies not registered with the State are presumed not to be subject to tax under chapter 431, HRS, and thus are not qualified production costs under 235-17, HRS. Example 1: J3T Productions is filming a qualified production in the State and pays insurance premiums to BDDF Insurance Company, which is doing business in the State, for insurance on J3T Productions’ activities and property associated with the qualified production. The insurance premiums J3T Productions pays to the insurance company are qualified production costs. J3T Productions must submit BDDF’s insurance license number as part of the production report required under section 18-235-17-03(b). Example 2: J3T Productions is filming a qualified production in the State and pays insurance premiums to DEED Insurance Company, which is not registered to do business in the State, for insurance on J3T Productions’ activities. The insurance premiums J3T Productions pays to DEED Insurance Company are presumed not subject to chapter 431, HRS, and not qualified production costs. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-14 Verification review of motion picture, digital media, and film production income tax credit claims. (a) As required by section 235-17(h), HRS, and Section 6 of Act 143, Session Laws of Hawaii 2017, a taxpayer claiming the tax credit under section 235-17, HRS, must submit to the Hawaii film office a verification review, together with a production report as described in section 18-235-17-03(b), no later than ninety days following the end of the calendar year in which the qualified production costs were incurred. (b) A “verification review” is an agreed-upon procedures report prepared by a qualified certified public accountant. The agreed-upon procedures report, must: (1) Verify that the production has obtained a preproduction registration approval letter and tentative allocation of credit under section 18-235-17-04(c) from the Hawaii film office; (2) Evaluate the taxpayer’s assertion of the amounts proposed as qualified production costs within the meaning of section 235-17, HRS, for the calendar year; HRS §235-17 HRS §235-17 §18-235-17-15 INCOME TAX LAW 235- 58 (Unofficial Compilation as of 12/31/2025) (3) Test compliance with the elements set forth in section 235-17, HRS, and any relevant administrative rules or administrative guidance issued by the department and Hawaii film office; (4) Verify that the production report to be submitted to the Hawaii film office complies with section 18-235-17-03(b); (5) Separately state any costs that were deemed not qualified production costs; and (6) Separately state the total of qualified production costs for which no exceptions were noted. (c) The department, in consultation with the Hawaii film office, shall issue a Tax Information Release specifying the procedures by which the agreed-upon procedures report shall be prepared by the qualified certified public accountant. (d) There is no requirement that the preparation of the verification review start after the end of the calendar year. The process of preparing the verification review may begin after production is completed or if no further production costs will be incurred for the calendar year. Example 1: XYZ Productions finishes the filming of its feature film on July 31, 2019. The qualified certified public accountant that XYZ Productions retains may begin the preparation of the verification review on August 1, 2019 because the filming of the feature film was completed on July 31, 2019. Example 2: Assume the same facts as Example 1, except that XYZ Productions’ feature film is a split-year production, filming in calendar year 2019 will stop on November 30, 2019, and filming will be completed in March of 2020. The qualified certified public accountant that XYZ Productions retains may begin the preparation of the 2019 verification review on December 1, 2019 because the filming of the feature was stopped for calendar year 2019 on November 30, 2019. (e) It is not necessary that the verification review be addressed to, or be relied upon by, any person other than the taxpayer. (f) It is the taxpayer’s responsibility to provide all relevant information to the taxpayer’s qualified certified public accountant. (g) The cost of the verification review shall be the responsibility of the taxpayer; provided that it may be claimed as a qualified production cost as described in section 18-235-17-10(b). (h) Inclusion of a verification review with the production report does not preclude the department from auditing and adjusting the tax credit amounts claimed. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17; SLH 2017, Act 143, §6) §18-235-17-15 Hawaii promotion; shared-card, end-title screen credit. (a) Section 235-17(d)(3), HRS, requires that a production provide the State a qualified Hawaii promotion, at a minimum, a shared-card, end- title screen credit. A shared-card, end-title screen credit is provided by: (1) Including in the end credits of each qualified production the phrase “Filmed on location on the Island of in Hawaii with the assistance of Hawaii Production Tax Credits administered by the Hawaii Film Office and the Department of Taxation” and a logo provided by the Hawaii film office; or (2) If it is not feasible to include an end credit as required under paragraph (1), including in each qualified production distributed by digital video disc, Blu-ray disc, digital download, or other media for the secondary market, a Hawaii promotional video approved by the Hawaii film office. (b) A production must submit a still shot, frame grab, finished copy of the qualified production in a media format acceptable to the Hawaii film office, or other documentation that the Hawaii film office may require prior to public release of the qualified production. (c) Failure to submit the documentation required under subsection (b) may result in the disallowance of the credit under section 235-17(d), HRS. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-16 Evidence of reasonable efforts to hire local talent and crew. (a) Section 235-17(d) (4), HRS, requires that a production provide to the department of business, economic development, and tourism evidence of reasonable efforts to hire local talent and crew. (b) Evidence of reasonable efforts to hire local talent and crew means: (1) Documentary evidence of having contacted state chapters of industry unions or guilds, including the date and time of any telephone calls, emails or other contact; the name of the HRS §235-17 HRS §235-17 INCOME TAX LAW §18-235-17-18 235- 59 (Unofficial Compilation as of 12/31/2025) union or guild representative contacted; the name of the production representative initiating contact; and the name of the union or guild contacted; or (2) Documentary evidence of the specific means of notifying the public of the production’s desire to hire local talent and crew, including copies of any press releases; solicitations; requests for proposals; bids; local newspaper ads; trade journal ads; flyers posted; open casting calls; radio spots; Hawaii film office website or other internet posting; or engagement of local production professionals as references for local talent and crew hires. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-17 Evidence of financial or in-kind contributions to educational or workforce development for the local film, television, and digital media industry. (a) Section 235-17(d)(6), HRS, requires that a production provide to the department of business, economic development, and tourism evidence of financial or in-kind contributions or educational or workforce development efforts, in partnership with related local industry labor organizations, educational institutions, or both, toward the furtherance of the local film, television, and digital media industries. (b) Only one contribution is necessary to satisfy the requirement under section 235-17(d)(6), HRS. However, a production may make multiple contributions to multiple qualified entities. (c) Refundable contributions do not satisfy section 235-17(d)(6), HRS. Any term allowing for refundability disqualifies a contribution from satisfying section 235-17(d)(6), HRS, including refundability contingent only upon a production failing to qualify to claim the credit under section 235-17, HRS. (d) Contributions do not satisfy section 235-17(d)(6), HRS, if a charitable deduction is taken for the contribution under section 170 of the Internal Revenue Code of 1986, as amended, or under conformity to such section. (e) Contributions are not qualified production costs for purposes of claiming the tax credit under section 235-17, HRS. (f) The following contributions qualify for purposes of section 235-17(d)(6), HRS: (1) Financial contributions to state public or charter schools totaling at least 0.1 per cent of a production’s qualified production costs or $1,000, whichever is higher. Financial contributions must be made in cash specifically to an arts or media program at a state public or charter elementary school, middle school, high school, or post-secondary school, preferably to a school in the same community in which the production takes place. Arts programs may include film, video, radio, performing arts, theater, music, and visual and fine arts; (2) In-kind contributions to state public or charter schools totaling at least the equivalent value of 0.1 per cent of a production’s qualified production costs or $1,000, whichever is higher. Contributions of in-kind property or services must be made specifically to an arts or media program at a state public or charter school, preferably in the same community in which production takes place. The in-kind contribution must include production-related property or services, such as cameras and sound equipment, editing/post-production equipment, grip/ electric equipment, computer hardware/software, props/set dressing, costumes, or other property or services previously agreed to by school administrators; (3) Educational programs provided to state public or charter schools consisting of at least one on-set or post-production internship arrangement with a state public or charter high school or post-secondary school, preferably in the same community in which the production takes place. The internship must include a total of at least eight hours of arts or digital media education-related volunteer services, such as teaching acting classes, directing a school play, participating in animated student projects, or giving craft seminars. The internship may be arranged with any cast or crew. The minimum time requirement, at the discretion of the Hawaii film office, may be reduced based upon the value of services; (4) Educational programs provided to local labor union chapters consisting of at least one on-set craft apprenticeship arranged with one of the local labor union chapters. The apprenticeship must include a total of at least eight hours of education-related volunteer services, such as giving a craft-related seminar. The apprenticeship may be arranged with any cast or crew. The minimum time requirement, at the discretion of the Hawaii film office, may be reduced based upon the value of services; and (5) Any other financial or in-kind contributions or any other educational or workforce development approved by the Hawaii film office. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-18 Production company personnel and contractors; required Hawaii tax notice. (a) Any taxpayer claiming the income tax credit allowed under section 235-17, HRS, shall provide every contractor, HRS §235-17 HRS §235-17 §18-235-17-18 INCOME TAX LAW 235- 60 (Unofficial Compilation as of 12/31/2025) vendor, loan-out company, or other agent providing goods or performing services in the state that does not have a general excise tax license with a tax advisory informing such persons of state tax obligations and obtain acknowledgement that the advisory was received. The tax advisory under this section shall be provided to all such persons not later than thirty calendar days after engaging the contractor, vendor, loan-out company, or other agent. (b) The tax advisory to be provided shall be any tax advisory made available to the motion picture and television film industry by the department through official pronouncement, and in a form that includes substantially the following: “The purpose of this Tax Advisory is to provide notice to persons engaged in the motion picture and television film production industry (film industry) of their Hawaii tax obligations. GENERAL EXCISE TAX OBLIGATIONS All businesses, including loan-out companies and independent contractors, that engage in business in Hawaii are subject to the general excise tax (GET). GET is a privilege tax that is measured by the business’ gross receipts. All businesses that provide services or have other business activities in the Hawaii film industry are subject to the GET, as they are engaged in business in Hawaii. All businesses must register for a GET license prior to engaging in business in Hawaii. Submit Form BB-1 together with a one-time $20 fee to register for a GET license. A $500 fine will be imposed on any non-cash- based business that receives income from engaging in business in Hawaii prior to registering for a GET license. Hawaii Revised Statutes (HRS) §237-9(c). GET is reported and remitted by filing periodic returns (Form G-45), followed by an annual reconciliation return (Form G-49) after the end of the tax year. Other forms may be necessary depending upon the circumstances. The penalty for failure to file a tax return by the deadline is 5% of the unpaid tax per month, with a maximum penalty of 25%. The penalty for failure to pay the tax within 60 days of timely filing a return is 20% of the amount that is unpaid. If the failure to pay tax is due to fraud, the penalty is an amount up to 50% of the underpayment. The interest on nonpayment of tax or underpayment of tax accrues at a rate of two-thirds of 1% per month. HRS §231-39. Taxpayers may register, file and pay GET online through the Department’s website at https://hitax. hawaii.gov. INCOME TAX OBLIGATIONS Income earned from performing services or conducting other business activities in Hawaii is taxable regardless of residency. Wages earned while working in Hawaii as an employee (receiving Form W-2) are subject to Hawaii income tax for the amount of income earned from performing services or conducting other business activities in Hawaii. Loan-out companies and independent contractors (receiving Form 1099) are also subject to Hawaii income tax on the income earned from performing services or conducting other business activities in Hawaii. Income tax is reported and remitted by using the proper income tax form. Resident individuals must file Form N-11 and nonresidents or part-year resident individuals file Form N-15. Corporations file Form N-30, S Corporations file N-35, and partnerships and multimember limited liability companies file Form N-20. Other forms may be necessary depending upon circumstances. The penalty for failure to file a tax return by the deadline is 5% of the unpaid tax per month, with a maximum penalty of 25%. The penalty for failure to pay the tax within 60 days of timely filing a return is 20% of the amount that is unpaid. If the failure to pay tax is due to fraud, the penalty is an amount up to 50% of the underpayment. The interest on nonpayment of tax or underpayment of tax accrues at a rate of two-thirds of 1% per month. HRS §231-39. CONTACT A TAX PROFESSIONAL The Department suggests that any person affected by this Tax Advisory contact a tax professional familiar with Hawaii tax laws to assist them with any Hawaii tax issues. ADDITIONAL INFORMATION For additional information: - Website: tax.hawaii.gov INCOME TAX LAW §18-235-20.5-01 235- 61 (Unofficial Compilation as of 12/31/2025) - Telephone: (808) 587-1530 - Fax: (808) 587-1584 - Hawaii Administrative Rules 18-235-17” (c) A taxpayer claiming the tax credit under section 235-17, HRS, shall retain evidence that the tax advisory was provided to the contractors, vendors, loan-out companies, or other agents, as required under subsection (a), not later than thirty calendar days after engaging such parties. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-17-19 Access to production company set and locations; required courtesy visit and press coverage. (a) All taxpayers submitting a production report to the Hawaii film office shall allow access to the taxpayer’s production set or location at least once during production for a courtesy visit by government officials. Taxpayers are entitled to at least seven days’ notice of the government’s intent to visit the taxpayer’s set or location. The taxpayer is entitled to escort the government officials on the visit and restrict access to any part of the set or location deemed proprietary or that access to which would result in competitive harm if government officials were allowed to visit. Government officials allowed to participate in the courtesy visit include, but shall not be limited to, Hawaii film office personnel; department personnel; state and county film commissioners; and legislators. (b) All taxpayers submitting a production report to the Hawaii film office shall hold a press conference or agree to at least one press story, broadcast or print, as agreed to by both the production and the Hawaii film office, where the taxpayer and any of its representatives shall allow themselves to be interviewed by government officials and the media regarding the qualified production. The press conference or other press story shall be held at a location mutually agreed upon between the production and the Hawaii film office and may be held at the production’s set or other location. (c) The courtesy visit and press requirements of this section must be satisfied before the Hawaii film office accepts a taxpayer’s production report as being complete. (d) Nothing in this section shall be interpreted as limiting or restricting the department’s authority to access premises or documents, including exercise of its subpoena power as otherwise allowed. [Eff 11/17/2019] (Auth: HRS §231-3(9)) (Imp: HRS §235-17) §18-235-20.5-01 Fees for issuing comfort letters, certificates under section 235-110.9, HRS, and certificates under section 235-110.91, HRS. (a) The department may charge a fee of $1,000 to any person requesting the issuance of a comfort ruling from the department. (b) The department may charge the following fees to each person requesting a certificate under section 235-110.9, HRS: (1) $100 for complete requests received by the department prior to the third Wednesday in January following the year in which the investment was made; (2) $150 for complete requests received by the department on or after the third Wednesday in January following the year in which the investment was made; or (3) For entities taxable as a partnership for net income tax purposes, such entities may request a certificate on behalf of their partners or members, and the following fees shall apply: (A) $750 for complete requests received by the department prior to the third Wednesday in January following the year in which the investment was made; or (B) $1,000 for complete requests received by the department on or after the third Wednesday in January following the year in which the investment was made. These fees shall apply provided that the person submits the application for certification in the manner prescribed by the department through published guidance. (c) The department shall charge the following fees to each person requesting a certificate under section 235-110.91, HRS: (1) $400 for complete requests received by the department prior to the third Wednesday in January following the year in which the expenses were incurred; or (2) $750 for complete requests received by the department on or after the third Wednesday in January following the year in which the expenses were incurred. (d) The department shall require payment in full of any outstanding fees prior to processing a request described in subsection (a), (b), or (c). (e) No fee shall be required from any person requesting a certificate under sections 235-110.9, HRS, or 235-110.91, HRS, where the credit sought to be claimed is less than $25,000 for the qualified high technology business’ taxable year. (f) As used in this section: “Comfort ruling” means a ruling concerning the application of the following high technology tax incentives: HRS §235-17 HRS §235-20.5 §18-235-20.5-01 INCOME TAX LAW 235- 62 (Unofficial Compilation as of 12/31/2025) (1) The high technology business investment tax credit under section 235-110.9, HRS; (2) The income tax exclusion for royalties and other income derived from patents and copyrights received by an individual or a qualified high technology business and developed and arising out of a qualified high technology business under section 235-7.3, HRS; (3) The income tax exclusion for stock options, dividends from stock, the receipt of the options, the exercise of the options, and income from the sale of the options under section 235-9.5, HRS; or (4) The tax credit for research activities under section 235-110.91, HRS. “Complete request” means the taxpayer has: (1) Answered all of the questions listed on the application for certification; and (2) Executed the application for certification under penalty of perjury. [Eff 11/03/2005] (Auth: HRS §§231-3(9), 235-10, 235-20.5) (Imp: HRS §235-20.5) INCOME TAX LAW §18-235-21-03 235- 63 (Unofficial Compilation as of 12/31/2025) SUBCHAPTER 2 DIVISION OF INCOME FOR TAX PURPOSES §18-235-21-01 (Reserved) §18-235-21-02 Two or more businesses of a single taxpayer. (a) A taxpayer may have more than one trade or business. In such cases, it is necessary to determine the business income attributable to each separate trade or business. The income of each business then is apportioned by an apportionment formula which takes into consideration the instate and outstate factors which relate to the trade or business the income of which is being apportioned. Example: The taxpayer is a conglomerate with three operating divisions. One division is engaged in manufacturing aerospace items for the federal government. Another division is engaged in growing coffee products. The third division produces and distributes motion pictures for theaters and television. Each division operates independently; there is no strong central management. Each division operates in this State as well as in other states. In this case, it is fair to conclude that the taxpayer is engaged in three separate trades or businesses. Accordingly, the amount of business income attributable to the taxpayer’s trade or business activities in this State is determined by applying an appropriate apportionment formula to the business income of each separate trade or business. (b) The determination of whether the activities of the taxpayer constitute a single trade or business or more than one trade or business will turn on the facts in each case. In general, the activities of the taxpayer will be considered a single business if there is evidence to indicate that the segments under consideration are integrated with, dependent upon, or contribute to each other. The following factors are considered to be good indicia of a single trade or business, and the presence of any of these factors creates a strong presumption that the activities of the taxpayer constitute a single trade or business: (1) A taxpayer is generally engaged in a single trade or business when all of its activities are in the same general line. For example, a taxpayer which only operates a chain of retail grocery stores will almost always be engaged in a single trade or business. (2) A taxpayer is almost always engaged in a single trade or business when its various divisions or segments are engaged in different steps in a large, vertically structured enterprise. For example, a taxpayer which explores for and mines copper ores; concentrates, smelts and refines the copper ores; and fabricates the refined copper into consumer products is engaged in a single trade or business, regardless of the fact that the various steps in the process are operated substantially independently of each other with only general supervision from the taxpayer’s executive offices. (3) A taxpayer which might otherwise be considered as engaged in more than one trade or business is properly considered as engaged in one trade or business when there is a strong central management, coupled with the existence of centralized departments for such functions as financing, advertising, research, or purchasing. Thus, some conglomerates may properly be considered as engaged in only one trade or business when the central executive officers are normally involved in the operations of the various divisions and there are centralized offices which perform for the divisions the normal matters which a truly independent business would perform for itself, such as accounting, personnel, insurance, legal, purchasing, advertising, or financing. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-21) §18-235-21-03 Business and nonbusiness income application of definitions. (a) The following are rules and examples for determining whether particular income is business or nonbusiness income. (The examples used throughout these rules are illustrative only and do not purport to set forth all pertinent facts.) (b) Rental income from real and tangible property is business income if the property with respect to which the rental income was received is used in the taxpayer’s trade or business or incidental to it and therefore is includable in the property factor under sections 18-235-30-01 to 18-235-30-04. Example 1: The taxpayer operates a multistate car rental business. The income from car rentals is business income. HRS §235-21 HRS §235-21 §18-235-21-03 INCOME TAX LAW 235- 64 (Unofficial Compilation as of 12/31/2025) Example 2: The taxpayer is engaged in the heavy construction business in which it uses equipment such as cranes, tractors, and earth-moving vehicles. The taxpayer makes short-term leases of the equipment when particular pieces of equipment are not needed on any particular project. The rental income is business income. Example 3: The taxpayer operates a multistate chain of clothing stores. The taxpayer purchases a five-story office building for use in connection with its trade or business. It uses the street floor as one of its retail stores and the second and third floors for its general corporate headquarters. The taxpayer manages and leases the remaining two floors to others. The rental of the two floors is incidental to the operation of the taxpayer’s trade or business. The rental income is business income. Example 4: The taxpayer operates a multistate chain of grocery stores. It purchases as an investment an office building in another state with surplus funds and hires an unrelated property management company to manage and lease the entire building to others. The net rental income is not business income of the grocery store trade or business. Therefore, the net rental income is nonbusiness income. Example 5: The taxpayer operates a multistate chain of clothing stores. The taxpayer invests in a twenty-story office building and uses the street floor as one of its retail stores and the second floor for its general corporate headquarters. The taxpayer hires an unrelated property management company to manage and lease the remaining eighteen floors to others. The rental of the eighteen floors is not incidental to but rather is separate from the operation of the taxpayer’s trade or business. The net rental income is not business income of the clothing store trade or business. Therefore, the net rental income is nonbusiness income. Example 6: The taxpayer constructed a plant for use in its multistate manufacturing business and twenty years later the plant was closed and put up for sale. The plant was rented for a temporary period from the time it was closed by the taxpayer until it was sold eighteen months later. The rental income is business income and the gain on the sale of the plant is business income. Example 7: The taxpayer operates a multistate chain of grocery stores. It owned an office building which it occupied as its corporate headquarters. Because of inadequate space, taxpayer acquired a new and larger building elsewhere for its corporate headquarters. The taxpayer hired an unrelated property management company to manage and lease the old building. The property management company leased the building to an unrelated investment company under a five-year lease. Upon expiration of the lease, taxpayer sold the building at a gain (or loss). The net rental income received over the lease period is nonbusiness income and the gain (or loss) on the sale of the building is nonbusiness income. (c) Gain or loss from the sale, exchange, or other disposition of real property or of tangible or intangible personal property constitutes business income if the property while owned by the taxpayer was used in, available for, or capable of being used in the taxpayer’s trade or business. However, if the property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale, exchange, or other disposition, the gain or loss will constitute nonbusiness income. See sections 18-235-30-01 to 18-235-30-04. Example 1: In conducting its multistate manufacturing business, the taxpayer systematically replaces automobiles, machines, and other equipment used in the business. The gains or losses resulting from those sales constitute business income. Example 2: The taxpayer constructed a plant for use in its multistate manufacturing business and twenty years later sold the property at a gain while it was in operation by the taxpayer. The gain is business income. Example 3: Same as Example 2 except that the plant was closed and put up for sale but was not in fact sold until a buyer was found 18 months later. The gain is business income. Example 4: Same as Example 2 except that the plant was rented while being held for sale. The rental income is business income and the gain on the sale of the plant is business income. INCOME TAX LAW §18-235-21-03 235- 65 (Unofficial Compilation as of 12/31/2025) Example 5: The taxpayer operates a multistate chain of grocery stores. It owned an office building which it occupied as its corporate headquarters. Because of inadequate space, taxpayer acquired a new and larger building elsewhere for its corporate headquarters. The taxpayer hired an unrelated property management company to manage and lease the old building. The property management company leased the building to an unrelated investment company under a five-year lease. Upon expiration of the lease, taxpayer sold the building at a gain (or loss). The gain (or loss) on the sale is nonbusiness income and the rental income received over the lease period is nonbusiness income. (d) Interest income is business income where the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer’s trade or business operations, or where the purpose for acquiring and holding the intangible is related to or incidental to those trade or business operations. Example 1: The taxpayer operates a multistate chain of department stores, selling for cash and on credit. Service charges, interest, or time-price differentials and the like are received with respect to installment sales and revolving charge accounts. These amounts are business income. Example 2: The taxpayer conducts a multistate manufacturing business. During the year the taxpayer receives a federal income tax refund and collects a judgment against a debtor of the business. Both the tax refund and the judgment bear interest. The interest income is business income. Example 3: The taxpayer is engaged in a multistate manufacturing and wholesaling business. In connection with that business, the taxpayer maintains special accounts to cover such items as worker’s compensation claims, rain and storm damage, and machinery replacement. The moneys in those accounts are invested at interest. Similarly, the taxpayer temporarily invests funds intended for payment of federal, state, and local tax obligations. The interest income is business income. Example 4: The taxpayer is engaged in a multistate money order and traveler’s check business. In addition to the fees received in connection with the sale of the money orders and traveler’s checks, the taxpayer earns interest income by the investment of the funds pending their redemption. The interest income is business income. Example 5: The taxpayer is engaged in a multistate manufacturing and selling business. The taxpayer usually has working capital and extra cash totaling $200,000 which it regularly invests in short-term interest bearing securities. The interest income is business income. (e) Dividends are business income where the stock with respect to which the dividends are received arises out of or was acquired in the regular course of the taxpayer’s trade or business operations or where the purpose of acquiring and holding the stock is related to or incidental to those trade or business operations. Example 1: The taxpayer operates a multistate chain of stock brokerage houses. During the year, the taxpayer receives dividends on stock that it owns. The dividends are business income. Example 2: The taxpayer is engaged in a multistate manufacturing and wholesaling business. In connection with that business, the taxpayer maintains special accounts to cover such items as worker’s compensation claims. A portion of the moneys in those accounts is invested in interest-bearing bonds. The remainder is invested in various common stocks listed on national stock exchanges. Both the interest income and any dividends are business income. Example 3: The taxpayer and several unrelated corporations own all of the stock of a corporation whose business operations consist solely of acquiring and processing materials for delivery to the corporate owners. The taxpayer acquired the stock in order to obtain a source of supply of materials used in its manufacturing business. The dividends are business income. Example 4: The taxpayer is engaged in a multistate heavy construction business. Much of its construction work is performed for agencies of the federal government and various state governments. Under state and federal laws applicable to contracts for these agencies, a contractor must have adequate bonding capacity, as measured by the ratio of its current assets (cash and §18-235-21-04 INCOME TAX LAW 235- 66 (Unofficial Compilation as of 12/31/2025) marketable securities) to current liabilities. In order to maintain an adequate bonding capacity the taxpayer holds various stocks and interest-bearing securities. Both the interest income and any dividends received are business income. Example 5: The taxpayer receives dividends from the stock of its subsidiary or affiliate which acts as the marketing agency for products manufactured by the taxpayer. The dividends are business income. (f) Patent and copyright royalties are business income where the patent or copyright with respect to which the royalties were received arises out of or was created in the regular course of the taxpayer’s trade or business operations or where the purpose for acquiring and holding the patent or copyright is related to or incidental to those trade or business operations. Example 1: The taxpayer is engaged in the multistate business of manufacturing and selling industrial chemicals. In connection with that business, the taxpayer obtained patents on certain of its products. The taxpayer licensed the production of the chemicals in foreign countries, in return for which the taxpayer receives royalties. The royalties received by the taxpayer are business income. Example 2: The taxpayer is engaged in the music publishing business and holds copyrights on numerous songs. The taxpayer acquires the assets of a smaller publishing company, including music copyrights. These acquired copyrights are thereafter used by the taxpayer in its business. Any royalties received on these copyrights are business income. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-21) §18-235-21-04 Proration of deductions. (a) In most cases an allowable deduction of a taxpayer will be applicable only to the business income arising from a particular trade or business or to a particular item of nonbusiness income. In some cases an allowable deduction may be applicable to the business incomes of more than one trade or business, or to several items of nonbusiness income, or both. In such cases the deduction shall be prorated among the trades or businesses and the items of nonbusiness income in a manner which fairly distributes the deduction among the classes of income to which it is applicable. (b) In filing returns with this State, if the taxpayer departs from or modifies the manner of prorating any deduction used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. (c) If the returns or reports filed by a taxpayer with all states to which the taxpayer reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the application or proration of any deduction, the taxpayer shall disclose in its return to this State the nature and extent of the variance. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-21, 235-5(c), 235-117) §18-235-22-01 Definitions. As used in this subchapter: “Allocation” refers to the assignment of nonbusiness income to a particular state. “Apportionment” refers to the division of business income between states by the use of a formula containing apportionment factors. “Combined reporting method” means the same as in section 18-235-22-03. “Director” means the director of taxation. “Multistate Tax Compact” means the Multistate Tax Compact as enacted by several of the states of the United States and the District of Columbia, and by this State in section 255-1, HRS. “Taxpayer” means a taxpayer as defined as in section 235-1, HRS, which: (1) Has income from business activity that is taxable both in this State and in another State, other than activity as a public utility or the rendering of purely personal services by an individual; or (2) Conducts business activity within this State and is a member of a unitary group that has income from business activity described in paragraph (1). “Uniform Division of Income for Tax Purposes Act” means the Uniform Division of Income for Tax Purposes Act as enacted by several of the states of the United States, and by this State in part II of chapter 235, HRS. “Unitary business” means a business carried on by a group of entities that includes the taxpayer where there are flows of value among the entities resulting from (1) functional integration, (2) centralization of management, or (3) economies of scale. Generally, if the operation of a business within Hawaii is integrated with, is dependent on, or contributes to the operation of the business outside Hawaii, the entire business is unitary in character. HRS §235-21 HRS §235-22 INCOME TAX LAW §18-235-22-03 235- 67 (Unofficial Compilation as of 12/31/2025) “Unitary group” means a group of entities carrying on a unitary business, but with respect to any taxpayer a unitary group does not include: (1) Any foreign affiliate (as defined in section 18-235-38.5-02) of the taxpayer; or (2) Any entity that is not related to the taxpayer within the meaning of section 267(b) and (c) (with respect to disallowance of deductions for transactions between related taxpayers), IRC. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-22) §18-235-22-02 Apportionment. If the business activity in respect to any trade or business of a taxpayer occurs both within and without this State, and if by reason of the business activity the taxpayer is taxable in another state, the portion of the net income (or net loss) arising from the trade or business which is attributable to the taxpayer’s activity in this State shall be determined by apportionment in accordance with sections 235-28 to 235-36, HRS. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-22) §18-235-22-03 Combined reporting method; combined return. (a) As used in this section: “Combined business income” means the business income of all members of a unitary group from the unitary business. “Combined reporting method” means the accounting method of determining the portion of the business income of a unitary group that is attributable to the taxpayer’s activity in this State with respect to that unitary business. “Combined return” means a single return that is filed to reflect the income of all taxpayers in a unitary group, but does not mean a consolidated return. “Designated member” means the member of a group that is designated, pursuant to subsection (d)(3)(B), to represent the group for tax matters relating to a combined return. “Group” means a unitary group as defined in section 18-235-22-01. (b) In the combined reporting method, nonbusiness income shall be allocated for each entity separately under sections 235-24 to 235-28, HRS, the same as if there were no group; and the combined business income of the group is apportioned with reference to the income from, and the property, payroll, and sales factors of, the entire unitary business just as would be done if the business had been conducted by one entity rather than a group. This method is different from a consolidated return, which is a taxing method in which two or more corporations are treated as one taxpayer. (See section 18-235-92(d).) In apportioning combined business income: (1) Transactions between members of the group relating to the unitary business, such as intercompany dividends, royalties, interest payments, sales, and rentals, shall be eliminated in computing combined business income and the property, payroll, and sales factors of each taxpayer in the group. (2) For each taxpayer in a group, the numerators of the property, payroll, and sales factors shall be those of the taxpayer, and the denominators of the factors shall be those of the group. (3) The business income attributable to the unitary business of each taxpayer in a group shall be the combined business income multiplied by the average of the taxpayer’s property, payroll, and sales factors. (4) The tax, deductions, credits, and allowances of each member of the group shall be computed separately. Credits, loss carrybacks, or loss carryovers of a group member shall not be applied against the income or Hawaii tax liability of any other group member because of the combined reporting method. (c) Each taxpayer in a group shall use the combined reporting method to determine its income unless the department permits it to do otherwise under section 235-38, HRS. For purposes of this section, a group of domestic corporations electing to file a consolidated return under section 235-92(2), HRS, shall be treated as one taxpayer. (d) Each taxpayer in a group shall file a separate return reporting its share of the combined business income or loss of the unitary business, and shall compute its tax, credits, deductions, and allowances separately, except as provided in this subsection. (1) The department shall permit a combined return to be filed for all of the taxpayers in a group, except when: (A) Not all of the taxpayers in the group are using the same apportionment formula; (B) Not all of the taxpayers in the group have the same taxable year; or (C) The department determines that such a return would prejudice the interests of the State. (2) If a group includes a taxpayer that is also a member of another unitary group (one with a separate line of business), the department may allow a combined return to be filed for all of the taxpayers in both groups. (3) An application to file a combined return shall contain: HRS §235-22 HRS §235-22 §18-235-22-03 INCOME TAX LAW 235- 68 (Unofficial Compilation as of 12/31/2025) (A) The names, federal employer identification numbers, and Hawaii general excise tax identification numbers (if applicable) of all group members; (B) A statement appointing one member as the designated member, and granting power of attorney to the designated member to represent the group for all tax matters related to the combined return; (C) The agreement of all group members to be jointly and severally liable for all taxes, penalties, interest, and additions to tax of the group; and (D) The agreement of all group members that a combined return shall be filed for all group members for any year in which any group member had gross income subject to taxation under chapter 235, HRS; and that the designated member, for itself and as agent for all group members, consents to the jurisdiction of the courts of this State solely for purposes of enforcing any summons or subpoena under section 231-7 or 235-108, HRS, for records, testimony, or other evidence pertinent to any combined return of the group. (4) Once permission to file a combined return is granted, the group shall continue to file a combined return until the department grants written permission to discontinue filing combined returns. An application to discontinue filing combined returns shall be submitted by the designated member at least ninety days prior to the filing due date of the combined return, including extensions of time. The application shall state the reasons for discontinuing filing combined returns. (5) An application to change which members of the group are included in a group’s combined return shall contain the items set forth in paragraph (3) with respect to the group after the proposed change. (6) If a group files a combined return, the group also shall file and pay estimated tax on a combined basis until permission to discontinue filing combined returns is received from the department. (7) Use of a combined return shall not affect the applicability of other provisions of chapter 235, HRS, to the taxpayers separately. For example, unless otherwise authorized by law or these rules, each taxpayer in a group is separately liable for filing withholding tax returns and payments. Furthermore, the tax liability of each taxpayer in a group shall be computed separately, unless otherwise authorized by law or these rules. (e) If a taxpayer is using the combined reporting method and the taxable year of any group member is not identical with that of the taxpayer: (1) In using the combined reporting method, the taxpayer shall convert the income, property, payroll, and sales factors of the group member to correspond to the taxpayer’s taxable year. Where this procedure results in using the business income and apportionment factors of an entity whose income year has not yet closed, the taxpayer shall make an estimate based on available information and amend the return not later than the date on which the group member’s return is due (including extensions). Example: Corporation T operates on a calendar year basis and conducts a unitary business with Corporation U, which operates with a September 30 year end. T is employing the combined reporting method (but is not filing a combined return) with U. T, in computing combined business income for 1993, shall include 9/12 of U’s income for the year ending September 30, 1993, and 3/12 of U’s estimated income for the year ending September 30, 1994. In computing T’s property, payroll, and sales factors, a similar computation shall be performed on U’s property, payroll, and sales factor denominators. If no extensions are given, T shall file its return on April 20, 1994, and shall amend its return no later than January 20, 1995, the same time U’s return is due for the year ending September 30, 1994, with a revised apportionment computation using U’s actual income and U’s actual property, payroll, and sales factor denominators. (2) Alternatively, and provided that the combined business income or apportionment factors are not materially distorted, the taxpayer may elect to include the income, property, payroll, and sales for the group member’s taxable year that ends within the taxable year of the taxpayer. (f) Where a taxpayer is authorized to use an apportionment formula other than that set forth in section 235-29, HRS, references in this section to the property, payroll, and sales factors instead shall refer to the factors in the apportionment formula that are being used by the taxpayer; and references to property, payroll, and sales shall instead refer to the components of factors in the apportionment formula that are being used by the taxpayer. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-22, 235-92, 235-97) INCOME TAX LAW §18-235-23-02 235- 69 (Unofficial Compilation as of 12/31/2025) §18-235-22-04 Allocation. A taxpayer shall allocate all of its nonbusiness income or loss within or without this State in accordance with sections 235-23 to 235-27, HRS. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235- 118) (Imp: HRS §§235-22) §18-235-22-05 Consistency and uniformity in reporting. (a) In filing returns with this State, if the taxpayer departs from or modifies the manner in which income has been classified as business income or nonbusiness income in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. (b) If the returns or reports filed by a taxpayer for all states to which the taxpayer reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the classification of income as business or nonbusiness income, the taxpayer shall disclose in its return to this State the nature and extent of the variance. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-22, 235-117) §18-235-23-01 Taxable in another state; in general. (a) Under section 235-22, HRS, the taxpayer is subject to the allocation and apportionment provisions of sections 235-21 to 235-29, HRS, if it has income from business activity that is taxable both within and without this State. A taxpayer’s income from business activity is taxable without this State if the taxpayer, by reason of that business activity (i.e., the transactions and activity occurring in the regular course of a particular trade or business), is taxable in another state within the meaning of section 235-23, HRS. (b) A taxpayer is taxable in another state if it meets either one of two tests: (1) If by reason of business activity in another state, the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (2) If by reason of that business activity, another state has jurisdiction to subject the taxpayer to a net income tax, whether or not the state imposes such a tax on the taxpayer. (c) A taxpayer is not taxable in another state with respect to a particular trade or business merely because the taxpayer conducts activities in that other state pertaining to the production of nonbusiness income or business activities relating to a separate trade or business. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-23) §18-235-23-02 When a taxpayer is subject to a tax under section 235-23(1), HRS. (a) A taxpayer is subject to one of the taxes specified in section 235-23(1), HRS, if it carries on business activity in a state and the state imposes such a tax on that activity. Any taxpayer which asserts that it is subject to one of the taxes specified in section 235-23(1), HRS, in another state shall furnish to the department upon its request evidence to support that assertion. The department may request that such evidence include proof that the taxpayer has filed the requisite tax return in the other state and has paid any taxes imposed under the law of the other state; the taxpayer’s failure to produce that proof may be taken into account in determining whether the taxpayer in fact is subject to one of the taxes specified in section 235-23(1), HRS, in the other state. The federal income tax imposed under chapter 1 of the federal Internal Revenue Code is not one of the taxes specified in section 235-23(1), HRS. (b) If the taxpayer voluntarily files and pays one or more of those taxes when not required to do so by the laws of that state or pays a minimal fee for qualification, organization, or the privilege of doing business in that state, but (1) Does not actually engage in business activity in that state; or (2) Does actually engage in some business activity, not sufficient for nexus, and the minimum tax bears no relationship to the taxpayer’s business activity in that state, the taxpayer is not subject to one of the taxes specified in section 235-23(1), HRS. Example: State A has a corporation franchise tax measured by net income for the privilege of doing business in that state. Corporation X files a return and pays the $50 minimum tax, although it carries on no business activity in State A. Corporation X is not taxable in State A. (c) The concept of taxability in another state is based upon the premise that every state in which the taxpayer is engaged in business activity may impose an income tax even though every state does not do so. In states which do not, other types of taxes may be imposed as a substitute for an income tax. Therefore, only those taxes which may be considered as basically revenue raising rather than regulatory measures shall be considered in determining whether the taxpayer is subject to one of the taxes specified in section 235-23(1), HRS, in another state. HRS §235-22 HRS §235-22 HRS §235-23 HRS §235-23 §18-235-23-03 INCOME TAX LAW 235- 70 (Unofficial Compilation as of 12/31/2025) Example 1: State A requires all nonresident corporations which qualify or register in State A to pay to the Secretary of State an annual license fee or tax for the privilege of doing business in the state regardless of whether the privilege is in fact exercised. The amount paid is determined according to the total authorized capital stock of the corporation; the rates are progressively higher by bracketed amounts. The statute sets a minimum fee of $50 and a maximum fee of $500. Failure to pay the tax bars a corporation from utilizing the state courts for enforcement of its rights. State A also imposes a corporation income tax. Nonresident Corporation X is qualified in State A and pays the required fee to the Secretary of State but does not carry on any business activity in State A (although it may utilize the courts of State A). Corporation X is not taxable in State A. Example 2: Same facts as Example 1, except that Corporation X is subject to and pays the corporation income tax. Payment is prima facie evidence that Corporation X is subject to the net income tax of State A and is taxable in State A. Example 3: State B requires all nonresident corporations qualified or registered in State B to pay to the Secretary of State an annual permit fee or tax for doing business in the state. The base of the fee or tax is the sum of (1) outstanding capital stock, and (2) surplus and undivided profits. The fee or tax base attributable to State B is determined by a three factor apportionment formula. Nonresident Corporation X which operates a plant in State B, pays the required fee or tax to the Secretary of State. Corporation X is taxable in State B. Example 4: State A has a corporation franchise tax measured by net income for the privilege of doing business in that state. Corporation X files a return based upon its business activity in the state but the amount of computed liability is less than the minimum tax. Corporation X pays the minimum tax. Corporation X is subject to State A’s corporation franchise tax. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-23) §18-235-23-03 When a state has jurisdiction to subject a taxpayer to a net income tax. (a) The second test, that of section 235-23(2), HRS, applies if the taxpayer’s business activity is sufficient to give the state jurisdiction to impose a net income tax by reason of that business activity under the Constitution and statutes of the United States. Jurisdiction to tax is not present where the state is prohibited from imposing the tax by reason of the provisions of Public Law 86-272, 15 U.S.C. sections 381-384. (b) For a state that is a foreign country or a political subdivision of a foreign country, the determination of whether the state has jurisdiction to subject the taxpayer to a net income tax shall be made as though the jurisdictional standards applicable to a state of the United States applied in that state. If jurisdiction is otherwise present, that state is not considered as being without jurisdiction by reason of the provisions of a treaty between that state and the United States. Example: Corporation X is actively engaged in manufacturing farm equipment in State A and in foreign country B. Both State A and foreign country B impose a net income tax but foreign country B exempts corporations engaged in manufacturing farm equipment. Corporation X is subject to the jurisdiction of State A and foreign country B. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-23) §18-235-24 to