HAR §18-235-28. (Reserved

) §18-235-29-01 Apportionment formula. All business income of each trade or business of the taxpayer shall be apportioned to this State by use of the apportionment formula set forth in section 235-29, HRS. The elements of the apportionment formula are the property factor (see sections 18-235-30-01 to 18-235-32-01), the payroll factor (see sections 18-235-33-01 to 18-235-34-01) and the sales factor (see sections 18-235-35-01 to 18-235-37-01) of the trade or business of the taxpayer. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-29) §18-235-29-02 Apportionment formula; denominator of zero. If the denominator of the property factor, payroll factor, or sales factor is zero, then the denominator of the fraction in section 235-29, HRS, shall be reduced by the number of factors with a zero denominator, and the numerator of that fraction shall not include any factor with a zero denominator. Example: X is a company that provides data entry services to United States companies. X performs its services exclusively through employees of F, its foreign parent that does no business HRS §235-23 HRS §235-29 HRS §235-29 INCOME TAX LAW §18-235-29-04 235- 71 (Unofficial Compilation as of 12/31/2025) in the United States. X has no employees of its own. X’s property factor is 5 per cent, its sales factor is 17 per cent, and its payroll factor has a zero denominator. X’s apportionment percentage is 11 per cent (5 per cent plus 17 per cent, divided by 2). [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-29) §18-235-29-03 Apportionment for installment sales. (a) Income from installment sales shall be apportioned on the basis of the apportionment percentage for the year of sale. This is because installment sale income is reported at least in part in a year other than the year in which the sale took place, and apportionment of installment sale income on the basis of the factors in the years other than the year of sale would result in that income being apportioned by activities that had no connection with the earning of the income. (b) This rule applies whether or not the income from the sale was included in the sales factor for the year of sale. Example: X is doing business in states A and B, and this State. In 1988, the taxpayer sold a plant in state A and realized a $500,000 gain on the sale which is properly classified as business income under section 18-235-21-03(c). The taxpayer elects to report on the installment method. Under applicable federal principles (section 453, IRC, as operative under chapter 235, HRS), the gain is recognized in two equal installments in 1989 and 1990. The taxpayer’s apportionment percentages are as follows: Taxable Year Apportionment Percentage 1988 11% 1989 1% 1990 32% In 1989, X’s apportioned business income includes $250,000 (gain recognized in 1989) x 11 per cent (apportionment factor for year of sale) = $27,500. In 1990, X’s apportioned business income includes $250,000 (gain recognized in 1990) x 11 per cent (apportionment factor for year of sale) = $27,500. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-29) §18-235-29-04 Apportionment formula as applied to partnerships. (a) If a taxpayer is a partner in a partnership, and the partnership’s activities and the taxpayer’s activities constitute a unitary business: (1) The taxpayer’s share of the partnership’s trade or business shall be combined with the taxpayer’s trade or business; (2) The property, payroll, and sales factors, or other applicable factors, of the taxpayer and the partnership shall be combined; and (3) Intercompany items shall be eliminated, under the principles set forth in section 18-235-22- 03. Example 1: Corporation A’s distributive share of income in partnership P is 20 per cent. Corporation A manufactures toys which are sold in the seven western states by partnership P. Corporation A’s business income for the year was $1,000,000 and partnership P’s business income for the same year was $800,000. The business income of corporation A is $1,160,000 ($1,000,000 plus 20 per cent of $800,000). Example 2: The facts are the same as in Example 1. Partnership P owns a building with an original cost of $100,000 which is rented to corporation A for $12,000 per year. Corporation A shall include $20,000 (20 per cent of $100,000) in its property factor because of its interest in partnership P. In addition, Corporation A shall take into account $9,600 ($12,000 less 20 per cent of $12,000) of rental expense into its property factor in order to include in the property factor the rented building used in Corporation A’s operation. Thus, Corporation A shall include $76,800 ($9,600 multiplied by 8, pursuant to section 235-31, HRS) for the rent paid, and $20,000 for its interest in the building through Partnership P, in its property factor, totalling $96,800 attributable to the building. (b) If a taxpayer is a partner in a partnership, and the partnership’s activities and the taxpayer’s activities do not constitute a unitary business, the partnership shall allocate and apportion its income at the partnership level. The taxpayer’s distributive share of the partnership’s income allocated or apportioned to this State shall not be subject to further apportionment by the taxpayer. HRS §235-29 HRS §235-29 §18-235-30-01 INCOME TAX LAW 235- 72 (Unofficial Compilation as of 12/31/2025) Example: Corporation A’s distributive share of income in partnership P is 20 per cent. Corporation A manufactures and sells toys in the seven western states. Partnership P operates farms within and without this State. Both corporation A and partnership P earn exclusively business income, except for distributions from Partnership P. Corporation A’s business income for the year is $1,000,000 and partnership P’s income is $800,000 for the same year. Because corporation A and partnership P are engaged in two different trades or businesses, corporation A shall apportion its $1,000,000 income on the basis of its own apportionment formula. Partnership P shall apportion its business income of $800,000 on the basis of its own apportionment formula. Corporation A’s apportionment factors are determined without regard to Partnership P’s apportionment factors, and vice versa. Assume that corporation A’s apportionment percentage determined under section 18-235-29-01 is 35 per cent, and that partnership P’s apportionment percentage is 10 per cent. Partnership P’s Hawaii income is 10 per cent of the income from its farming business ($80,000 = 10 per cent x $800,000). Corporation A is taxable in this State upon 35 per cent of the income from its toy manufacturing business ($350,000 = 35 per cent x $1,000,000) plus its full distributive share of the partnership income attributed to this State ($16,000 = 20 per cent x $80,000), or $366,000. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-29) §18-235-30-01 Property factor; in general. (a) The property factor of the apportionment formula for each trade or business of the taxpayer shall include all real and tangible personal property owned or rented by the taxpayer and used during the tax period in the regular course of the trade or business. (b) “Real and tangible personal property” includes land, buildings, machinery, stocks of goods, equipment, and other real and tangible personal property but does not include money. (c) Property used in connection with the production of nonbusiness income shall be excluded from the property factor. Property used both in the regular course of the taxpayer’s trade or business and in the production of nonbusiness income shall be included in the factor only to the extent that the property is used in the regular course of the taxpayer’s trade or business. (d) The method of determining that portion of the value to be included in the factor will depend upon the facts of each case. The property factor shall include the average value of property includable in the factor. See section 18-235-32-01. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-30) §18-235-30-02 Property factor; property used for the production of business income. (a) Property shall be included in the property factor if it is actually used or is available for or capable of being used during the tax period in the regular course of the trade or business of the taxpayer. (b) Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor. For example, a plant temporarily idle or raw material reserves not currently being processed are includable in the factor. (c) Property or equipment under construction during the tax period (except inventoriable goods in process) shall be excluded from the factor until that property is actually used in the regular course of the trade or business of the taxpayer. If the property is partially used in the regular course of the trade or business of the taxpayer while under construction, the value of the property to the extent used shall be included in the property factor. (d) Property used in the regular course of the trade or business of the taxpayer shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its conversion to the production of nonbusiness income, its sale, or the lapse of an extended period of time during which the property is held for sale. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-30) §18-235-30-03 Property factor; consistency in reporting. (a) In filing returns with this State, if the taxpayer departs from or modifies the manner of valuing property, or of excluding or including property in the property factor, used 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 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 valuation of property and in the exclusion or inclusion of property in the property factor, 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 §§235-30, 235-117) §18-235-30-04 Property factor; numerator. (a) The numerator of the property factor shall include the average value of the real and tangible personal property owned, rented, or leased by the taxpayer and used in this State during the tax period in the regular course of the trade or business of the taxpayer. HRS §235-30 HRS §235-30 HRS §235-30 HRS §235-30 INCOME TAX LAW §18-235-31-02 235- 73 (Unofficial Compilation as of 12/31/2025) (b) Property in transit between locations of the taxpayer to which it belongs shall be considered to be at the destination for purposes of the property factor. Property in transit between a buyer and seller which is included by a taxpayer in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination. (c) The value of mobile or movable property such as construction equipment, trucks, or leased electronic equipment which are located within and without this State during the tax period shall be determined for purposes of the numerator of the factor on the basis of total time within the State during the tax period. (d) A motor vehicle assigned to a traveling employee shall be included in the numerator of the factor of the state to which the employee’s compensation is assigned under the payroll factor or in the numerator of the state in which the motor vehicle is licensed. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-30) §18-235-30-05 Special rules; property factor. For special rules concerning the application of the property factor, see section 18-235-38-02. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §§235-31, 235-38) §18-235-31-01 Property factor; valuation of owned property. (a) Property owned by the taxpayer shall be valued at its original cost. As a general rule, original cost is deemed to be the basis of the property for federal income tax purposes (before any federal adjustments) at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements and partial dispositions. However, capitalized intangible drilling and development costs shall be included in the property factor whether or not they have been expensed for either federal or state tax purposes. Example 1: The taxpayer acquired a factory building in this State at a cost of $500,000 and, eighteen months later, expended $100,000 for major remodeling of the building. Taxpayer files its return for the current taxable year on the calendar-year basis. A depreciation deduction in the amount of $22,000 was claimed with respect to the building on the return for the current taxable year. The value of the building includable in the numerator and denominator of the property factor is $600,000; the depreciation deduction is not taken into account in determining the value of the building for purposes of the factor. Example 2: During the current taxable year, Corporation X merges into Corporation Y in a tax-free reorganization under the Internal Revenue Code. At the time of the merger, Corporation X owns a factory which X built five years earlier at a cost of $1,000,000. X has been depreciating the factory at the rate of two per cent per year, and its basis in X’s hands at the time of the merger is $900,000. Since the property is acquired by Y in a transaction in which, under the Internal Revenue Code, its basis in Y’s hands is the same as its basis in X’s hands, Y includes the property in Y’s property factor at X’s original cost, without adjustment for depreciation, i.e., $1,000,000. Example 3: Corporation Y acquires the stock of Corporation X and makes an election under section 338 of the Internal Revenue Code of 1986 (with respect to certain stock purchases treated as asset acquisitions). Under these circumstances, Y’s cost of the assets is the purchase price of the X stock, prorated over the X assets. If the original cost of property is unascertainable, the property is included in the factor at its fair market value as of the date of acquisition by the taxpayer. (b) Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes. (c) Property acquired by gift or inheritance shall be included in the factor at its basis for determining depreciation for federal income tax purposes. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-31) §18-235-31-02 Property factor; valuation of rented property. (a) Property rented or leased by the taxpayer is valued at eight times its net annual rental rate. (1) The net annual rental rate for any item of rented property is the annual rental rate paid by the taxpayer for the property less the aggregate annual subrental rates paid by subtenants of the taxpayer. (See section 18-235-38-02 for special rules when the use of such net annual rental rate produces a negative or clearly inaccurate value or when property is used by the taxpayer at no charge or is rented at a nominal rental rate.) (2) Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business HRS §235-30 HRS §235-31 HRS §235-31 §18-235-31-02 INCOME TAX LAW 235- 74 (Unofficial Compilation as of 12/31/2025) of the taxpayer when it is producing that income. Accordingly, there is no reduction in its value. Example 1: The taxpayer receives subrents from a bakery concession in a food market operated by the taxpayer. Since the subrents are business income, they are not deducted from rent paid by the taxpayer for the food market. Example 2: The taxpayer rents a five-story office building primarily for use in its multistate business, uses three floors for its offices, and manages and subleases two floors to various other businesses and persons such as professional people and shops. The rental of the two floors is incidental to the operation of the taxpayer’s trade or business. Since the subrents are business income, they are not deducted from the rent paid by the taxpayer. Example 3: The taxpayer rents a twenty-story office building and uses the lower two stories for its general corporation headquarters. The taxpayer hires an unrelated property management company to manage and sublease 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. Since the subrents are nonbusiness income they shall be deducted from the rent paid by the taxpayer. (b) As used in this section: “Annual rental rate” means the amount paid as rental for property for a twelve-month period (i.e., the amount of the annual rent). (1) Where property is rented for less than a twelve-month period, the rent paid for the actual period of rental shall constitute the annual rental rate for the tax period. (2) Where a taxpayer has rented property for a term of twelve or more months and the current tax period covers a period of less than twelve months (due, for example, to a reorganization or change of accounting period), the rent paid for the short tax period shall be annualized. (3) If the rental term is for less than twelve months, the rent shall not be annualized beyond its term. (4) Rent shall not be annualized because of the uncertain duration when the rental term is on a month-to-month basis. Example 1: Taxpayer A, which ordinarily files its returns based on a calendar year, is merged into Taxpayer B on April 30. The net rent paid under a lease with five years remaining is $2,500 a month. The rent for the tax period January 1 to April 30 is $10,000. After the rent is annualized the net rent is $30,000 ($2,500 x 12). Example 2: Same facts as in Example 1 except that the lease would have terminated on August 31. In this case, the annualized rent is $20,000 ($2,500 x 8). “Rent” means the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property. (1) Rent includes any amount payable for the use of real or tangible personal property, or any part of it, whether designated as a fixed sum of money or as a percentage of sales, profits, or otherwise. Example: A taxpayer, pursuant to the terms of a lease, pays a lessor $1,000 per month as a base rental and at the end of the year pays the lessor one per cent of its gross sales of $400,000. The annual rent is $16,000 ($12,000 plus one per cent of $400,000 or $4,000). (2) Rent includes any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance on the demised premises, repairs, or any other items which are required to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities or janitor services. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and other items. INCOME TAX LAW §18-235-32-01 235- 75 (Unofficial Compilation as of 12/31/2025) Example 1: A taxpayer, pursuant to the terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent is $15,000. Example 2: A taxpayer stores part of its inventory in a public warehouse. The total charge for the year was $1,000 of which $700 was for the use of storage space and $300 for inventory insurance, handling and shipping charges, and C.O.D. collections. The annual rent is $700. (3) Rent does not include incidental day-to-day expenses such as hotel or motel accommodations, or daily rental of motor vehicles. (4) Rent does not include royalties based on extraction of natural resources, whether represented by delivery or purchase. For this purpose, a royalty includes any consideration conveyed or credited to a holder of an interest in property which constitutes a sharing of current or future production of natural resources from such property, irrespective of the method of payment or how such consideration may be characterized, whether as a royalty, advance royalty, rental, or otherwise. (c) Leasehold improvements, for purposes of the property factor, shall be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor. (d) If a payment is made by a taxpayer to acquire a leasehold interest or a leased fee, rent includes the portion of the payment that is reported by the taxpayer as rental expense. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235- 118) (Imp: HRS §235-31) §18-235-31-03 Property factor; special rules. For special rules concerning application of the property factor, see section 18-235-38-02. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §§235-31, 235-38) §18-235-32-01 Property factor; averaging property values. (a) As a general rule, the average value of property owned by the taxpayer shall be determined by averaging the values at the beginning and ending of the tax period. However, the department may require or allow averaging by monthly values if that method of averaging is required to properly reflect the average value of the taxpayer’s property for the tax period. (b) Averaging by monthly values will generally be applied if substantial fluctuations in the values of the property exist during the tax period or if property is acquired after the beginning of the tax period or disposed of before the end of the tax period. Example: The monthly value of the taxpayer’s property was as follows: January $ 2,000 July $ 15,000 February 2,000 August 17,000 March 3,000 September 23,000 April 3,500 October 25,000 May 4,500 November 13,000 June 10,000 December 2,000 $ 25,000 $ 95,000 Total $120,000 The average value of the taxpayer’s property includable in the property factor for the income year is determined as follows: $ 120,000 = $ 10,000     12 Averaging with respect to rented property is achieved automatically by the method of determining the net annual rental rate of that property as set forth in section 18-235-31-02. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-32) HRS §235-31 HRS §235-32 §18-235-33-01 INCOME TAX LAW 235- 76 (Unofficial Compilation as of 12/31/2025) §18-235-33-01 Payroll factor; in general. (a) The payroll factor of the apportionment formula for each trade or business of the taxpayer shall include the total amount paid by the taxpayer in the regular course of its trade or business for compensation during the tax period. (b) The total amount paid to employees is determined with reference to the taxpayer’s accounting method. If the taxpayer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid. Notwithstanding the taxpayer’s method of accounting, at the election of the taxpayer, compensation paid to employees may be included in the payroll factor by use of the cash method if the taxpayer is required to report such compensation under that method for unemployment compensation purposes. (c) The compensation of any employee on account of activities which are connected with the production of nonbusiness income shall be excluded from the factor. Example 1: The taxpayer uses some of its employees in the construction of a storage building which, upon completion, is used in the regular course of the taxpayer’s trade or business. The wages paid to those employees are treated as a capital expenditure by the taxpayer. The amount of those wages is included in the payroll factor. Example 2: The taxpayer owns various securities which it holds as an investment separate and apart from its trade or business. The management of the taxpayer’s investment portfolio is the only duty of X, an employee. The salary paid to X is excluded from the payroll factor. (d) As used in sections 235-33 and 235-34, HRS, and the rules interpreting these sections: “Compensation” means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services. Payments made to an independent contractor or any other person not properly classifiable as an employee are excluded. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the taxpayer in return for personal services provided that the amounts constitute income to the recipient under the Internal Revenue Code. In the case of employees not subject to the Internal Revenue Code, such as those employed in foreign countries, the determination of whether benefits or services would constitute income to the employees shall be made as though the employees were subject to the Internal Revenue Code. “Employee” means (1) any officer of a corporation, or (2) any individual who, under the usual common- law rules applicable in determining the employer-employee relationship, has the status of an employee. Generally, a person will be considered to be an employee if the person is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act, Internal Revenue Code chapter 21; except that, since certain individuals are employees under the Federal Insurance Contributions Act who would not be employees under the usual common-law rules, it may be established that a person who is included as an employee for purposes of the Federal Insurance Contributions Act is not an employee for purposes of this subchapter. (e) In filing returns with this State, if the taxpayer departs from or modifies the treatment of compensation paid used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. (f) 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 treatment of compensation paid, 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 §§235-33, 235-117) §18-235-33-02 Payroll factor; denominator. The denominator of the payroll factor is the total compensation paid everywhere during the tax period. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is immune from taxation, for example, by Public Law 86-272, is included in the denominator of the payroll factor. Example: A taxpayer has employees in its state of legal domicile (State A) and is taxable in State B. In addition the taxpayer has other employees whose services are performed entirely in State C where the taxpayer is immune from taxation under Public Law 86-272. As to these latter employees, the compensation will be assigned to State C where their services are performed (i.e., included in the denominator but not the numerator of the payroll factor) even though the taxpayer is not taxable in State C. If the taxpayer is a corporation incorporated in this State, however, under section 235-4(d), HRS, that compensation shall be assigned to this State. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-33) HRS §235-33 HRS §235-33 INCOME TAX LAW §18-235-35-01 235- 77 (Unofficial Compilation as of 12/31/2025) §18-235-33-03 Payroll factor; numerator. The numerator of the payroll factor is the total amount paid in this State during the tax period by the taxpayer for compensation. If compensation paid to employees is included in the payroll factor by use of the cash method of accounting or if the taxpayer is required to report compensation under that method for unemployment compensation purposes, it shall be presumed that the total wages reported by the taxpayer to this State for unemployment compensation purposes constitute compensation paid in this State except for compensation excluded under sections 18-235-33-01 to 18-235-34-01. The presumption may be overcome by satisfactory evidence that an employee’s compensation is not properly reportable to this State for unemployment compensation purposes. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-33) §18-235-34-01 Payroll factor; compensation paid in this State. (a) Compensation is paid in this State if any one of the following tests, applied consecutively, is met: (1) The employee’s service is performed entirely within the State. (2) The employee’s service is performed both within and without the State, but the service performed without the State is incidental to the employee’s service within the State. In this paragraph, “incidental” means any service which is temporary or transitory in nature, or which is rendered in connection with an isolated transaction. (3) If the employee’s services are performed both within and without this State, the employee’s compensation shall be attributed to this State: (A) If the employee’s base of operations is in this State; (B) If there is no base of operations in any state in which some part of the service is performed, but the place from which the service is directed or controlled is in this State; or (C) If the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed but the employee’s residence is in this State. (b) As used in sections 235-33 and 235-34, HRS, and the rules thereunder: “Base of operations” means the place of more or less permanent nature from which the employee starts work and to which the employee customarily returns in order to receive instructions from the taxpayer or communications from customers or other persons or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of the employee’s trade or profession at some other point or points. “Place from which the service is directed or controlled” means the place from which the power to direct or control is exercised by the taxpayer. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-34) §18-235-35-01 Sales factor; in general. (a) “Sales” means all gross receipts of the taxpayer not allocated under sections 235-24 to 235-28, HRS. Thus, for the purposes of the sales factor of the apportionment formula for each trade or business of the taxpayer, sales means all gross receipts derived by the taxpayer from transactions and activity in the regular course of that trade or business. The following are rules for determining sales in various situations: (1) In the case of a taxpayer engaged in manufacturing and selling or purchasing and reselling goods or products, sales includes all gross receipts from the sale of goods or products (or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the tax period) held by the taxpayer primarily for sale to customers in the regular course of its trade or business. Gross receipts for this purpose means gross sales less returns and allowances, and includes all interest income, service charges, carrying charges, or time-price differential charges incidental to those sales. Federal and state excise taxes (including sales taxes and general excise taxes under chapter 237, HRS) shall be included as part of the seller’s receipts if the taxes are passed on to the buyer or included as part of the selling price of the product. (2) In the case of cost plus fixed fee contracts, such as the operation of a government-owned plant for a fee, sales includes the entire reimbursed cost plus the fee. (3) In the case of a taxpayer engaged in providing services, sales includes the gross receipts from the performance of those services, including fees, commissions, and similar items. (4) In the case of a taxpayer engaged in renting real or tangible property, sales includes the gross receipts from the rental, lease, or licensing the use of the property. (5) In the case of a taxpayer engaged in the sale, assignment, or licensing of intangible personal property such as patents and copyrights, sales includes the gross receipts from those activities. HRS §235-33 HRS §235-34 HRS §235-35 §18-235-35-02 INCOME TAX LAW 235- 78 (Unofficial Compilation as of 12/31/2025) (6) If a taxpayer derives receipts from the sale of equipment used in its business, those receipts constitute sales. For example, a truck express company owns a fleet of trucks and sells its trucks under a regular replacement program. The gross receipts from the sales of the trucks are included in the sales factor. See section 18-235-38-03 for rules that would apply if the sales were occasional. (b) In some cases certain gross receipts shall be disregarded in determining the sales factor in order that the apportionment formula will operate fairly to apportion to this State the income of the taxpayer’s trade or business. See section 18-235-38-03. (c) In filing returns with this State, if the taxpayer departs from or modifies the basis for excluding or including gross receipts in the sales factor used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. (d) 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 inclusion or exclusion of gross receipts, 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 §§235-35, 235-117) §18-235-35-02 Sales factor; denominator. The denominator of the sales factor shall include the total gross receipts derived everywhere by the taxpayer from transactions and activity in the regular course of its trade or business, except receipts excluded under section 18-235-38-03. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235- 118) (Imp: HRS §235-35) §18-235-35-03 Sales factor; numerator. The numerator of the sales factor shall include gross receipts attributable to this State and derived by the taxpayer from transactions and activity in the regular course of its trade or business. All interest income, service charge, carrying charges, or time-price differential charges incidental to those gross receipts shall be included regardless of (1) the place where the accounting records are maintained or (2) the location of the contract or other evidence of indebtedness. [Eff 11/25/94] (Auth: HRS §§231- 3(9), 235-118) (Imp: HRS §235-35) §18-235-35-04 Sales factor; special rules. For special rules concerning application of the sales factor, see section 18-235-38-03. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §§235-35 to 235-38) §18-235-35-05 Sales factor; no effect on warehousing exemption. Nothing in sections 235-35 to 235-37, HRS, or the rules under those sections shall be construed to expand or limit the exemption in section 235-6, HRS. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-6, 235-35) §18-235-36-01 Sales factor; sales of tangible personal property in this State. (a) Gross receipts from sales of tangible personal property (except sales to the United States Government; see section 18-235-36-02) are in this State: (1) If the property is delivered or shipped to a purchaser within this State regardless of the f.o.b. point or other conditions of sale; or (2) If the property is shipped from an office, store, warehouse, factory, or other place of storage in this State and the taxpayer is not taxable in the state of the purchaser. (b) Property shall be deemed to be delivered or shipped to a purchaser within this State if the recipient is located in this State, even though the property is ordered from outside this State. Example: The taxpayer, with inventory in State A, sold $100,000 of its products to a purchaser having branch stores in several states, including this State. The order for the purchase was placed by the purchaser’s central purchasing department located in State B. $25,000 of the purchase order was shipped directly to purchaser’s branch store in this State. The branch store in this State is the purchaser within this State with respect to $25,000 of the taxpayer’s sales. (c) Property is delivered or shipped to a purchaser within this State if the shipment terminates in this State, even though the property is subsequently transferred by the purchaser to another state. Example: The taxpayer makes a sale to a purchaser who maintains a central warehouse in this State at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in other states for sale. All of the taxpayer’s products shipped to the purchaser’s warehouse in this State constitute property delivered or shipped to a purchaser within this State. HRS §235-35 HRS §235-35 HRS §235-35 HRS §235-35 HRS §235-36 INCOME TAX LAW §18-235-37-01 235- 79 (Unofficial Compilation as of 12/31/2025) (d) In this section, “purchaser within this State” includes the ultimate recipient of the property if the taxpayer in this State, at the designation of the purchaser, delivers to or has the property shipped to the ultimate recipient within this State. Example: A taxpayer in this State sold merchandise to a purchaser in State A. Taxpayer directed the manufacturer or supplier of the merchandise in State B to ship the merchandise to the purchaser’s customer in this State pursuant to purchaser’s instructions. The sale by the taxpayer is in this State. (e) When property being shipped by a seller from the state of origin to a consignee in another state is diverted to a purchaser in this State while en route, the sales are in this State. Example: The taxpayer, a produce grower in State A, begins shipment of perishable produce to the purchaser’s place of business in State B. While en route, the produce is diverted to the purchaser’s place of business in this State in which state the taxpayer is subject to tax. The sale by the taxpayer is attributed to this State. (f) If the taxpayer is not taxable in the state of the purchaser, the sale is attributed to this State if the property is shipped from an office, store, warehouse, factory, or other place of storage in this State. Example: The taxpayer has its head office and factory in State A. It maintains a branch office and inventory in this State. Taxpayer’s only activity in State B is the solicitation of orders by a resident salesperson. All orders by the State B salesperson are sent to the branch office in this State for approval and are filled by shipment from the inventory in this State. Since the taxpayer is immune under Public Law 86-272 from tax in State B, all sales of merchandise to purchasers in State B are attributed to this State, the state from which the merchandise was shipped. (g) If a taxpayer whose salesperson operates from an office located in this State makes a sale to a purchaser in another state in which the taxpayer is not taxable and the property is shipped directly by a third party to the purchaser, the following rules apply: (1) If the taxpayer is taxable in the state from which the third party ships the property, then the sale is in that state. (2) If the taxpayer is not taxable in the state from which the property is shipped, then the sale is in this State. Example: The taxpayer in this State sold merchandise to a purchaser in State A. Taxpayer is not taxable in State A. Upon direction of the taxpayer, the merchandise was shipped directly to the purchaser by the manufacturer in State B. If the taxpayer is taxable in State B, the sale is in State B. If the taxpayer is not taxable in State B, the sale is in this State. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-36) §18-235-36-02 Sales factor; sales of tangible personal property to United States Government in this State. Gross receipts from sales of tangible personal property to the United States Government are in this State if the property is shipped from an office, store, warehouse, factory, or other place of storage in this State. For the purposes of this section, only sales for which the United States Government makes direct payment to the seller pursuant to the terms of a contract with an agency or instrumentality of the United States constitute sales to the United States Government. Thus, as a general rule, sales by a subcontractor to the prime contractor, the party to the contract with the United States Government, do not constitute sales to the United States Government. Example 1: A taxpayer contracts with General Services Administration to deliver X number of trucks which were paid for by the United States Government. The sale is a sale to the United States Government. Example 2: The taxpayer, as a subcontractor to a prime contractor with the National Aeronautics and Space Administration, contracts to build a component of a rocket for $1,000,000. The sale by the subcontractor to the prime contractor is not a sale to the United States Government. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-36) §18-235-37-01 Sales factor; sales other than sales of tangible personal property in this State. (a) Section 235-37, HRS, provides for the inclusion in the numerator of the sales factor of gross receipts HRS §235-36 HRS §235-37 §18-235-37-01 INCOME TAX LAW 235- 80 (Unofficial Compilation as of 12/31/2025) from transactions other than sales of tangible personal property (including transactions with the United States Government). Under this section, gross receipts are attributed to this State if the income producing activity which gave rise to the receipts is performed wholly within this State. Also, gross receipts are attributed to this State if, with respect to a particular item of income, the income producing activity is performed within and without this State but the greater proportion of the income producing activity is performed in this State, based on costs of performance. (b) As used in this section: “Costs of performance” means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer. “Income producing activity” applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining gains or profit. Income producing activity does not include transactions and activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, income producing activity includes but is not limited to the following: (1) The rendering of personal services by employees or the utilization of tangible and intangible property by the taxpayer in performing a service; (2) The sale, rental, leasing, licensing, or other use of real property; (3) The rental, leasing, licensing, or other use of tangible personal property; and (4) The sale, licensing, or other use of intangible personal property. The mere holding of intangible personal property is not, of itself, an income producing activity. (c) Receipts (other than from sales of tangible personal property) in respect to a particular income producing activity are in this State if: (1) The income producing activity is performed wholly within this State; or (2) The income producing activity is performed both in and outside this State and a greater proportion of the income producing activity is performed in this State than in any other state, based on costs of performance. (d) The following are special rules for determining when receipts from the income producing activities described below are in this State: (1) Gross receipts from the sale, lease, rental, or licensing of real property are in this State if the real property is located in this State. (2) Gross receipts from the rental, lease, or licensing of tangible personal property are in this State if the property is located in this State. The rental, lease, licensing, or other use of tangible personal property in this State is a separate income producing activity from the rental, lease, licensing, or other use of the same property while located in another state; consequently, if property is within and without this State during the rental, lease, or licensing period, gross receipts attributable to this State shall be measured by the ratio which the time the property was physically present or was used in this State bears to the total time or use of the property everywhere during that period. Example: Taxpayer is the owner of ten rental motor vehicles. During the year, the total of the days during which each motor vehicle was present in this State was fifty days. The receipts attributable to the use of each of the motor vehicles in this State are a separate item of income and shall be determined as follows: 10 vehicles x 50 days   x Total Receipts = Total Hawaii Receipts 10 vehicles x 365 days (3) Gross receipts for the performance of personal services are attributable to this State to the extent that such services are performed in this State. If services relating to a single item of income are performed partly within and partly without this State, the gross receipts from the performance of such services shall be attributable to this State only if the greater proportion of the services were performed in this State, based on costs of performance. Usually, where services are performed partly within and partly without this State, the services performed in each state will constitute a separate income producing activity; in such cases, the gross receipts from the performance of services attributable to this State shall be measured by the ratio which the time spent in performing the services in this State bears to the total time spent in performing the services everywhere. Time spent in performing services includes the amount of time expended in the performance of a contract or other obligation which gives rise to those gross receipts. Personal service not directly connected with the performance of INCOME TAX LAW §18-235-38-02 235- 81 (Unofficial Compilation as of 12/31/2025) the contract or other obligation, as for example time expended in negotiating the contract, is excluded from the computations. Example 1: Taxpayer, a road show, gave theatrical performances at various locations in State X and in this State during the tax period. All gross receipts from performances given in this State are attributed to this State. Example 2: The taxpayer, a public opinion survey corporation, conducted a poll by means of its employees in State X and in this State for the sum of $9,000. The project required six hundred employee hours to obtain the basic data and prepare the survey report. Two hundred of the six hundred employee hours were expended in this State. The receipts attributable to this State are $3,000: 200 x $9,000 = $3,000 600 [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §§235-37, 235-38) §18-235-38-01 Equitable adjustment of apportionment formula. (a) If the director of taxation determines that the apportionment formula prescribed by section 235-29, HRS, does not fairly determine net income derived from or attributable to Hawaii, the director may direct or permit the use of an apportionment formula based on other factors that would more clearly reflect income attributable to Hawaii. (b) A taxpayer may petition the director to use an allocation or apportionment method other than that prescribed in part II of chapter 235, HRS, by written request. (1) The petition shall include data clearly showing that the application of factors provided in the law, including these rules, do not result in a reasonable attribution of net income to Hawaii due to the peculiar nature of the taxpayer’s business and that the taxpayer’s proposed method more clearly reflects income attributable to Hawaii. (2) The petition shall disclose whether the method that is being used or requested is being employed in all other states to which the taxpayer reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act. (c) The following shall be sufficient to constitute the director’s imposition of alternative apportionment under this section: (1) Issuance of an assessment based on an alternative method accompanied by notification that an alternative method was used; (2) For a claim for refund on an original return, denial of a taxpayer’s claim for refund accompanied by notification that an alternative method was used; (3) For a claim for refund made via an amended original return, denial of a taxpayer’s claim for refund without more, provided that the alternative used by the director consists wholly of the method used by the taxpayer in filing its original return. (4) In all other cases, any notification that an alternative method was used.” [Eff 11/25/94; am 4/2/16] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §§235-38, 235-117) §18-235-38-02 Special rules; property factor. (a) If the subrents taken into account in determining the net annual rental rate under section 18-235-31-02 produce a negative or clearly inaccurate value for any item of property, another method which will properly reflect the value of rented property may be required by the department or requested by the taxpayer. In no case, however, shall the value be less than an amount which bears the same ratio to the annual rental rate paid by the taxpayer for the property as the fair market value of that portion of the property used by the taxpayer bears to the total fair market value of the rented property. Example: The taxpayer rents a ten-story building at an annual rental rate of $1,000,000. Taxpayer occupies two stories and sublets eight stories for $1,000,000 a year. The net annual rental rate of the taxpayer must not be less than two-tenths of the taxpayer’s annual rental rate for the entire year, or $200,000. (b) If property owned by others is used by the taxpayer at no charge or rented by the taxpayer for a nominal rate, the net annual rental rate for the property shall be determined on the basis of a reasonable market rental rate for the property. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §§235-31, 235-38) HRS §235-38 HRS §235-38 §18-235-38-03 INCOME TAX LAW 235- 82 (Unofficial Compilation as of 12/31/2025) §18-235-38-03 Special rules; sales factor. (a) Where substantial amounts of gross receipts arise from an occasional sale of a fixed asset used in the regular course of the taxpayer’s trade or business, those gross receipts shall be excluded from the sales factor. For example, gross receipts from the sale of a factory or plant will be excluded. (b) Insubstantial amounts of gross receipts arising from occasional transactions or activities may be excluded from the sales factor unless their exclusion would materially affect the amount of income apportioned to this State. For example, the taxpayer ordinarily may include in or exclude from the sales factor gross receipts from transactions such as the sale of office furniture or business motor vehicles. (c) In subsections (a) and (b), a transaction qualifying as a casual sale as defined in section 237-1, HRS, and section 18-237-1 shall be considered an occasional transaction. (d) Where the income producing activity in respect to business income from intangible personal property can be readily identified, the income is included in the denominator of the sales factor and, if the income producing activity occurs in this State, in the numerator of the sales factor as well. For example, usually the income producing activity can be readily identified in respect to interest income received on deferred payments on sales of tangible property (section 18-235-35-01(a)(1)) and income from the sale, licensing, or other use of intangible personal property (section 18-235-37-01(b)(4)). (e) Where business income from intangible property cannot readily be attributed to any particular income producing activity of the taxpayer, the income cannot be assigned to the numerator of the sales factor for any state and shall be excluded from the denominator of the sales factor. For example, where business income in the form of dividends received on stock, royalties received on patents or copyrights, or interest received on bonds, debentures, or government securities results from the mere holding of the intangible personal property by the taxpayer, the dividends and interest shall be excluded from the denominator of the sales factor. Income from a foreign affiliate as defined in section 18-235-38.5-02, including dividends from a foreign affiliate and interest paid on intercompany loans, shall be excluded from the denominator of the sales factor. (f) Where gains and losses on the sale of liquid assets are not excluded from the sales factor by other provisions under this section, such gains or losses shall be treated as provided in this subsection. This subsection does not provide rules relating to the treatment of other receipts produced from holding or managing such assets. If a taxpayer holds liquid assets in connection with one or more treasury functions of the taxpayer, and the liquid assets produce business income when sold, exchanged or otherwise disposed, the overall net gain from those transactions for each treasury function for the tax period is included in the sales factor. For purposes of this subsection, each treasury function will be considered separately. (1) For purposes of subsection (f), a “liquid asset” is an asset (other than functional currency or funds held in bank accounts) held to provide a relatively immediate source of funds to satisfy the liquidity needs of the trade or business. “Liquid assets” include foreign currency (and trading positions therein) other than functional currency used in the regular course of the taxpayer’s trade or business; marketable instruments (including stocks, bonds, debentures, options, warrants, futures contracts, etc.); and mutual funds which hold such liquid assets. An instrument is considered marketable if it is traded in an established stock or securities market and is regularly quoted by brokers or dealers in making a market. Stock in a corporation which is unitary with the taxpayer, or which has a substantial business relationship with the taxpayer is not considered marketable stock. (2) For purposes of subsection (f), a “treasury function” is the pooling and management of liquid assets for the purpose of satisfying the cash flow needs of the trade or business, such as providing liquidity for a taxpayer’s business cycle, providing a reserve for business contingencies, business acquisitions, etc. A taxpayer principally engaged in the trade or business of purchasing and selling instruments or other items included in the definition of liquid assets set forth herein is not performing a treasury function with respect to income so produced. (3) For purposes of subsection (f), “overall net gain” refers to the total net gain from all transactions incurred at each treasury function for the entire tax period, not the net gain from a specific transaction. Example 1: A taxpayer manufactures various gift items. Because of seasonal variations, the taxpayer must keep liquid assets available for later inventory acquisitions. Because the manufacturer wants to obtain a return on available funds, the manufacturer acquires liquid assets, which are held and managed in this State. The net gain resulting from all gains and losses on the sale of the liquid assets for the tax year will be reflected in the denominator of the sales factor and in the numerator of this State. HRS §235-38 INCOME TAX LAW §18-235-38-06 235- 83 (Unofficial Compilation as of 12/31/2025) Example 2: A stockbroker acts as a dealer or trader for its own account in its ordinary course of business. Some of the instruments sold are liquid assets. This subsection does not operate to classify those sales as attributable to a treasury function. [Eff 11/25/94; am 9/8/98] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §§235-35 to 235-38) §18-235-38-04 Allocation of income and deductions among taxpayers. (a) If two or more organizations, trades, or businesses, whether or not incorporated or organized in Hawaii, are owned or controlled directly or indirectly by the same interests, the director may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among the organizations, trades, or businesses if the director determines that the distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or to clearly reflect the income attributable to any taxpayer’s activity in Hawaii. (b) This section shall not be construed to permit the filing of consolidated returns by two or more affiliated corporations except as provided by section 235-92, HRS. (c) The director shall not allocate or apportion income to Hawaii in excess of what is considered just and reasonable under the circumstances. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118, 235-38) (Imp: HRS §235-38, IRC §482) Historical note: §18-235-38-04 is based substantially upon §18-235-5-04. [Eff 2/16/82; am and ren §18-235-5-04 9/3/94] §18-235-38-05 Apportionment method considered method of accounting. (a) A taxpayer’s change in any of the following shall be a change in the taxpayer’s method of accounting within the meaning of sections 446 (with respect to methods of accounting) and 481 (with respect to adjustments required by changes in method of accounting), IRC, as operative under chapter 235, HRS: (1) The manner of prorating any item of deduction among the classes of income to which it is applicable. See section 18-235-21-04. (2) The manner in which income is classified as business income or nonbusiness income. See section 18-235-22-05. (3) The manner of valuing property, or of excluding or including property in the property factor. See section 18-235-30-03. (4) The treatment of compensation paid. See section 18-235-33-01. (5) The manner of excluding or including gross receipts in the sales factor. See section 18-235- 35-01. (6) The apportionment formula employed. See section 18-235-38-01. (7) Whether the taxpayer is employing a combined reporting method. See section 18-235-22-03. (b) In order to secure the department’s consent to a change in any of the items set forth in subsection (a), the taxpayer shall file a written application with the department within one-hundred-eighty days after the beginning of the taxable year in which it is desired to make the change. (1) The taxpayer, to the extent applicable, shall (A) disclose in detail all classes of items which would be treated differently as a result of the proposed change, (B) state the reasons for making the change, and (C) furnish the taxpayer’s computation of any applicable adjustments to take into account any duplications or omissions. (2) The department may require such other information as may be necessary in order to determine whether the proposed change will be permitted. (3) Permission shall not be granted unless the taxpayer and the department agree to the terms, conditions, and adjustments, if any, under which the change will be effected. (4) Within one-hundred-eighty days after receiving the application, the department shall grant or deny the application. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-38, IRC §§446, 481) §18-235-38-06 Apportionment of income for special industries. The director finds that neither the apportionment formula of section 235-29, HRS, nor the separate accounting method clearly or accurately reflects the correct taxable income in Hawaii of taxpayers doing business within and without Hawaii in the industries listed in the following table. Accordingly, income of these taxpayers shall be apportioned using the methods in the section listed opposite the name of the industry in the following table. Special industry Section Air carriers 18-235-38-06.02 Construction contractors 18-235-38-06.03 HRS §235-38 HRS §235-38 HRS §235-38 §18-235-38-06.01 INCOME TAX LAW 235- 84 (Unofficial Compilation as of 12/31/2025) Ocean carriers 18-235-38-06.01 Publishing 18-235-38-06-05 Radio broadcasting 18-235-38-06.04 Television broadcasting 18-235-38-06.04 [Eff 9/3/94; am 3/11/96, 7/25/98] (Auth: HRS §§231-3(9), 235-118, 235-38) (Imp: HRS §235-38) Historical note: §18-235-38-06 is based substantially upon §18-235-5(b)(2). [Eff 2/16/82; am and ren 9/3/94] §18-235-38-06.01   Apportionment of income for ocean carriers. (a) As used in this section: “Originating revenue within this State” means revenue to an ocean carrier from the transportation of revenue passengers and revenue cargo first received by the carrier either as originating or connecting traffic at ports within the State. “Revenue tons handled”, for an ocean carrier at a port, mean the weight in tons of revenue passengers (at five hundred pounds per passenger) and revenue cargo first received as originating or connecting traffic, or finally discharged by the carrier at the port. “Voyage hours” mean the total hours the ocean carrier’s vessels have spent over the high seas plus the hours spent in port. Voyage hours do not include hours when vessels are withheld from service because of strikes, repairs or maintenance, acts of God, or seasonal reduction of service. (b) Business income of an ocean carrier shall be apportioned to Hawaii by multiplying the income by a fraction, the denominator of which is three and the numerator of which is the sum of the following three ratios: (1) The ratio of revenue tons handled by the ocean carrier at ports within this State during the taxable year to the total revenue tons handled by the carrier at ports within and without this State during the same period; (2) The ratio of the ocean carrier’s originating revenue within this State for the taxable year to the carrier’s total originating revenue within and without this State for the same period; and (3) The ratio of the ocean carrier’s voyage hours within this State for the taxable year to the carrier’s total voyage hours within and without this State for the same period. (c) For an ocean carrier incorporated in Hawaii, the numerator in each of the ratios in subsection (b) (1), (2), and (3) shall include that portion of revenue tons, originating revenues, and voyage hours attributable to jurisdictions in which the ocean carrier is not taxable. [Eff 9/3/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-38) Historical note: §18-235-38-06.01 is based substantially upon §18-235-5(e)(5)(A). [Eff 2/16/82; am and ren 9/3/94] §18-235-38-06.02   Apportionment of income for air carriers. (a) As used in this section: “Flight operating hours” mean the normal air and ground hours of aircraft of an air carrier in scheduled flights and nonscheduled operations. Flight operating hours do not include time spent for repairs and maintenance and delays caused by abnormal events such as strikes, acts of God, and weather conditions. “Originating revenue within this State” means revenue from the transportation of revenue passengers and revenue cargo that are first received by the air carrier either as originating or connecting traffic at airports within the State. (1) Originating revenue includes revenue from the carriage of express and mail. (2) Originating revenue does not include passenger receipts that will be turned over to another air carrier as its share of the total passenger receipts. “Revenue tons handled”, by an air carrier at an airport, mean the weight in tons of revenue passengers (at two hundred pounds per passenger) and revenue cargo first received as originating or connecting traffic, or finally discharged by the air carrier at the airport. (1) Revenue tons handled includes express and mail tonnage. (2) For purposes of computing revenue tons handled, revenue passengers do not include those passengers making transfers on connecting flights of the same carrier; however, passengers making voluntary stopovers at a connecting point for twenty-four hours or more shall not be considered to be making connecting flights. (b) Business income of an air carrier shall be apportioned to Hawaii by multiplying the income by a fraction, the denominator of which is three and the numerator of which is the sum of the following three ratios: (1) The ratio of the revenue tons handled by the air carrier at airports within this State during the taxable year to the total revenue tons handled at airports within and without this State during the same period; HRS §235-38 HRS §235-38 INCOME TAX LAW §18-235-38-06.03 235- 85 (Unofficial Compilation as of 12/31/2025) (2) The ratio of the air carrier’s originating revenue within this State for the taxable year to the total originating revenue within and without this State for the same period; and (3) The ratio of the air carrier’s flight operating hours within this State for the taxable year to the total flight operating hours within and without this State for the same period. (c) For an air carrier incorporated in Hawaii, the numerator in each of the ratios in subsection (b)(1), (2), and (3) shall include that portion of revenue tons, originating revenues, and flight operating hours attributable to jurisdictions in which the air carrier is not taxable. [Eff 9/3/94] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-38) Historical note: §18-235-38-06.02 is based substantially upon §18-235-5(e)(5)(B). [Eff 2/16/82; am and ren 9/3/94] §18-235-38-06.03   Construction contractors. (a) These rules apply to a taxpayer that uses the percentage of completion method or the completed contract method to account for income from long-term contracts (construction contracts covering a period in excess of one year from the date of execution of the contract to the date on which the contract is finally completed and accepted). (1) Every taxpayer shall determine how much of the taxpayer’s income for the year constitutes nonbusiness income, and how much constitutes business income, under section 235-21, HRS, and the rules that interpret that section. (2) Nonbusiness income is directly allocated to Hawaii under sections 235-25 to 235-28, HRS, and the rules that interpret those provisions. (3) For a taxpayer using the percentage of completion method described in subsection (d)(2), the taxpayer’s business income (including income from long-term contracts that is allocable to the year) is apportioned to Hawaii using the three-factor formula in section 235-29, HRS, where the factors are modified as follows: (A) The rules in subsection (d)(4) apply to the property factor, in order to take into account the taxpayer’s investment in a construction project in progress; (B) The rules in subsection (d)(5) apply to the payroll factor; and (C) The rules in subsection (d)(6), including subsection (d)(6)(B), apply to the sales factor in order to take into account receipts from long-term contracts. (4) For a taxpayer using the completed contract method described in subsection (d)(3): (A) The taxpayer’s business income (not including business income from long-term contracts) is apportioned to Hawaii using the three-factor formula in section 235-29, HRS, where the factors are modified as follows: (i) The rules in subsection (d)(4) modify the property factor to take into account the taxpayer’s investment in a construction project in progress; (ii) The rules in subsection (d)(5) apply to the payroll factor; and (iii) The rules in subsection (d)(6), including subsection (d)(6)(C), apply to the sales factor in order to take into account receipts from long-term contracts; and (B) Business income from each long-term contract is separately apportioned as follows: (i) Income from each long-term contract completed during the year is apportioned to Hawaii using the method described in subsection (e), which uses a weighted average of the factors determined under subparagraph (A) for each year the contract was in progress; (ii) If the taxpayer dissolves, withdraws, or otherwise ceases doing business in Hawaii during the year, income from each incomplete contract shall be taken into account and apportioned to Hawaii using the method described in subsection (f), which uses a weighted average of the factors determined under subparagraph (A) for each year the contract was in progress; or (iii) Otherwise, income from each long-term contract that is not completed during the year is not taken into account in that year. (5) The sum of: (A) The items of nonbusiness income directly allocated to Hawaii under paragraph (2), and (B) The amount of business income apportioned to Hawaii under paragraph (3) or (4), is the amount of the taxpayer’s income that is subject to net income tax by Hawaii. (b) For definitions, rules, and examples for determining business and nonbusiness income, see section 235-21, HRS, and the rules that interpret that section. (c) For general rules of accounting, definitions, and methods of accounting for long-term construction contracts see sections 446 (relating to methods of accounting generally) and 460 (relating to the general requirement HRS §235-38 §18-235-38-06.03 INCOME TAX LAW 235- 86 (Unofficial Compilation as of 12/31/2025) that the percentage of completion method be used) of the Internal Revenue Code of 1986, as amended, as operative under chapter 235, HRS; and Treasury Regulations section 1.451-3. (d) The following rules apply to apportionment of business income. (1) Business income is apportioned to Hawaii by a three-factor formula consisting of property, payroll, and sales regardless of the method of accounting for long-term contracts elected by the taxpayer. The total of the property, payroll, and sales percentages is divided by three to determine the apportionment percentage. The apportionment percentage then is applied to business income to determine the amount apportioned to Hawaii. (2) Under the percentage of completion method of accounting for long-term contracts, the amount to be included each year as business income from each contract is the amount by which the gross contract price corresponding to the percentage of the entire contract that has been completed during the income year exceeds all expenditures made during the income year in connection with the contract. In so doing, account must be taken of the material and supplies on hand at the beginning and end of the income year for use in each long-term contract. Example: A taxpayer using the percentage of completion method of accounting for long-term contracts entered into a long-term contract to build a structure for $9,000,000. The contract allowed three years for completion and, as of the end of the second income year, the taxpayer’s books of account, kept on the accrual method, disclosed the following: Receipts Expenditures End of 1st income year $2,500,000 $2,400,000 End of 2nd income year 4,500,000 4,100,000 Totals $7,000,000 $6,500,000 In computing the above expenditures, consideration was given to material and supplies on hand at the beginning and end of each income year. It was estimated that the contract was 30 per cent completed at the end of the first income year and (because of change orders given during the second income year) 80 per cent completed at the end of the second income year. The amount to be included as business income for the first income year is $300,000 (30 per cent of $9,000,000 or $2,700,000, less expenditures of $2,400,000, equals $300,000). The amount to be included as business income for the second income year is $400,000 (50 per cent of $9,000,000 or $4,500,000, less expenditures of $4,100,000, equals $400,000). If a taxpayer has made the election under section 460(b)(5) of the Internal Revenue Code (under which a taxpayer does not take into account income with respect to a contract under the percentage of completion method until the income year as of the close of which at least 10 per cent of the estimated total contract costs have been incurred), then with respect to each contract to which the election is effective: (A) The property, payroll, and sales factors shall be computed as set forth in this section the same as if the election had not been made; (B) Income from the contract for the 10 per cent year is apportioned to Hawaii using the methodology described in subsection (e), which uses a weighted average of the property, payroll, and sales factors for the 10 per cent year and all prior income years in which the contract was in progress; and (C) Where the taxpayer dissolves, withdraws, or otherwise ceases doing business in Hawaii during a year prior to the 10 per cent year, the taxpayer shall take into account income with respect to the contract, and the income shall be apportioned to Hawaii, using the method described in subsection (f), which uses a weighted average of the property, payroll, and sales factors for all income years in which the contract was in progress. (3) Under the completed contract method of accounting, business income derived from long- term contracts is reported for the income year in which the contract is finally completed and accepted. Therefore, a special computation is required to compute the amount of business income attributable to Hawaii from each completed contract (see subsection (e)). Thus, all receipts and expenditures applicable to those contracts, whether complete or incomplete as of the end of the income year, are apportioned separately from business income derived INCOME TAX LAW §18-235-38-06.03 235- 87 (Unofficial Compilation as of 12/31/2025) from other sources, such as short-term contracts, interest, rents, or royalties, which are apportioned by the regular three-factor formula of property, payroll, and sales. (4) In general, the numerator and denominator of the property factor shall be determined as set forth in sections 235-30 to 235-32, HRS, and the rules that interpret those provisions. However, the following special rules also are applicable: (A) The average value of the taxpayer’s cost (including materials and labor) of construction in progress, to the extent the costs exceed progress billings (accrued or received, depending on whether the taxpayer is on the accrual or cash basis for keeping its accounts) shall be included in the denominator of the property factor. The value of any such construction costs attributable to construction projects in Hawaii shall be included in the numerator of the property factor. Example 1: Taxpayer commenced a long-term construction project in Hawaii as of the beginning of a given income year. By the end of its second year, its equity in the costs of production to be reflected in the numerator and denominator of its property factor for that year is computed as follows: 1st Year 2nd Year Beginning Ending Beginning Ending Construction Costs $1,000,000 Progress Billings 600,000 Balance 12/31 - (1/1) $400,000 $400,000 Construction Costs - Total from beginning of project $5,000,000 Progress billings - Total from beginning of project 4,000,000 Balance 12/31 1,000,000 Balance beginning of year 400,000 Total $1,400,000 Average (1/2) (Note 1) - Value used in property factor $ 700,000 Note 1 - It may be necessary to use monthly averages if yearly averages do not properly reflect the average value of the taxpayer’s equity. See section 235-32, HRS, and the rules that interpret that section. Example 2: Same facts as in Example 1, except that progress billings exceeded construction costs. No value for the taxpayer’s equity in the construction project is shown in the property factor. (B) Rent paid for the use of equipment directly attributable to a particular construction project is included in the property factor at eight times the net annual rental rate even though the rental may be capitalized into the cost of construction. (C) The property factor is computed in the same manner for all long-term contract methods of accounting and is computed for each income year even though under the completed contract method of accounting, business income is computed separately (see subsection (e)). (5) In general the numerator and denominator of the payroll factor shall be determined as set forth in sections 235-33 and 235-34, HRS, and the rules that interpret those provisions. However, the following special rules also are applicable: (A) Compensation paid employees which is attributable to a particular construction project is included in the payroll factor even though capitalized into the cost of construction. (B) Compensation paid employees who in the aggregate perform most of their services in a state other than the state to which their employer reports them for unemployment tax purposes, shall nevertheless be attributed to the state in which the services are performed.       Example: A taxpayer engaged in a long-term contract in state X sends several key employees to that state to supervise the project. The taxpayer, for unemployment §18-235-38-06.03 INCOME TAX LAW 235- 88 (Unofficial Compilation as of 12/31/2025) tax purposes, reports these employees to state Y where the main office is maintained and where the employees reside. For payroll factor purposes, the compensation is assigned to the numerator of state X. (C) The payroll factor is computed in the same manner for all long-term contract methods of accounting and is computed for each income year even though, under the completed contract method of accounting, business income is computed separately (see subsection (e)). (6) In general, the numerator and denominator of the sales factor shall be determined as set forth in sections 235-35 to 235-37, HRS, and the rules that interpret those provisions. However, the following special rules also are applicable: (A) Gross receipts derived from the performance of a contract are attributable to Hawaii if the construction project is located in Hawaii. If the construction project is located partly within and partly without Hawaii, the gross receipts attributable to Hawaii are based upon the ratio which construction costs for the project in Hawaii incurred during the income year bear to the total of construction costs for the entire project during the income year. Any other method, such as engineering cost estimates, may be used if it provides a reasonable apportionment. Example: A construction project was undertaken in Hawaii by a calendar year taxpayer which had elected one of the long-term contract methods of accounting. The following gross receipts (progress billings) were derived from the contract during the three income years that the contract was in progress. 1st Year 2nd Year 3rd Year Gross Receipts $1,000,000 $4,000,000 $3,000,000 The gross receipts to be reflected in both the numerator and denominator of the sales factor for each of the three years are the amounts shown. (B) If the percentage of completion method is used, the sales factor includes only that portion of the gross contract price which corresponds to the percentage of the entire contract which was completed during the income year. Example: A taxpayer which had elected the percentage of completion method of accounting entered into a long-term construction contract. At the end of its current income year (the second since starting the project), it estimated that the project was 30 per cent completed. The bid price for the project was $9,000,000 and it had received $2,500,000 from progress billings as of the end of its current income year. The amount of gross receipts to be included in the sales factor for the current income year is $2,700,000 (30 per cent of $9,000,000), regardless of whether the taxpayer uses the accrual method or the cash method of accounting for receipts and disbursements. (C) If the completed contract method of accounting is used, the sales factor includes the portion of the gross receipts (progress billings) received or accrued, whichever is applicable, during the income year attributable to each contract. Example 1: A taxpayer which had elected the completed contract method of accounting entered into a long-term construction contract. By the end of its current income year (the second since starting the project), it had billed, and had accrued on its books, a total of $5,000,000. Of that amount, $2,000,000 had accrued in the first year in which the contract was undertaken, and $3,000,000 had accrued in the current (second) year. The amount of gross receipts to be included in the sales factor for the current income year is $3,000,000. Example 2: Same facts as in Example 1 except that the taxpayer keeps its books on the cash basis and, as of the end of its current income year, had received only $2,500,000 of the $3,000,000 billed during the current year. The amount of gross receipts to be included in the sales factor for the current income year is $2,500,000. INCOME TAX LAW §18-235-38-06.03 235- 89 (Unofficial Compilation as of 12/31/2025) (D) The sales factor, except as noted above in subparagraphs (B) and (C), is computed in the same manner regardless of which long-term method of accounting the taxpayer has elected, and is computed for each income year even though, under the completed contract method of accounting, business income is computed separately. (7) The total of the property, payroll, and sales percentages is divided by three to determine the apportionment percentage. The apportionment percentage then is applied to business income to establish the amount apportioned to Hawaii. (e) The completed contract method of accounting requires that the reporting of income (or loss) be deferred until the year in which the construction project is completed or accepted. Accordingly, a separate computation is made for each such contract completed during the income year, regardless of whether the project is located within or without Hawaii, in order to determine the amount of income which is attributable to sources within Hawaii. The amount of income from each contract completed during the income year apportioned to Hawaii, plus other business income apportioned to Hawaii by the regular three-factor formula (such as interest income, rents, royalties, or income from short-term contracts), plus all nonbusiness income allocated to Hawaii, is the measure of tax for the income year. The amount of income (or loss) from each contract which is derived from sources within Hawaii using the completed contract method of accounting is computed as follows: (1) In the income year in which the contract is completed, the income (or loss) from the contract is determined. (2) The income (or loss) determined at paragraph (1) is apportioned to Hawaii by the following method: (A) A fraction is determined for each year the contract was in progress. The numerator is the amount of construction costs paid or accrued in each year the contract was in progress and the denominator is the total of all construction costs for the project. (B) Each percentage determined in (A) is multiplied by the apportionment formula percentage for that particular year as determined in subsection (d)(7). (C) The percentages determined in (B) for each year during which the contract was in progress are totaled. The amount of total income (or loss) from the contract determined in paragraph (1) is multiplied by the total percentage. The resulting income (or loss) is the amount of business from such contract derived from sources within Hawaii. Example 1: A taxpayer using the completed contract method of accounting for long- term contracts is engaged in three long-term contracts: Contract L in Hawaii, Contract M in state X and Contract N in state Y. In addition, it has other business income (less expenses) during the income year 1992 from interest, rents, and short-term contracts amounting to $500,000, and nonbusiness income allocable to Hawaii of $8,000. During 1992, it completed Contract M in state X at a profit of $900,000. Contracts L and N in Hawaii and state Y, respectively, were not completed during the income year. The apportionment percentages of the taxpayer as determined in subsection (d)(7) and the percentages of contract costs as determined in this paragraph for each year during which Contract M in state X was in progress are as follows: 1990 1991 1992 Apportionment % 30% 20% 40% % of Construction costs of Contract M each year to total construction costs - (100%) 20% 50% 30% The corporation’s net income subject to tax in Hawaii for 1992 is computed as follows: Business Income $500,000 Apportion 40% to Hawaii 200,000 Add: Income from Contract M (Note 1) 252,000 Total business income derived from sources within Hawaii 452,000 Add: Nonbusiness income allocated to Hawaii 8,000 Net income subject to tax $460,000 Note 1 - Income from Contract M apportioned to Hawaii: §18-235-38-06.03 INCOME TAX LAW 235- 90 (Unofficial Compilation as of 12/31/2025) 1990 1991 1992 Total Apportionment % 30% 20% 40% % of Construction Costs 20% 50% 30% 100% Product 6% 10% 12% 28% 28% of $900,000 = $252,000 Example 2: Same facts as in Example 1 except that Contact L was started in 1992 in Hawaii, the first year in which the taxpayer was subject to tax in Hawaii. Contract L in Hawaii and Contract N in state Y are incomplete in 1992. The corporation’s net income subject to tax in Hawaii for 1992 is computed as follows: Business Income $500,000 Apportion 40% to Hawaii 200,000 Add: Income from Contract M (Note 1) 108,000 Total business income derived from sources within Hawaii 308,000 Add: Nonbusiness income allocated to Hawaii 8,000 Net Income subject to tax $316,000 Note 1 - Income from Contract M apportioned to Hawaii: 1990 1991 1992 Total Apportionment % -0- -0- 40% Costs 20% 50% 30% 100% Product -0- -0- 12%   12% 12% of $900,000 = $108,000 Here, only 12 per cent is used to determine the income derived from sources within Hawaii since the corporation was not subject to tax in Hawaii prior to 1992. Example 3: Same facts as in Example 1 except that the figures relate to Contract L in Hawaii and 1992 is the first year the corporation was taxable in another state (see sections 235-22 and 235-23, HRS, and the rules that interpret those provisions). Contracts M and N in states X and Y were started in 1992 and are incomplete. The corporation’s net income subject to tax in Hawaii for 1992 is computed as follows: Business Income $500,000 Apportion 40% to Hawaii 200,000 Add: Income from Contract L (Note 1) 738,000 Total business income derived from sources within Hawaii 938,000 Add: Nonbusiness income allocated to Hawaii 8,000 Net income subject to tax $946,000 Note 1 - Income from Contract L apportioned to Hawaii: 1990 1991 1992 Total Apportionment % 100% 100% 40% % of Construction Costs 20% 50% 30% 100% Product 20% 50% 12% 82% 82% of $900,000 = $738,000 (f) Use of the completed contract method of accounting for long-term contracts requires that income derived from sources within Hawaii from incomplete contracts in progress outside Hawaii on the date of withdrawal, dissolution, or cessation of business in Hawaii be included in the measure of tax for the taxable year during which the corporation withdraws, dissolves, or ceases doing business in Hawaii. The amount of income (or loss) from each contract to be apportioned to Hawaii by the apportionment method set forth in subsection (e)(2) shall be determined as if the percentage of completion method of accounting INCOME TAX LAW §18-235-38-06.03 235- 91 (Unofficial Compilation as of 12/31/2025) were used for all contracts on the date of withdrawal, dissolution, or cessation of business. The amount of business income (or loss) for each contract shall be the amount by which the gross contract price from each contract which corresponds to the percentage of the entire contract which has been completed from the commencement of the contract to the date of withdrawal, dissolution, or cessation of business exceeds all expenditures made during that period in connection with each contract. In so doing, account must be taken of the material and supplies on hand at the beginning and end of the income year for use in each contract. Example: A construction contractor qualified to do business in Hawaii had elected the completed contract method of accounting for long-term contracts. It was engaged in two long- term contracts. Contract L in Hawaii was started in 1991 and completed at a profit of $900,000 on December 16, 1993. The taxpayer withdrew on December 31, 1993. Contract M in state X was started in 1992 and was incomplete on December 31, 1993. The apportionment percentages of the taxpayer, as determined in subsection (d), and percentages of construction costs, as determined in subsection (e)(2), for each year for each contract are as follows: 1991 1992 1993 Total Apportionment % 30% 20% 40% % of Construction Costs: Contract L, Hawaii 20% 50% 30% 100% Contract M, state X -0- 10% 25% 35% The corporation had other business income (net of expenses) of $500,000 during 1992 and $300,000 during 1993. The gross contract price of Contract M (state X) was $1,000,000, and it was estimated to be 35 per cent completed on December 31, 1993. Total expenditures to date for Contract M (state X) were $300,000 for the period ended December 31, 1993. The measure of tax for the taxable year ended December 31, 1993 is computed as follows: Taxable Year 1993 Income Year 1992 Income Year 1993 Business Income $500,000 $300,000 Apportionment % to Hawaii 20% 40% Amount apportioned to Hawaii 100,000 120,000 Add: Income from contracts: L (Hawaii) (Note 1) 252,000 M (state X) (Note 2) 6,000 Total business income derived from sources within Hawaii $100,000 $378,000 Note 1 - Income from Contract L apportioned to Hawaii: 1991 1992 1993 Total Apportionment % 30% 20% 40% % of Construction Costs 20% 50% 30% 100% Product 6% 10% 12% 28% 28% of $900,000 = $252,000 Note 2 - Income from Contract M apportioned to Hawaii: 1991 1992 1993 Total Apportionment % -0- 20% 40% % of Construction Costs -0- 10% 25% 35% Product -0- 2% 10% 12% 12% of 50,000 (Note 3) = $6,000 Note 3 - Computation of apportionable income from Contract M based on percentage of completion method: Total Contract Price $1,000,000 Estimated to be 35% completed 350,000 §18-235-38-06.04 INCOME TAX LAW 235- 92 (Unofficial Compilation as of 12/31/2025) Less: Total expenditures to date 300,000 Apportionable income $ 50,000 [Eff 3/11/96] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-38) §18-235-38-06.04   Television and radio broadcasting. (a) When a person in the business of broadcasting film or radio programming, whether through the public airwaves, by cable, direct or indirect satellite transmission, or any other means of communication, either through a network (including owned and affiliated stations) or through an affiliated, unaffiliated, or independent television or radio broadcasting station, has income from sources both within and without Hawaii, the amount of business income from sources within Hawaii shall be determined pursuant to sections 235-21 to 235-39, HRS, or the Multistate Tax Compact (section 255-1, HRS), except as modified by this section. (b) For definitions, rules, and examples for determining whether income shall be classified as business or nonbusiness income, see sections 18-235-21-01 to 18-235-21-04. (c) In this section, unless the context clearly requires otherwise: “Film” or “film programming” means any and all performances, events, or productions telecast on television, including news, sporting events, plays, stories, or other literary, commercial, educational, or artistic works, through the use of video tape, disc, or any other type of format or medium. Each episode of a series of films produced for television shall constitute a separate film notwithstanding that the series relates to the same principal subject and is produced during one or more tax periods. “Outer-jurisdictional property” means tangible personal property, such as orbiting satellites, undersea transmission cables, and the like, that are owned or rented by the taxpayer and used in the business of telecasting or broadcasting, but that are not physically located in any particular state. “Radio” or “radio programming” means any and all performances, events, or productions that are broadcast on radio, including news, sporting events, plays, stories, or other literary, commercial, educational, or artistic works, through the use of an audio tape, disc, or any other format or medium. Each episode of a series of radio programming produced for radio broadcast shall constitute a separate radio programming notwithstanding that the series relates to the same principal subject and is produced during one or more tax periods. “Release” or “in release” means the placing of film or radio programming into service. A film or radio program is placed into service when it is first broadcast to the primary audience for which the program was created. Thus, for example, a film is placed in service when it is first publicly telecast for entertainment, educational, commercial, artistic, or other purposes. Each episode of a television or radio series is placed in service when it is first broadcast. A program is not placed in service merely because it is completed and therefore is in a condition or state of readiness and availability for broadcast, or merely because it is previewed to prospective sponsors or purchasers. “Rent” includes license fees or other payments or consideration provided in exchange for the broadcast or other use of film or radio programming. “State” includes the District of Columbia, the Commonwealth of Puerto Rico, or any possession or territory of the United States. A “subscriber” to a cable television system is the individual residence or other outlet which is the ultimate recipient of the transmission. “Telecast” or “broadcast” (sometimes used interchangeably with respect to television) means the transmission of television or radio programming, respectively, by an electronic or other signal conducted by radio waves, microwaves, wires, lines, coaxial cables, wave guides, fiber optics, satellite transmissions, or by any other means, directly or indirectly to viewers or listeners. (d) The property factor shall be determined in accordance with sections 235-30 to 235-32, HRS, and the rules thereunder; the payroll factor in accordance with sections 235-33 to 235-34, HRS, and the rules thereunder; and the sales factor in accordance with sections 235-35 to 235-37, HRS, and the rules thereunder; except as modified by this section. (e) The following rules relate to the property factor. (1) The following rules apply with respect to the property factor in general. (A) In the case of rented studios, the net annual rental rate shall include only the amount of the basic or flat rental charge by the studio for the use of a stage or other permanent equipment such as sound recording equipment and the like; except that additional equipment rented from other sources or from the studio not covered in the basic or flat rental charge and used for one week or longer (even though rented on a day- to-day basis) shall be included. Lump-sum net rental payments for a period which encompasses more than a single income year shall be assigned ratably over the rental period. HRS §235-38 INCOME TAX LAW §18-235-38-06.04 235- 93 (Unofficial Compilation as of 12/31/2025) (B) No value or cost attributable to any outer-jurisdictional and film or radio programming property shall be included in the property factor. (2) The following rules apply with respect to the property factor denominator. (A) All real property and tangible personal property (other than outer-jurisdictional and film or radio programming property), whether owned or rented, that is used in the business shall be included in the denominator of the property factor. (B) Audio or video cassettes, discs, or similar media containing film or radio programming and intended for sale or rental by the taxpayer for home viewing or listening shall be included in the property factor at their original cost. To the extent that the taxpayer licenses or otherwise permits others to manufacture or distribute cassettes, discs, or other media containing film or radio programming for home viewing or listening, the value of the cassettes, discs, or other media shall include the license, royalty, or other fees received by the taxpayer capitalized at a rate of eight times the gross receipts derived therefrom during the income year. (C) Outer-jurisdictional and film or radio programming property shall be excluded from the denominator of the property factor. (3) The following rules apply with respect to the property factor numerator. (A) With the exception of outer-jurisdictional and film or radio programming property, all real and tangible personal property owned or rented by the taxpayer and used in Hawaii during the tax period shall be included in the numerator of the property factor as set forth in section 18-235-30-04. (B) Outer-jurisdictional and film or radio programming property shall be excluded from the numerator of the property factor. Example: XYZ Television Co. has a total value of all of its property everywhere of $500,000,000, including a satellite valued at $50,000,000 that was used to telecast programming into Hawaii and $150,000,000 in film property of which $1,000,000 worth was located in Hawaii the entire year. The total value of real and tangible personal property, other than film programming property, located in Hawaii for the entire income year was valued at $2,000,000. The movable and mobile property described in subparagraph (e)(3)(A) has a value of $4,000,000. That property was used in Hawaii for 100 days. The property factor is determined as follows: Value of property permanently in Hawaii: $2,000,000 Value of mobile and movable property (100/365 x $4,000,000): 1,095,600 Total value of property to be included in Hawaii’s property factor numerator without apportionment of outer-jurisdictional and film property: $3,095,600 Total value of property everywhere: $500,000,000 Less value of satellite: (50,000,000) Less value of film property: (150,000,000) Total value of property to be used in denominator: $300,000,000 Property factor ($3,095,600/$300,000,000): .0103 (f) The following rules relate to the payroll factor. (1) The denominator of the payroll factor shall include all compensation, including residual and profit participation payments, paid to employees during the income year, including that paid to directors, actors, newscasters, and other talent in their status as employees. (2) With respect to the payroll factor numerator, compensation for all employees shall be attributed to the state or states as may be determined under sections 18-235-33-01 to 18-235- 34-01. (g) The following rules relate to the sales factor. §18-235-38-06.05 INCOME TAX LAW 235- 94 (Unofficial Compilation as of 12/31/2025) (1) The denominator of the sales factor shall include the total gross receipts derived by the taxpayer from transactions and activity in the regular course of its trade or business, except receipts excluded under section 18-235-38-03. (2) The numerator of the sales factor shall include all gross receipts of the taxpayer from sources within Hawaii, including the following. (A) Gross receipts, including advertising revenue, from television, film, or radio programming in release to or by a television station (independent or unaffiliated) or network of stations for broadcast shall be attributed to Hawaii in the ratio (hereafter “audience factor”) that the audience for the station (or owned and affiliated stations in the case of networks) located in Hawaii bears to the total audience for the station (or owned and affiliated stations in the case of networks). The audience factor for television or radio programming shall be determined by the ratio that the taxpayer’s in-state viewing (listening) audience bears to its total viewing (listening) audience. The audience factor shall be determined either by reference to the books and records of the taxpayer or by reference to published rating statistics, provided the method used by the taxpayer is consistently used from year to year for this purpose and fairly reflects the taxpayer’s activity in Hawaii. (B) Gross receipts from film programming in release to or by a cable television system shall be attributed to Hawaii in the ratio (hereafter “audience factor”) that the subscribers for such cable television system located in Hawaii bears to the total subscribers of such cable television system. If the number of subscribers cannot be accurately determined from the books and records maintained by the taxpayer, the audience factor ratio shall be determined on the basis of the applicable year’s subscription statistics located in published surveys, provided that the source selected is consistently used from year to year for that purpose. (C) Receipts from the sale, rental, licensing, or other disposition of audio or video cassettes, discs, or similar media intended for home viewing or listening shall be included in the sales factor as provided in sections 235-36 and 235-37, HRS, and the rules thereunder. [Eff 7/25/98 ] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-38) §18-235-38-06.05   Publishing. (a) Except as specifically modified in this section, when a person in the business of publishing, selling, licensing, or distributing newspapers, magazines, periodicals, trade journals, or other printed material has income from sources both within and without Hawaii, the amount of business income from sources within Hawaii from that business activity shall be determined pursuant to sections 235-21 to 235-39, HRS, or the Multistate Tax Compact (section 255-1, HRS), except as modified by this section. (b) In this section, unless the context clearly requires otherwise: “Outer-jurisdictional property” means tangible personal property, such as orbiting satellites, undersea transmission cables, and the like, that are owned or rented by the taxpayer and used in the business of publishing, licensing, selling, or otherwise distributing printed material, but are not physically located in any particular state. “Print or printed material” includes the physical embodiment or printed version of any thought or expression, such as a play, story, article, column, or other literary, commercial, educational, artistic, or other written or printed work. The determination of whether an item is, or consists of, print or printed material shall be made without regard to its content. Printed material may take the form of a book, newspaper, magazine, periodical, trade journal, or any other form of printed matter, and may be contained on any medium or property. “Purchaser” and “subscriber” mean the individual, residence, business, or other outlet which is the ultimate or final recipient of the print or printed material. Neither of these terms includes a wholesaler or other distributor of print or printed material. “Terrestrial facility” shall include any telephone line, cable, fiber optic, microwave, earth station, satellite dish, antenna, or other relay system or device that is used to receive, transmit, relay, or carry any data, voice, image, or other information that is transmitted from or by any outer-jurisdictional property to the ultimate recipient of the information. (c) Business income shall be apportioned using the following rules. (1) The following rules relate to the property factor. (A) All real property and tangible personal property, including outer-jurisdictional property, whether owned or rented, that are used in the business shall be included in the denominator of the property factor. (B) The following rules relate to the property factor numerator. HRS §235-38 INCOME TAX LAW §18-235-38-06.05 235- 95 (Unofficial Compilation as of 12/31/2025) (i) All real and tangible personal property owned or rented by the taxpayer and used in Hawaii during the tax period shall be included in the numerator of the property factor. (ii) Outer-jurisdictional property owned or rented by the taxpayer and used in Hawaii during the tax period shall be included in the numerator of the property factor in the ratio that the value of the property attributable to its use by the taxpayer in business activities in Hawaii bears to the total value of the property attributable to its use in the taxpayer’s business activities everywhere. The value of outer-jurisdictional property to be attributed to the numerator of the property factor of Hawaii shall be determined by the ratio that the number of uplinks and downlinks (sometimes referred to as “half-circuits”) that were used during the tax period to transmit from Hawaii and to receive in Hawaii any data, voice, image, or other information bears to the total number of uplinks and downlinks, or half-circuits, that the taxpayer used for transmissions everywhere. If information regarding uplink and downlink or half-circuit usage is not available, or if that measurement of activity is not applicable to the type of outer-jurisdictional property used by the taxpayer, the value of such property to be attributed to the numerator of the property factor of Hawaii shall be determined by the ratio that the amount of time (in terms of hours and minutes of use), or any other measurement of use of outer-jurisdictional property that was used during the tax period to transmit from Hawaii and to receive in Hawaii any data, voice, image, or other information, bears to the total amount of time or other measurement of use that was used for transmissions everywhere. (iii) Outer-jurisdictional property shall be considered to have been used by the taxpayer in its business activities within Hawaii when that property, wherever located, is employed by the taxpayer in any manner in the publishing, sale, licensing, or other distribution of books, newspapers, magazines, or other printed material and any data, voice, image, or other information is transmitted to or from Hawaii either through an earth station or terrestrial facility located in Hawaii. Example: One example of the use of outer-jurisdictional property is where the taxpayer either owns its own communications satellite or leases the use of uplinks, downlinks, circuits, or time on a communications satellite for the purpose of sending messages to its newspaper printing facilities or employees in a state. The state or states in which any printing facility that receives the satellite communications is located and the state from which the communications were sent, under this section, would apportion the cost of the owned or rented satellite to their respective property factors based upon the ratio of the in-state use of the satellite to its total usage everywhere. Assume that ABC Newspaper Co. owns a total of $400,000,000 of property everywhere and that, in addition, it owns and operates a communication satellite for the purpose of sending news articles to its printing plant in Hawaii, as well as for communicating with its printing plants and facilities or news bureaus, employees, and agents located in other states and throughout the world. Also assume that the total value of its real and tangible personal property that was permanently located in Hawaii for the entire income year was valued at $3,000,000. Assume also that the total original cost of the satellite is $100,000,000 for the tax period and that of the 10,000 uplinks and downlinks of satellite transmissions used by the taxpayer during the tax period, 200 or 2 per cent are attributable to satellite communications received in and sent from Hawaii. Assume further that the company’s mobile property has an original cost of $4,000,000 and was used in Hawaii for 95 days. The property factor is determined as follows: Value of property permanently in Hawaii: $3,000,000 Value of mobile property (95/365 x $4,000,000): 1,041,096 Value of satellite property used in-state (.02 x $100,000,000): 2,000,000 §18-235-38.5-01 INCOME TAX LAW 235- 96 (Unofficial Compilation as of 12/31/2025) Total value of property attributable to state: $6,041,096 Property factor ($6,041,096/$500,000,000) 0.012082 (2) The payroll factor shall be determined in accordance with sections 235-33 and 235-34, HRS, and the rules interpreting those sections. (3) The following rules apply with respect to the sales factor. (A) The denominator of the sales factor shall include the total gross receipts derived by the taxpayer from transactions and activity in the regular course of its trade or business, except receipts that may be excluded under sections 18-235-35-01 to 18-235-36-02, section 18-235-38-03, or subparagraph (B). (B) The numerator of the sales factor shall include all gross receipts of the taxpayer from sources within Hawaii, including, but not limited to, the following. (i) Gross receipts derived from the sale of tangible personal property, including printed materials, delivered or shipped to a purchaser or a subscriber in Hawaii. (ii) Except as provided in clause (c)(3)(B)(iii), gross receipts derived from advertising and the sale, rental, or other use of the taxpayer’s customer lists or any portion of them shall be attributed to Hawaii as determined by the taxpayer’s “circulation factor” during the tax period. The circulation factor shall be determined for each individual publication by the taxpayer of printed material containing advertising, and shall be equal to the ratio that the taxpayer’s in-state circulation to purchasers and subscribers of its printed material bears to its total circulation to purchasers and subscribers everywhere. The circulation factor for an individual publication shall be determined by reference to the rating statistics as reflected in such sources as Audit Bureau of Circulations or other comparable sources, provided that the source selected is consistently used from year to year for this purpose. If none of the foregoing sources are available, or, if available, none is in form or content sufficient for these purposes, then the circulation factor shall be determined from the taxpayer’s books and records. (iii) When specific items of advertisements can be shown, upon clear and convincing evidence, to have been distributed solely to a limited regional or local geographic area in which Hawaii is located, the taxpayer may petition, or the department may require, that a portion of such receipts be attributed to the sales factor numerator of Hawaii on the basis of a regional or local geographic area circulation factor and not upon the basis of the circulation factor as provided in clause (c)(3)(B)(ii). This attribution shall be based upon the ratio that the taxpayer’s circulation to purchasers and subscribers located in Hawaii of the printed material containing specific items of advertising bears to its total circulation of the printed material to purchasers and subscribers located within that regional or local geographic area. This alternative attribution method shall be permitted only upon the condition that these receipts are not double counted or otherwise included in the numerator of any other state. (iv) If the purchaser or subscriber is the United States Government or the taxpayer is not taxable in a State, the gross receipts from all sources, including the receipts from the sale of printed material, from advertising, and from the sale, rental, or other use of the taxpayer’s customer lists, or any portion of them that would have been attributed by the circulation factor to the numerator of the sales factor for that State, shall be included in the numerator of the sales factor of Hawaii if the printed material or other property is shipped from an office, store, warehouse, factory, or other place of storage or business in Hawaii. [Eff 7/25/98] (Auth: HRS §§231-3(9), 235-38, 235-118) (Imp: HRS §235-38) §18-235-38.5-01 Construction. In construing part II of chapter 235, HRS, the department shall be guided by the rules, regulations, and other published interpretations of the Multistate Tax Commission relating to the Uniform Division of Income for Tax Purposes Act and the Multistate Tax Compact, but with due regard to the water’s edge requirement of section 235-38.5, HRS. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-38.5) HRS §235-38.5 INCOME TAX LAW §18-235-38.5-02 235- 97 (Unofficial Compilation as of 12/31/2025) §18-235-38.5-02 Exclusion of income, property, payroll, and sales of foreign affiliates. (a) As used in this section: “Foreign affiliate” of a taxpayer means a person, other than the taxpayer, if no part of the business income of the person is subject to the federal income tax under the federal Internal Revenue Code of 1986, as amended, whether or not the person and the taxpayer are owned or controlled directly or indirectly by the same interests. “Subject to the federal income tax” when referring to a person means that the United States has jurisdiction to subject the person to the tax imposed by chapter 1 (with respect to income tax) of the federal Internal Revenue Code of 1986, as amended. (b) The income of a taxpayer shall not be computed with reference to the income or other attributes (such as property, payroll, or sales) of a foreign affiliate. (1) No taxpayer shall file, and the director shall not require a taxpayer to file, a combined report with a foreign affiliate. (2) A taxpayer’s business income subject to apportionment shall not include the business income, deductions, or losses of a foreign affiliate; provided that transactions between a taxpayer and a foreign affiliate, such as a dividend paid to a taxpayer by a foreign affiliate, shall be recognized and shall not be eliminated. (3) For any taxpayer using the apportionment formula set forth in section 235-29, HRS, the numerator and the denominator of the taxpayer’s property, payroll, and sales factors shall not include the property, payroll, or sales of a foreign affiliate. (4) For any taxpayer using an apportionment formula other than that set forth in section 235-29, HRS, attributes of a foreign affiliate shall not be included in the taxpayer’s apportionment computation. (c) If the taxpayer and a foreign affiliate are engaged in a unitary business, the income of the taxpayer shall be segregated by allocation and separate accounting. The segregation shall be subject to adjustment under section 482 (with respect to allocation of income and deductions among taxpayers), IRC, and section 18-235-38-04. (d) This section shall apply notwithstanding anything to the contrary in this subchapter. [Eff 11/25/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-38.5, IRC §482) HRS §235-38.5 §18-235-38.5-02 INCOME TAX LAW 235- 98 (Unofficial Compilation as of 12/31/2025) [THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.] INCOME TAX LAW §18-235-54 235- 99 (Unofficial Compilation as of 12/31/2025) SUBCHAPTER 3 INDIVIDUAL INCOME TAX LAW §18-235-51 (Reserved)