HAR §18-237-13. Amended and renumbered

§18-237-13-01 Tax on manufacturers. Containers and packaging materials. See section 18-237- 4(b). [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18-237-13-01 12/27/90] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) §18-237-13-02 Tax on business of selling tangible personal property; producing. (a) Recapping tires or selling tangible personal property for use in recapping tires. (1) Sales by recapper. This paragraph applies to a person who purchases used tires or accepts used tires as trade-ins and subsequently recaps the same for the person’s own stock for sale. When tires covered by this paragraph are sold, the sales take the rate of: (A) One-half of one per cent if made to another person who purchases the tires for purposes of resale; and (B) Four per cent if made for consumption or use by the purchaser and not for resale. Example 1: A tire recapper (taxpayer R) sells tires from stock to a service station operator (taxpayer S) who purchases the tires for purposes of resale. Taxpayer R is subject to the general excise tax at the rate of one-half of one per cent on the amount received from taxpayer S. Example 2: A tire recapper (taxpayer R) sells tires from stock to a customer who installs the tires on the customer’s family automobile. Taxpayer R is subject to the general excise tax at the rate of four per cent on the amount received from the customer. (2) Sales by purchaser of recapped tires. This paragraph applies to the gross income of a person who purchases recapped tires for purposes of resale. When tires covered by this paragraph are sold, such sales take the rate of: (A) One-half of one per cent if made to another person who purchases the tires for purposes of resale; and (B) Four per cent if made for consumption or use by the purchaser and not for resale. (3) Sales of tangible personal property for use in tire recapping. This paragraph applies to a person who sells tangible personal property for use in tire recapping. When personal property covered by this paragraph is sold to a person using or consuming the personal property in tire recapping, such sales take the rate of: (A) Four per cent if made to a tire recapper whose gross income is taxable at the rates stated in section 18-237-13-06.11; and (B) One-half of one per cent if made to a tire recapper whose gross income is taxable at the rates stated in paragraph (1). (b) Furnishing or use of trading stamps and similar devices. See section 18-237-13-10. (c) Containers and packaging materials. See section 18-237-4(b). (d) Resale certificates and sales at wholesale. This subsection sets forth the application of section 237- 13(2)(F), HRS. (1) Scope. A seller, in proper cases, may take from the purchaser of tangible personal property a certificate, in the form the director prescribes, certifying that the sale is a sale at wholesale. This subsection sets forth the effect as to resale certificates; defines “sales at wholesale”; sets forth the duties of sellers and purchasers in determining whether a sale is at wholesale; and prescribes the form of the certificate referred to in this subsection and in the administration and enforcement of these rules as a “resale certificate”. (2) Effect of rules as to resale certificates. (A) A purchaser who furnishes a resale certificate in one of the prescribed general forms to a seller who accepts the certificate, thereby makes the certificate applicable to each sale of tangible personal property by the seller to that purchaser until the certificate is HRS §237-13(1) HRS §237-13(2) 237- 17 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-02 revoked by notice in writing, except those orders as to which it is specified in writing that the certificate does not apply. A special form of resale certificate is prescribed for use by sellers, at their option, for certain sales to purchasers who are in the contracting business, or who are subject to taxation as if so engaged. A purchaser who furnishes a resale certificate thereby makes the certificate applicable to each sale of materials or commodities made by the seller to that purchaser in connection with the particular work or project identified by this special form of resale certificate until the certificate is revoked by notice in writing, except those orders as to which it is specified by notice in writing that the certificate does not apply. (B) A purchaser, by giving a resale certificate in any of the prescribed forms to a seller who accepts the certificate, certifies that unless the purchaser gives notice in writing, which either specifies that the certificate does not apply to a particular order or revokes the certificate altogether, the purchaser will upon demand of the seller pay to the seller the amount of the additional tax which by reason thereof is imposed upon the seller in the event any sale of tangible personal property by the seller to the purchaser (or in the case of a resale certificate in the special form, any sale made in connection with the particular work or project identified by the special form) is not in fact a “sale at wholesale,” as defined by section 18-237-4, or is not a sale at wholesale to the extent stated in the resale certificate, as the case may be. (C) If no resale certificate is given, or if there is a certificate but not in the proper form, or if the certificate is made inapplicable to a specific sale by a notice in writing, or if the certificate is revoked, there is a presumption that the sales which, in whole or in part, are not covered by an applicable certificate in the proper form, are not at wholesale. However, this presumption does not apply if the seller is one having a business which consists exclusively of sales at wholesale, as defined. (D) The additional amount which the seller may require the purchaser to pay pursuant to subparagraph (B), is illustrated by the following examples: Example 1: Seller manufactures animal feed as a by-product. On a sale as to which there is an applicable resale certificate, seller’s price is $100. Tax is reported and remitted by the seller in the amount of $.50, at the one-half of one per cent manufacturing rate. However, the sale in fact is not at “wholesale” because the feed is used by the purchaser for feeding saddle animals. Seller is assessed at the four per cent rate applicable to sales other than at wholesale. The purchaser is liable to pay the seller $4. Example 2: The facts are the same except that the seller is a producer of agricultural products, which are the subject of the sale. The amount which the purchaser is liable to pay the seller is $4. Example 3: The sale is of animal feed brought in from the mainland. On a sale where there is an applicable resale certificate, seller’s price is $100. Tax is reported and remitted by the seller in the amount of $.50, at the one-half of one per cent wholesale rate. However, the sale in fact is not at “wholesale” because the feed is used by the purchaser for feeding saddle animals. Seller is assessed at the four per cent rate applicable to sales other than at wholesale. The purchaser is liable to pay the seller $4. Example 4: The sale is of cement brought in from the mainland. On a sale where there is an applicable resale certificate, seller’s price is $100. Tax is reported and remitted by the seller in the amount of $.50, at the one-half of one per cent wholesale rate. However, the sale in fact is not at “wholesale” because the project consists in the improvement of a rental unit owned by the purchaser and which the purchaser continues to hold. Seller is assessed at the four per cent rate applicable to sales other than at wholesale. The purchaser is liable to pay the seller $4. (3) “Sale at wholesale”, defined. See section 18-237-4. (4) Duties of the seller. It is the duty of the seller, under the penalties prescribed by sections 237-41, 237-48, 231-34, and 231-39, HRS, to: (A) Refuse to accept a resale certificate if it is not in proper form and properly made out; or if having due regard to the type of property sold, the nature and character of the business of the purchaser, and the generally known customs or practices of the §18-237-13-02.01 GENERAL EXCISE TAX LAW 237- 18 (Unofficial Compilation as of 12/31/2025) purchaser’s trade, it appears that the sales made to the purchaser will not be sales at wholesale, or will not be sales at wholesale to the extent stated in the certificate; (B) Make inquiry and ascertain the facts when, having due regard to the type of property sold, the nature and character of the business of the purchaser, and the generally known customers or practices of the purchaser’s trade, the seller has reason to believe that some of the sales to the purchaser, in addition to those of which the seller is notified, are not sales at wholesale; (C) Report for taxation at the rate of four per cent all sales of tangible personal property which the seller knows are not sales at wholesale, unless upon inquiry the seller ascertains the facts as to those sales which, in fact, are sales at wholesale; (D) Keep as a part of the seller’s records all resale certificates accepted by the seller, notices of inapplicability of such resale certificates to particular sales, and notices of revocation of such certificates; and (E) Keep proper records, as required by section 237-14, HRS, correctly segregating the items of gross income, gross proceeds of sales, and value of products taxable at less than four per cent, in order that a lesser rate may be applied. (5) Duties of the purchaser. It is the duty of the purchaser, under the penalties prescribed by sections 237-41, 237-48, and 231-34, HRS, to: (A) Furnish to sellers only resale certificates as are in proper form and properly made out; (B) Give notice of revocation of resale certificates furnished to sellers, if the purchaser no longer holds a general excise tax license, if the purchaser has a different license number under the general excise tax law from that stated on the certificate, or in any other case of a material change in facts; (C) Furnish to sellers the facts as to whether sales are at wholesale; and (D) Keep as a part of the purchaser’s records copies of all resale certificates given by the purchaser, notices of inapplicability of such resale certificates to particular sales, and notices of revocation of such certificates. (6) Forms of resale certificates. Three forms of resale certificates are prescribed, two types of general form and a special form which may be used by sellers, at their option, for sales to purchasers who are in the contracting business, or who are subject to taxation the same as if engaged in the contracting business, of materials and commodities as set forth in section 18-237-4(a)(3), in connection with a particular project identified in the special form of certificate. [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18-237-13-02 12/27/90] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) §18-237-13-02.01 Tax on business of selling tangible personal property by an out-of-state seller, including drop shipments. (a) For the purposes of this section: “Accept or Acceptance” means the purchaser or its agent inspecting the tangible personal property and taking physical possession of the tangible personal property or having dominion and control over the tangible personal property. “Agent” means a person authorized by the purchaser to act on behalf of the purchaser and includes the power to inspect and accept or reject the tangible personal property. “Delivery” means the act of transferring possession of tangible personal property. It includes, the transfer of goods from consignor to freight forwarder or for-hire carrier, from freight forwarder to for-hire carrier, one for-hire carrier to another, or for-hire carrier to consignee. “Drop Shipment”, sometimes known as direct delivery, means the delivery and acceptance of tangible personal property by a customer in Hawaii from a manufacturer or wholesaler who is someone other than the seller with whom the customer placed the order. “Landed value” means the value of imported tangible personal property which is the fair and reasonable cash value of the tangible personal property when it arrives in Hawaii. It includes the sales price, shipping and handling fees, insurance costs, and customs duty. It does not include sales tax paid to another state. “Nexus” means the activity carried on by a seller in Hawaii which is sufficiently connected with the seller’s ability to establish or maintain a market for its products in Hawaii. It includes issues of taxability addressed under the Due Process and Commerce Clauses of the United States Constitution to support the application of the general excise tax and the use tax under chapters 237 and 238, HRS, respectively. “Place of delivery” means the state or place where the purchaser or its agent accepts a delivery of tangible personal property. (b) Imposition of general excise tax on sales of tangible personal property to customers in Hawaii. Section 237-13, HRS, imposes “privilege taxes against persons on account of their business and other activities in the HRS §237-13(2) 237- 19 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-02.01 State . . . .” Section 237-2, HRS, states that “business” includes “all activities (personal, professional, or corporate), engaged in or caused to be engaged in with the object of gain or economic benefit either direct or indirect . . . .” (1) The act or place of passing of title is not the determinative factor for purposes of imposing the general excise tax. In states imposing a retail sales tax where a sale is defined as the transfer of title or ownership, the place where title passes may be relevant. The general excise tax, however, is not a sales tax imposed when title passes. Rather, the general excise tax is a gross receipts tax imposed when business is transacted in Hawaii. (2) The general excise tax law looks to the place of delivery of tangible personal property to determine whether the sale of tangible personal property is business transacted in Hawaii. (3) Hawaii does not impose the general excise tax on sales of tangible personal property which originate outside of this State unless the place of delivery of the tangible personal property is in Hawaii and the seller has nexus. There must be both: (1) a place of delivery within Hawaii by the purchaser, or its agent; and (2) the seller must have nexus for the general excise tax to apply to a particular sale. The general excise tax will not be imposed if one of these elements is missing. (4) Delivery of tangible personal property to a freight consolidator, freight forwarder, or for-hire carrier utilized only to arrange for and/or transport the tangible personal property does not constitute acceptance of the tangible personal property by the purchaser or its agent unless the freight consolidator, freight forwarder, or for-hire carrier has expressed written authority to accept the tangible personal property as an agent for the purchaser. Simply signing the bill of lading without this expressed written authority is not sufficient. (5) When the place of delivery of the tangible personal property is to a customer in Hawaii and the seller has nexus, the sale of that tangible personal property constitutes business subject to the general excise tax. Section 237-22, HRS, states that gross income or gross proceeds of sale will be exempt if the State is prohibited from taxing the gross income under federal law or constitutional principles. If an out-of-state seller has no nexus with Hawaii, its gross income or gross proceeds of sale would be exempt under section 237-22, HRS. (c) Imposition of the use tax on the sale of tangible personal property to a customer in Hawaii. Section 238-2, HRS, imposes use tax “on the use in this State of tangible personal property which is imported . . . for use in the State” if it is purchased from a seller that does not have a general excise tax license. All tangible personal property used or consumed in the State is subject to a uniform tax burden irrespective of whether it is acquired within or without the State. (1) The use tax is levied on the importer of tangible personal property based upon the landed value of the tangible personal property imported. (2) The tax rate is one-half of one per cent if the tangible personal property is intended for resale at retail, four per cent if the tangible personal property is intended for consumption or use by the importer or purchaser, or no tax if the tangible personal property is intended for resale to a reseller licensed under the general excise tax law. (d) The liability for paying the general excise tax or the use tax is dependent on all the factual circumstances. (e) The following is an example involving two parties and is treated as a single transaction. Example: S, an out-of-state seller of tangible personal property, receives an order over the telephone or through the mail, from H, a Hawaii customer who is the ultimate consumer. H requests that the tangible personal property be delivered to H in Hawaii. S ships the tangible personal property for delivery to and acceptance by H in Hawaii. The additional fact as to whether or not S has nexus with Hawaii determines the result in this example: (1) If S has nexus with Hawaii, S’s sale of tangible personal property constitutes business in Hawaii for purposes of the general excise tax law. As a result, S must obtain a general excise/use tax license. S is considered the importer for resale at retail and is subject to the use tax at one-half of one per cent. S is also subject to the general excise tax at four per cent on the sale. (2) If S does not have nexus with Hawaii, pursuant to section 237-22, HRS, the general excise tax is not imposed upon S. Because S is not a licensed seller and the import is for consumption by H, H is subject to the use tax at four per cent. (f) The following is an example of a drop shipment that involves three parties and is treated as two separate transactions. §18-237-13-03 GENERAL EXCISE TAX LAW 237- 20 (Unofficial Compilation as of 12/31/2025) Example: S, an out-of-state seller of tangible personal property, receives an order over the telephone or through the mail, from H, a Hawaii customer who is the ultimate consumer. W is an out-of-state wholesaler of tangible personal property. S notifies W of the order and requests that W ship the tangible personal property directly to H in Hawaii. W then ships the tangible personal property for delivery to and acceptance by H in Hawaii. The following are the results when differing additional facts as to whether S and W have nexus with Hawaii and are properly licensed under the general excise tax law are incorporated into the example: (1) If neither S nor W has nexus with Hawaii and both are unlicensed, the importation of the tangible personal property by H is from an unlicensed seller for consumption. H is subject to the use tax at four per cent. (2) If S has nexus with Hawaii and is licensed but W is unlicensed and has no nexus, S is considered to have imported the tangible personal property for resale at retail and is subject to the use tax at one-half of one per cent. The sale from S to H is a retail sale. S’s gross income from the sale is subject to the general excise tax at the rate of four per cent. (3) If both S and W have nexus with Hawaii and are licensed, both sales would be subject to the general excise tax. The sale from W to S is a wholesale sale. W’s gross income is taxable at one-half of one per cent. The sale from S to H is a retail sale. S’s gross income is taxable at four per cent. There is no use tax because W imported the tangible personal property for resale to a licensed reseller. (4) If W has nexus with Hawaii and is licensed but S is unlicensed and has no nexus, the sale from W to S does not qualify as a wholesale sale under section 237-4(1), HRS, because S is not a licensed seller for general excise purposes, therefore, W is subject to the general excise tax at the rate of four per cent. W is considered to have imported the tangible personal property for resale at retail and is subject to the use tax at one-half of one per cent. The general excise tax is not imposed on the sale from S to H because S does not have sufficient nexus with Hawaii. Since W is the importer of the tangible personal property and H is not, H would not be subject to the use tax. [Eff 5/26/98 ] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §§237-4(1), 237-13(2), 237-21, 237-22, 238-2, 238-3(c)) §18-237-13-03 Tax upon contractors. (a) For the purposes of this section: “Contractor” includes every person engaging in the business of contracting to erect, construct, repair, or improve buildings or structures, of any kind or description, including any portion thereof, or to make any installation therein, or to make, construct, repair, or improve any highway, road, street, sidewalk, ditch, excavation, fill, bridge, shaft, well, culvert, sewer, water system, drainage system, dredging or harbor improvement project, electric or steam rail, lighting or power system, transmission line, tower, dock, wharf, or other improvements; every person engaging in the practice of architecture, professional engineering, land surveying, and landscape architecture, as defined in section 464-1, HRS; and every person engaged in the practice of pest control or fumigation as a pest control operator as defined in section 460J-1, HRS. “Licensed specialty contractor” means the same as the term is defined in section 444-7, HRS, in chapter 16-77 and in Exhibit A entitled, Specialty Contractors Classifications, located at the end, and made a part, of this chapter, and who is licensed under chapter 444, HRS. “Owner-contractor” means an owner or lessee of property who builds or improves residential, farm, industrial, or commercial buildings or structures on such property for the owner-contractor’s own use, or for use by the owner-contractor’s grandparents, parents, siblings, or children and does not offer such building or structure for sale or lease, as distinguished from the business of contracting which is taxed under section 237-13(3)(D), HRS. The sale or lease, or offering for sale or lease, of such structure within one year after completion is prima facie evidence that the construction or improvement of such structure was undertaken for the purpose of sale or lease; provided that this shall not apply to residential properties sold or leased to employees of the owner or lessee; provided further that the owner or lessee registers for an exemption from the contractors licensing law, under section 444-9.1, HRS. “Person” means the same as the term is defined in section 237-1, HRS. “Prime contractor” means a person who: (1) contracts directly with the owner, lessor, lessee, developer, mortgagor, mortgagee, or any other person, including another contractor or licensed specialty contractor, to engage in the activities listed in the definition of a contractor in chapter 237, HRS; or (2) performs the activities listed in the definition of a contractor in chapter 237, HRS, except that this does not include an owner-contractor. HRS §237-13(3) 237- 21 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-03 “Subcontractor” means a person who contracts with the prime contractor to engage in the activities listed in the definition of a contractor in chapter 237, HRS, and this rule. (b) Subcontract deduction. Section 237-16, HRS, imposes the general excise tax at the rate of four per cent upon the gross income received or derived from the business of a contractor. That section, however, does not apply to gross income received from contracting with the state, county, or federal government, those persons exempted under section 237-23, HRS, and those persons licensed under chapter 237, HRS. The gross income of a contractor which is not subject to taxation under section 237-16, HRS, however, shall be subject to taxation under section 237-13(3), HRS. Section 237-13(3)(A), HRS, imposes the general excise tax at the rate of four per cent on the gross income of the contracting business. A prime contractor is allowed a deduction from gross income for payments made to a subcontractor or licensed specialty contractor; provided the requirements of section 237-13(3)(B), HRS, and this section are satisfied. These requirements are as follows: (1) The prime contractor is licensed under chapter 237, HRS; (2) The subcontractor or specialty contractor is licensed under chapter 237, HRS; (3) The subcontractor is a contractor as defined in section 237-6, HRS, or the subcontractor is a specialty contractor licensed by the department of commerce and consumer affairs, pursuant to chapter 444, HRS, except that where a prime contractor and subcontractor or specialty contractor perform work exclusively on federal property the specialty contractor must be licensed under chapter 237, HRS, but need not be licensed pursuant to chapter 444, HRS; (4) The general excise taxes due on the amount claimed as a deduction by the prime contractor must be paid by the subcontractor or the licensed specialty contractor or by the prime contractor on behalf of the subcontractor or the licensed specialty contractor. The prime contractor may attempt to secure the payment of the excise tax by the subcontractor or licensed specialty contractor by issuing a check payable jointly to the subcontractor or licensed specialty contractor and the department of taxation for the amount of the general excise tax due for the work done by the subcontractor or licensed specialty contractor. Subsequently, the subcontractor or licensed specialty contractor may sign the check and deposit it with the department of taxation. If the subcontractor or licensed specialty contractor fails to deposit the check with the department of taxation, however, the prime contractor shall not be entitled to the subcontract deduction. Rather than relying upon the subcontractor or licensed specialty contractor to pay the tax to the department of taxation, the prime contractor may withhold the general excise tax from the gross income paid to the subcontractor or licensed specialty contractor and remit those taxes to the department of taxation together with a separate general excise tax return with the name and general excise number of the subcontractor or licensed specialty contractor. There must exist, however, some indicia that the subcontractor or licensed specialty contractor has authorized the prime contractor to withhold the tax due and remit the tax to the department of taxation. The prime contractor shall provide the subcontractor with a copy of the general excise tax return filed by the prime contractor on behalf of the subcontractor or licensed specialty contractor. A copy of the general excise tax return may serve as the receipt required by section 231-13(3)(B), HRS. The department of taxation may audit the prime contractor and disallow the prime contractor’s subcontract deduction if the tax is not paid by the subcontractor or licensed specialty contractor or by the prime contractor on behalf of the subcontractor or licensed specialty contractor. If the subcontract deduction is disallowed, the prime contractor shall pay to the department of taxation the amount of the additional tax due, including any applicable interest from the date of the filing of the return in which the prime contractor claimed the subcontract deduction. The statute of limitations for collecting the tax and interest from the prime contractor shall run from the date of the filing of the return in which the prime contractor claimed the subcontract deduction. If the department of taxation collects the tax and interest relating to a disallowed subcontract deduction from the prime contractor, the department will not subsequently attempt to collect a tax which is attributable to the disallowed subcontract deduction from the subcontractor or licensed specialty contractor who initially failed to pay the tax; and (5) The prime contractor shall provide the department of taxation with the name and general excise number of each subcontractor or licensed specialty contractor for which the deduction is claimed and the total amount of gross proceeds paid to each subcontractor or licensed specialty contractor. The prime contractor shall report this information on either the back side of the prime contractor’s general excise tax monthly, quarterly, or semi-annual return and summarized on the annual return or on a separate schedule attached to the respective §18-237-13-03 GENERAL EXCISE TAX LAW 237- 22 (Unofficial Compilation as of 12/31/2025) returns. A prime contractor may claim the subcontract deduction only when the prime contractor correctly reports its gross income as contracting income on the prime contractor’s general excise tax returns. Thus, a taxpayer who reports gross income as professional services, rather than as contractor income, is erroneously reporting the income and will be questioned by the department of taxation about the subcontract deduction. (c) Whether a prime contractor qualifies for the subcontract deduction shall be determined on the basis of all the facts of each particular case. The application of this deduction is illustrated in the following examples: Example 1: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the construction of a commercial building for $100,000. ABC then subcontracts various aspects of the job to architect W for $10,000, engineer X for $10,000, land surveyor Y for $10,000, and landscape architect Z for $10,000, all of whom are licensed pursuant to chapters 237 and 444, HRS, and are included in the definition of a contractor in section 237- 6, HRS. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. Accordingly, ABC, the prime contractor, is subject to the general excise tax at the rate of four per cent on $60,000, which is the $100,000 contract less the $10,000 taxable to each of the four subcontractors, W, X, Y, and Z. W, X, Y, and Z are subject to the general excise tax at the rate of four per cent on the payments received from ABC. Example 2: Assume the same facts as in Example 1, except that W fails to pay the general excise tax due on the payment that W receives from ABC and ABC claims the subcontract deduction for the payment to W. ABC shall pay to the director, upon demand, $400, which is the amount of the additional tax due on the amount W received. Example 3: X, an engineer, contracts for $100,000 to perform engineering work on a building. X is acting as a prime contractor and subcontracts $10,000 of the engineering work to Y, another engineer who specializes in designing fire sprinkler systems. X reports the gross income for the contract as professional services and deducts $10,000 from gross income for the subcontract for Y. This deduction will be questioned because X incorrectly reported the gross income received as professional services. Providers of professional services are not allowed to take subcontract deductions. If X had correctly reported the gross income as contracting income, the subcontract deduction would not be questioned. Example 4: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the renovation of a residential building for $50,000. While renovating the building, ABC discovers termites and subcontracts with DEF Pest Control Operator, a pest control operator licensed pursuant to chapters 237 and 460J, HRS, to fumigate the building for $5,000. Additionally, ABC subcontracts a portion of the job for $5,000 to GHI Acoustical and Installation Contractor, a specialty contractor licensed pursuant to chapters 237 and 444, HRS. Section 237- 13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. Accordingly, ABC, the prime contractor, is subject to the general excise tax at the rate of four per cent on $40,000, which is the $50,000 contract less the $5,000 taxable to DEF, the subcontractor, and the $5,000 taxable to GHI, the licensed specialty contractor. DEF and GHI are subject to the general excise tax at the rate of four per cent on the payments received from ABC. Example 5: ABC Land Planning Company works with architects and engineers to plan construction projects by providing financial and market analysis and feasibility studies. ABC contracts with X Landscape Surveyor and Y Landscape Architect, who are both licensed under chapter 237, HRS, and are included in the definition of a contractor in section 237-6, HRS, to do various aspects of the projects. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. ABC is not a prime contractor since it is not engaged in the business of contracting. See, section 237-6, HRS. Accordingly, ABC is not entitled to a deduction for the payments to X and Y. Example 6: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the construction of a residential building. ABC purchases cabinets manufactured by D Supply House from D and ABC installs the cabinets. ABC also rents equipment from E Rental Company and subcontracts with F Solar Energy Systems Contractor, a 237- 23 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-03 specialty contractor licensed under chapters 237 and 444, HRS, to assemble and install a solar hot water system. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to contractors and licensed specialty contractors. Neither D nor E are subcontractors or licensed specialty contractors. F, however, is a licensed specialty contractor. Accordingly, ABC, the prime contractor, is entitled to a deduction for the payment to F but is not entitled to a deduction for the payments to D and E. F is subject to the general excise tax at the rate of four per cent on the payment received from ABC. Example 7: ABC Supply House sells customized cabinets to its customers, including DEF Construction Company. DEF installs the cabinets for its customers. Additionally, ABC, which has a specialty contractor’s license, sells and installs cabinets for GHI Construction Company. GHI is entitled to a subcontract deduction for the payment to ABC. DEF, however, is not entitled to a deduction for the payment to ABC as ABC is not engaged in the contracting business, as such, when ABC sells the cabinets to DEF. Example 8: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the construction of a residential building. ABC contracts with Edifice Wrecks, a licensed specialty contractor, to demolish the existing structure and remove the debris. ABC purchases lumber from E Supply House to be used in the construction of the building. ABC subsequently contracts with F Hauling Company, who is licensed by the Public Utilities Commission as a carrier of general commodities and household goods, to haul the lumber to the job site. F is subject to chapter 239, HRS, and is not licensed under chapter 237, HRS. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to contractors and licensed specialty contractors. ABC is entitled to a deduction for the payments to Edifice Wrecks, a licensed specialty contractor. ABC, however, is not entitled to a deduction for the payments to E and F. Example 9: ABC Construction Company, DEF Construction Company, and XYZ Bank form a joint venture to develop a shopping center. The joint venture will sell or otherwise dispose of the shopping center within one year of the completion. The joint venture contracts with G Landscape Surveyor and H Landscape Architect, who are both licensed under chapter 237, HRS, and are included in the definition of a contractor in section 237-6, HRS, to do various aspects of the project. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. The definition of a person under section 237-1, HRS, includes a joint venture. Accordingly, the joint venture is a prime contractor and taxable as a contractor on the disposition of the property. The joint venture, however, is entitled to a deduction for the payments to G and H. G and H are subject to the general excise tax at the rate of four per cent on the payments received from the joint venture. Example 10: Individual A, who is not engaged in the construction business, purchases land and decides to build a residence. A, an owner-contractor under sections 444-2 and 444-9.1, HRS, and this section, contracts with Contractor X, who is licensed under chapter 237, HRS, and is included in the definition of a contractor in section 237-6, HRS, to do various aspects of the job. The definition of a prime contractor does not include an owner-contractor, such as A. Thus, A is not entitled to a subcontract deduction for the payments to X, and X is subject to the general excise tax at the rate of four per cent on the payments received from A. If, however, X fails to pay the general excise tax due on the payment that X receives from A, A is not liable for the nonpayment of the tax. Example 11: Assume the same facts as Example 10, except that X contracts with Contractors Y and Z, who are both licensed under chapter 237, HRS, and are included in the definition of a contractor in section 237-6, HRS, to do various aspects of the project. X is entitled to a deduction for the payments to Y and Z. Y and Z are subject to the general excise tax at the rate of four per cent on the payments received from X. Example 12: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor for the construction of a commercial building. ABC then subcontracts with DEF Company, a specialty contractor licensed under chapter 237, HRS, but not licensed under chapter 444, HRS, to do part of the job. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and specialty contractors licensed under chapter 444, §18-237-13-03 GENERAL EXCISE TAX LAW 237- 24 (Unofficial Compilation as of 12/31/2025) HRS. DEF, however, is an unlicensed specialty contractor. Accordingly, ABC is not entitled to a deduction for the payments to DEF. Example 13: Assume the same facts as in Example 12 above, except that the renovation will be done on a commercial building which is exclusively on federal property. The specialty contractor, DEF, is not required to be licensed under chapter 444, HRS, because its contracting activities on the federal property are not within the regulatory jurisdiction of the State. Accordingly, ABC is entitled to a deduction for the payments to DEF if DEF pays the general excise tax at the rate of four per cent on the payments received from ABC. DEF is required to be licensed as a taxpayer under chapter 237, HRS. Example 14: ABC Construction Company, a contractor licensed under chapter 237, HRS, but unlicensed under chapter 444, HRS, is the prime contractor for the renovation of a commercial building. ABC then contracts with DEF Acoustical and Installation Construction Company, a specialty contractor licensed under chapters 237 and 444, HRS, to do part of the job. Section 237- 13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. There is no requirement that the prime contractor be licensed under chapter 444, HRS. Accordingly, ABC is entitled to a deduction for the payments to DEF. DEF is subject to the general excise tax at the rate of four per cent on the payments received from ABC. Example 15: Customer X purchases tile from ABC Retailer, a company licensed under chapter 237, HRS, but unlicensed under chapter 444, HRS. ABC then contracts with DEF Tile Contractor, a specialty contractor licensed under chapters 237 and 444, HRS, to prepare the base and install the tile. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. ABC, however, is not a contractor under section 237-6, HRS. Accordingly, ABC is not entitled to a deduction for the payments to DEF. DEF is subject to the general excise tax at the rate of four per cent on the payments received from ABC. (d) Exemption from the general excise tax of all rents and proceeds received from housing projects, including all gross proceeds received by contractors for the construction of housing projects developed pursuant to chapters 201E and 356, HRS. (1) Scope. This subsection sets forth the general excise tax exemption provisions of section 201E-205, HRS. (2) Definitions. For the purposes of this subsection: “Corporation” means the housing finance and development corporation established under chapter 201E, HRS. “Housing” or “housing project” means dwelling units developed and constructed pursuant to contracts or partnership agreements executed between the corporation and eligible bidders (as defined in section 201E-213, HRS). (3) Application of exemption from the general excise tax. (A) Qualifying process. The following are exempted from the general excise tax under chapter 237, HRS: (i) All rents received on account of the lease or rental of dwelling units developed and constructed pursuant to sections 201E-211 and 201E-213, HRS, and (ii) All gross proceeds received by a contractor for the development and construction of dwelling units pursuant to sections 201E-211 and 201E-213, HRS. (B) Non-qualifying proceeds. Gross proceeds shall not be exempt from the general excise tax where they are received by any person who furnishes tangible personal property or renders service to: (i) Another person who receives rental payments which are exempted from the general excise tax under this section; or (ii) A contractor for the development and construction of housing or housing projects pursuant to sections 201E-211 and 201E-213, HRS. (4) Filing of claim; time and place. An exemption claim (FORM G-37) shall be prepared by the claimant and submitted to the corporation for certification after final execution of the partnership agreement or contract or both between such claimant and the corporation. The original copy of the certified exemption claim shall be filed with the tax assessor for the 237- 25 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-06.05 taxation district in which the claimant files the claimant’s general excise tax return (FORM G-HW-1). (5) Failure to file claim. The exemption shall not be allowed unless the original copy of the certified exemption claim is filed with the tax assessor. (6) Records. A claimant shall keep at the claimant’s principal place of business such records as will enable the director to verify the accuracy of the amount of exemption claimed. [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18-237-13-03 12/27/90] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) §18-237-13-04 (Reserved) §18-237-13-05 (Reserved) §18-237-13-06.01 (Reserved) §18-237-13-06.05 Tax on service business; fees and commissions received by a director, trustee, executor, or other fiduciary. (a) Scope. This section sets forth the application of the provisions of chapter 237, HRS, relating to the imposition of the general excise tax on fees and commissions received by a person who serves as a fiduciary such as, but not limited to, a director, trustee, executor, administrator, custodian, or guardian. The purpose of this subsection is to clarify for purposes of chapter 237, HRS, those fees and commissions derived from the performance of fiduciary services which are more than casual transactions. This subsection, therefore, does not apply to those persons who, by practice or profession, serve as fiduciaries such as attorneys and accountants who are taxed under section 237-13(8), HRS, and those persons engaged in business as fiduciary companies under the provisions of chapter 402, HRS. (b) Imposition of tax; rate of tax. Section 237-13, HRS, levies a general excise tax against persons on account of their business and other activities in the State measured by the application of rates against gross income. Fees and commissions received by fiduciaries such as, but not limited to, directors, trustees, executors, administrators, custodians, or guardians may be taxed by section 237-13(6), (8), or (10), HRS, respectively, as follows: (1) Section 237-13(6), HRS, imposes a tax equal to four per cent of the gross income upon every person engaging or continuing within the State in any service business or calling. (2) Section 237-13(8), HRS, imposes a tax equal to four per cent of the gross income upon every person engaging or continuing within the State in the practice of a profession. (3) Section 237-13(10), HRS, imposes a tax equal to four per cent of the gross income upon every person engaging or continuing within the State in any business, trade, activity, occupation, or calling not otherwise specifically included in section 237-13, HRS. (c) Determination as to taxable activity. (1) In ascertaining whether a person is engaged in the activity of a fiduciary, it is immaterial whether the appointment was solicited; whether there is a generally recognized market for the services; whether the income was necessary for the person’s livelihood; whether the primary purpose was to accommodate friends; or any other subjective considerations. The activity shall be deemed to be engaged in with the object of economic gain or benefit where the person renders the service and accepts in return therefore a normal and usual compensation for the rendition of such service. (2) Section 237-24(6), HRS, shall not apply to the fees or commissions received by a person who renders services in the capacity of a fiduciary. (3) A person is deemed to be engaged in a trade or business as a fiduciary within the meaning of chapter 237, HRS, upon the person’s appointment thereto, performance of duties, and the receipt of fees if such person: (A) Serves as a fiduciary in four or more of each or combination of any of the following capacities during the taxable year: director of a corporation, trustee of a trust, executor of an estate, or any other fiduciary; or (B) Receives fees or commissions in an aggregate amount of more than $1,200 in a taxable year for the performance of the person’s duties as fiduciary. (4) Application of the principles cited in this subsection may be illustrated by the following examples: Example 1: A, an engineer, serving as a director of two corporations, as a trustee of a trust, and as an executor of an estate during the taxable year and who received fees and commissions therefrom shall be deemed to be engaged in business within the meaning of chapter 237, HRS. HRS §237-13(6) §18-237-13-06.11 GENERAL EXCISE TAX LAW 237- 26 (Unofficial Compilation as of 12/31/2025) Example 2: B, a contractor, serving as a director of two corporations, one of which is a nonprofit religious corporation for which no fees were received, as a trustee of a trust, and as an executor of an estate during the taxable year and who received fees and commissions in the amount of $1,000 per year for services as a director, trustee, and as an executor shall not be deemed to be engaged in the business within the meaning of chapter 237, HRS. Example 3: D, a chemist, serving as a trustee of a trust and as an executor of one estate during the taxable year and who received an aggregate amount of $1,300 therefrom, and who in addition to the foregoing, received $500 in fees as a director of a corporation during the taxable year for directors’ meetings held outside the State of Hawaii shall be deemed to be engaged in business within the meaning of chapter 237, HRS. Example 4: F, a lawyer and an accountant, is not engaged in private practice but is employed by a corporation as a full-time lawyer and an accountant. Serving as a director of the abovementioned corporation and another corporation during the taxable year, F received an aggregate amount of $1,000 therefrom in the taxable year. The directors’ fees received by F shall not be deemed from engaging in business within the meaning of chapter 237, HRS, inasmuch as F’s activities and fees therefrom are not within the provisions of paragraph (3)(A). [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18-237-13-06.05 12/27/90] (Auth: HRS §§231­ 3(9), 237-8) (Imp: HRS §237-13) §18-237-13-06.11 Tax on service business; tire recapping services. (a) This section applies to the gross income derived from recapping a tire belonging to another person. (b) When recapping services are rendered upon the order of or at the request of another taxpayer who is engaged in the service business and who in fact acts or acts in the nature of an intermediary between the person rendering such services and the ultimate recipient of the benefits of services: (1) The gross income of the recapper takes the rate of one-half of one per cent; (2) The gross income of the intermediary takes the rate of four per cent. (c) When recapping services are rendered upon the order or request of another person who is not an intermediary within the meaning of subsection (b), the gross income of the recapper takes the rate of four per cent. Example 1: A customer takes a tire to service station operator (taxpayer S) for recapping. Taxpayer S in turn has the tire recapped by taxpayer R. Taxpayer R (tire recapper) is subject to a general excise tax of one-half of one per cent on the amount received from taxpayer S for the recapping services rendered. Taxpayer S is subject to the general excise tax of four per cent on the amount received from the customer. Example 2: A customer takes a tire to the tire recapper (taxpayer R) for recapping. Taxpayer R is subject to the general excise tax rate of four per cent on the amount received from the customer for the recapping services rendered. [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18-237-13-06.11 12/27/90] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) §18-237-13-06.16 Tax on service business; telecommunication services. (a) Scope. This section is intended to provide uniform rules of administrative procedure to govern the taxation of the telecommunication industry pursuant to section 237-13(6), HRS, of the general excise tax law. This section shall not apply to gross income that is taxable under chapter 239, HRS, the public service company tax law. (b) Definitions. As used in this section, unless the context otherwise requires: “Directly related to Hawaii” means geographically located within Hawaii or allocated to Hawaii according to generally accepted accounting principles and practices. “Foreign common carrier” means any person operating under the legal jurisdiction of a country other than the United States which provides telecommunication service to the public in general or to specified classes of the public. “Gross income” means the gross receipts, as defined in section 237-3, HRS, of a long distance carrier. “Hawaii billed income” means the gross income received or accrued by a long distance carrier from telecommunication service which is originated or terminated in this State and is charged to a telephone number, customer, or account in this State. “Interexchange carrier” means any person which provides telecommunication service between local access transport areas. “Interstate telecommunications” means all telecommunications that either originate or terminate outside of this State. HRS §237-13(6) HRS §237-13(6) 237- 27 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-06.16 “Intrastate telecommunications” means all telecommunications that originate and terminate within this State. “Local access transport area” means any local intrastate calling area. “Long distance carrier” means any interexchange carrier, reseller, or foreign common carrier which purchases, installs, rents, or leases a telephone system, telecommunication system, or telecommunications service for the interexchange carrier, reseller, or foreign common carrier’s own use to provide the interexchange carrier, reseller, or foreign common carrier or other persons with telephonic interstate or international telecommunication service which is wholly or partially independent of any local exchange system or any intrastate or interstate interexchange network or which is a substitute for any dedicated facility by which an interexchange or foreign common carrier provides a telephonic communication path in the State. “Reseller” means any person which provides telecommunication service through the use of facilities or services owned or provided by another telecommunication service provider. “Telecommunication service” means the transmission, conveyance, routing, or reception of any electronic, electromagnetic interactive transmission, or any other kind of energy force variations of information in any form, including but not limited to voice, image, data, or printed copy signal by means of wires, cables, radio waves, laser microwaves, satellites, fiber optics, any combination of these media, or any other method now in existence or that may be devised. (c) Application. (1) This section shall apply to all long distance carriers conducting business, by providing telecommunication service, in the State. (2) The income of a long distance carrier that is subject to tax is that portion of gross income received by any long distance carrier from telecommunication service which is originated or terminated in this State and is charged to a telephone number, customer, or account in this State. (3) Apportionment. Under the Constitution and laws of the United States, the entire gross income as determined in paragraph (2) cannot be included in the measure of tax; such gross income shall be apportioned by using the apportionment formula in subsection (e)(1). (d) Apportionment factor. (1) The apportionment factor shall be as follows: HCOP NHOA + NHTA + HCOP + [ HBI x NCOP] NBI HBI = Hawaii Billed Income originating or terminating in the State and charged to a telephone number, customer, or account in the State. HCOP = Hawaii Cost of Operations includes those costs charged, under a long distance carrier’s normal method of accounting, to the following tax return and Federal Communication Commission-prescribed account titles or their equivalents, which are directly related to Hawaii. - Cost of Operations - Contributions - Bad Debts - Operating Expenses - Hawaii Originating or Terminating Connection Expenses or Access Fees or Costs - General and Administrative Expenses - Advertising Expenses - Leases - Payroll - Maintenance, including repair to: Cables Central Office Equipment Buildings and Grounds Maintenance of Transmission Power Other Maintenance Expenses - Depreciation and Amortization Expenses - Traffic Expenses - Commercial Expenses other than advertising §18-237-13-06.16 GENERAL EXCISE TAX LAW 237- 28 (Unofficial Compilation as of 12/31/2025) - General Office Salaries and Expenses other than general and administrative expenses and payroll - Insurance - Accidents and Damages - Operating Rents - Relief and Pensions - Operating Taxes - Miscellaneous Deductions From Income NBI = Nationwide Billed Income received from providing telecommunication service. NCOP = Nationwide Cost of Operations includes the tax return and Federal Communication Commission-prescribed account titles or equivalents described by HCOP above. NCOP specifically excludes costs included in HCOP, NHOA, NHTA, and connection expenses or access fees not included in HCOP, NHOA, or NHTA. NHOA = Non-Hawaii Originating Access Cost relating to HBI, which may be (1) The actual non-Hawaii originating access cost relating to a specific call resulting in Hawaii billed income; or (2) A reasonable estimate derived by using the nationwide or average Hawaii trunk access cost per unit to originate calls multiplied by the number of calls terminating in Hawaii resulting in Hawaii billed income; or (3) A reasonable estimate using the proportional relationship of the Hawaii originating and terminating access costs to derive the non-Hawaii originating access costs as a proportion of the total Hawaii terminating access costs. NHTA = Non-Hawaii Terminating Access Cost relating to HBI, which may be (1) The actual non-Hawaii terminating access cost relating to a specific call resulting in Hawaii billed income; or (2) A reasonable estimate derived by using the nationwide or average Hawaii trunk access cost per unit to terminate calls multiplied by the number of calls originating in Hawaii resulting in Hawaii billed income; or (3) A reasonable estimate using the proportional relationship of the Hawaii originating and terminating access costs to derive the non-Hawaii terminating access costs as a proportion of the total Hawaii originating access costs. Example: ABC Long Distance does not have figures for access costs for specific phone calls and decides it can reasonably estimate its non-Hawaii terminating access costs on a per unit basis as allowed by (2). For ABC Long Distance, the originating access cost is $.80 and the terminating access cost is $1.00 through the local exchange in Hawaii or on a nationwide basis for each call. If ABC Long Distance customers place 200,000 outgoing calls and receive 100,000 incoming calls during the reporting period, the NHTA would be estimated to be (200,000 X $1.00) $200,000 and the NHOA as (100,000 X $.80) $80,000. Example: XYZ Long Distance decides to make its estimate for non-Hawaii terminating access costs on a proportional basis as allowed by (3). Assume the same cost relationship for Hawaii-located originating and terminating access costs exists for XYZ as in the above example. Therefore, if it costs $1.00 to terminate a call in Hawaii and $.80 to originate a call, the originating access cost is equivalent to eighty per cent of the terminating access cost. If XYZ Long Distance incurs $4,000,000 in originating access costs and $1,000,000 in terminating access costs in Hawaii, then XYZ Long Distance’s non-Hawaii terminating access costs may be calculated as follows: $4.0M = $5.0M .8 XYZ Long Distance’s non-Hawaii originating access costs may be calculated as follows: $1.0M x .8 = $.8M or $800,000 237- 29 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-06.16 (2) The apportionment factor shall be multiplied by the Hawaii billed income of each long distance carrier to determine the portion of gross income subject to tax. (3) The apportionment factor shall be uniformly applied to the Hawaii billed income of all long distance carriers conducting business within and outside of the State. (4) The director may periodically review, evaluate, and adjust the apportionment factor to reflect any changes in the industry as necessary. (e) Apportionment formula. (1) The apportionment formula shall be as follows: HCOP x HBI = AHGI NHOA + NHTA + HCOP + [ HBI x NCOP] NBI AHGI = Apportioned Hawaii Gross Income received from providing telecommunication service in the State. All other components are as described in subsection (d)(1). Example: Aloha Communications, a local long distance carrier with no portion of its operations located out-of-Hawaii, provides long distance telephone service exclusively to customers in Hawaii. The billings total for all long distance telephone calls that originate or terminate in Hawaii and which are billed to a customer, telephone number, or account in Hawaii is $10,000,000. Aloha’s nationwide billings total is also $10,000,000 as all of its billings are made to Hawaii customers. The Hawaii cost of operations amount to $7,000,000. The nationwide cost of operations, which excludes the Hawaii cost of operations, is zero. The non-Hawaii originating access costs related to the Hawaii-billed calls income is $150,000. The non-Hawaii terminating access costs relating to Hawaii-billed calls is $1,500,000. The gross income received from telephone calls originating or terminating in Hawaii and billed to a customer, number, or account in Hawaii is apportioned as follows: $7M x $10M = $8,092,485.55 $.15M + $1.5M + $7M + [ ($10M) x 0] ($10M) The factor set out in subsection (d)(1) multiplied by the long distance carrier’s Hawaii billed calls income of $10,000,000, equals the amount of gross income that is subject to tax, in this instance, $8,092,485.55. Example: ABC Long Distance Company, an out-of-state long distance carrier that sells long distance telephone services to nationwide customers, has a branch office located in Hawaii which provides long distance telephone services in conjunction with its out-of-state offices. The amount of the Hawaii billed calls income is $100,000,000. The Hawaii cost of operations is $70,000,000. The nationwide billed income is $8,000,000,000. The nationwide cost of operations, excluding the Hawaii cost of operations, Hawaii-related originating and terminating access costs, and non- Hawaii-related access cost, is $3,000,000,000. The non-Hawaii originating access cost relating to Hawaii billed calls income is $1,500,000. The non-Hawaii terminating access cost relating to Hawaii billed calls income is $15,000,000. The gross income received from telephone calls originating or terminating in Hawaii and billed to a customer, number, or account in Hawaii is apportioned as follows: $70M x $100,000,000 = $56,451,612.90 $1.5M + $15M + $70M + [ ($100M) x $3B] ($8B) The factor set out in subsection (d)(1), multiplied by the long distance carrier’s Hawaii billed calls income of $100,000,000, equals the amount of gross income that is subject to tax, in this instance, $56,451,612.90. (2) The apportionment formula shall be uniformly applied to the gross income received or accrued from telecommunication service by all long distance carriers conducting business within and outside of the State. §18-237-13-06.16 GENERAL EXCISE TAX LAW 237- 30 (Unofficial Compilation as of 12/31/2025) (3) The director may periodically review, evaluate, and adjust the apportionment formula to reflect any changes in the industry as necessary. (f) Industry apportionment factor. (1) On or before February 15 or August 15 of each year, each long distance carrier shall calculate its apportionment factor and apportioned Hawaii gross income based upon the long distance carrier’s Hawaii billed income and costs of the preceding twelve months (January 1 through December 31 or July 1 through June 30, respectively) and shall submit to the department a report for the applicable reporting period ending on December 31 or June 30. The report shall include the long distance carrier’s formula, the resulting apportionment factor, and any supporting information, worksheets, or other documentation as may be required by the director. The department may review the calculation of each apportionment factor for reasonable compliance with subsection (d) and may make any necessary adjustments to the factor. (2) The department may calculate an industry apportionment factor for uniform application to the Hawaii billed income of each long distance carrier providing telecommunication service in Hawaii, based upon not less than ninety per cent of the total Hawaii billed income received by all long distance carriers doing business in the State for any reporting period, by weighting the apportionment factors submitted in accordance with paragraph (1) in proportion to the long distance carriers’ shares of the total Hawaii billed income received by all long distance carriers doing business in the State for the period. Any adjustment to the industry apportionment factor shall be made by amending this rule and shall be effective on the July 1 or January 1 following the reporting periods set forth in paragraph (1). (3) Each long distance carrier shall multiply the industry apportionment factor by the long distance carrier’s Hawaii billed income to determine the portion of the long distance carrier’s gross income subject to tax. (4) If the department does not receive sufficient information as required under paragraph (1) during any reporting period to enable the department to calculate an industry apportionment factor, or if the department’s calculation of a industry apportionment factor is challenged by the filing of a tax return with payment under protest or the filing of a civil complaint in any court of competent jurisdiction by a long distance carrier whose proportion of the total Hawaii billed income is not less than five per cent, or if the application of an industry apportionment factor is determined to be unauthorized under the constitution or laws of this State or the United States, the director may suspend the application of the industry apportionment factor, and each long distance carrier shall apply the apportionment factor calculated in accordance with subsection (d) to the long distance carrier’s Hawaii billed income. If a determination to suspend is made, the director shall publish, not less than twenty days prior to the date on which use of the industry apportionment factor shall be suspended, notice of the suspension of the use of the industry apportionment factor at least once in a newspaper of general circulation in the State and at least once in a financial newspaper of general circulation in the United States. On the first day of the month following the publication of the notice of suspension, use of the industry apportionment factor shall cease and long distance carriers shall revert to use of the apportionment factor calculated in accordance with subsection (d). Example: In January, 1989, Alpha, Beta, and Delta, three long distance carriers, submit to the department the following Hawaii-billed incomes and individual apportionment factors for the previous twelve-month period ending on December 31, 1988: TWELVE MONTH HAWAII-BILLED INCOME INDIVIDUAL APPORTIONMENT FACTOR Alpha $ 50 Million .60 Beta $ 75 Million .50 Delta $ 25 Million .75 TOTAL $150 Million Thereafter, the department determines the industry apportionment factor by using a proportionate representation based on each long distance carrier’s share of the total Hawaii- billed income as follows: 237- 31 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW §18-237-13-06.16 Alpha $50 / 150 x .60 = .200 Beta $75 / 150 x .50 = .250 Delta $25 / 150 x .75 = .125 The industry apportionment factor equals (.200 + .250 + .125) or .575 or 57.5%. Thus, beginning on July 1, 1989, the apportioned Hawaii gross income (AHGI) of each long distance carrier will be set at 57.5 per cent of the long distance carrier’s Hawaii-billed income (until the industry apportionment factor is changed effective the next January 1). For example, the tax due for the month of July may be calculated as follows: Alpha Hawaii Billed Income $ 5.0 M Industry Apportionment Factor .575 Apportioned Hawaii Income $2.875 M Tax Rate 4% Tax Due $115,000 Beta Hawaii Billed Income $ 7.5M Industry Apportionment Factor .575 Apportioned Hawaii Income $4.3125M Tax Rate 4% Tax Due $172,500 §18-237-13-07 GENERAL EXCISE TAX LAW 237- 32 (Unofficial Compilation as of 12/31/2025) Delta Hawaii Billed Income $ 2.5M Industry Apportionment Factor .575 Apportioned Hawaii Income $1.4375M Tax Rate 4% Tax Due $ 57,500 In this example, if Alpha, Beta, or Delta had failed to furnish the department with the data required to determine an industry apportionment factor, the ninety per cent requirement would not have been met, and long distance carriers would not be able to use an industry apportionment factor. Each long distance carrier would be required instead to use an apportionment factor calculated under subsection (d) to determine the portion of its Hawaii- billed income subject to the general excise tax. (5) Beginning on January 1, 1993, the industry apportionment factor shall be 0.4786. (g) Unfair competition; billing. (1) No long distance carrier shall advertise or hold out to the public in any manner, directly or indirectly, that the tax hereby imposed upon the long distance carrier is not considered as an element in the price to the purchaser. (2) A separately stated tax on any billing to a customer, number, or account reflecting the tax imposed on gross income under this paragraph shall be designated: “4.00% STATE TAX - HAWAII INCOME”. [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18- 237-13-06.16, 12/27/90; am 1/1/92; am 1/1/93] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) §18-237-13-07 (Reserved) §18-237-13-08 Professions. Fees and commissions received by a director, trustee, executor, or other such fiduciary. See section 18-237-13-06.05. [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18-237- 13-08 12/27/90] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) §18-237-13-09 (Reserved) §18-237-13-10 Tax on other business. (a) The furnishing or use of trading stamps and similar devices. (1) General excise tax, rates applicable, amounts. A person, hereinafter called the “user of stamps or other devices,” who uses in, with, or for any transaction, stamps, coupons, tickets, certificates, cards, or other similar devices, redeemable in goods, wares, or merchandise, or which entitle the customer to procure from any person any goods, wares, or merchandise, free of charge, or for less than the retail market price thereof, is taxable upon the full amount of gross proceeds of sale or gross income of the transaction in, with, or for which the stamps or other devices are used, at the rates provided by chapter 237, HRS, without any deduction therefrom on account of the cost of the stamps or other devices. (2) Stamp company, tax applicable to. The person who furnishes to the user of the stamps or other devices, or redeems, such stamps, coupons, tickets, certificates, cards, or other similar devices, is taxable upon the gross income received or derived therefrom at the rate provided by section 237-13(10), HRS. (3) Prize, no tax applies, when; transfer of merchandise to person awarding prize. (A) As to the goods, wares, or merchandise which constitute the prize for or redemption value of the stamps or similar devices, no tax applies in respect of the transfer of such goods, wares, or merchandise to the person surrendering the stamps or similar devices for redemption or who receives the prize, except to the extent of the additional consideration, if any, received or derived therefrom when the goods, wares, or merchandise are transferred for a price other than the stamps or devices themselves. (B) As to the transfer of such goods, wares, or merchandise to the person giving the prize or redeeming the stamps or similar devices, this shall be deemed a sale at wholesale. (b) Fees and commissions received by a director, trustee, executor, or other such fiduciary. See section 18-237-13-06.05. (c) Containers and packaging materials. See section 18-237-4(b). HRS §237-13(6) HRS §237-13(9) 237- 33 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW § 18-237-13(6)-04 (d) Gross income received or derived from recapping tires or from selling tangible personal property for use in recapping tires. See section 18-237-13-02(a). [Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren §18- 237-13-10 12/27/90] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) § 18-237-13(6)-01 One-half per cent intermediary services rate, in general. (a) Section 237-13(6), HRS, provides that where any person engaging or continuing within the State in any service business or calling not otherwise specifically taxed under chapter 237 renders such services upon or at the request of another taxpayer who is engaged in the service business and who, in fact, acts as or acts in the nature of an intermediary between the person rendering such services and the ultimate recipient of the benefits of such services, so much of the gross income as is received by the person rendering the services shall be subject to tax at the rate of one-half of one per cent and all of the gross income received by the intermediary from the principal shall be subject to tax at the rate of four per cent. (b) This provision has been interpreted very strictly by the courts in all three reported cases addressing this issue. In re Tax Appeal Busk Enter., 53 Haw. 518 (1972); In re Tax Appeal Pacific Laundry, T.A. No. 1864, affirmed 65 Haw. 678 (1982); and In re Tax Appeal McDonald’s Restaurants, T.A. No. 2232 (1985). The Department has been guided by these cases in applying the intermediary services rate and drafting these rules. These cases require a “clear analogue to the wholesaler-retailer-customer transaction of goods” and the intermediary must be a “mere conduit.” While few states tax services as extensively as Hawaii does, the Department has searched the statutes, rules, and case law of other states for legal tests relating to the resale of property or services, the wholesale sale of property or services, the consumption or use of property or services, and the recipient of property or services. The authorities that discuss services use the same terms that are used in the area of property - use, consumption, recipient, resale. Others reach a conclusion without articulating a clear reason for the conclusion, e.g., the “primary objective” of the parties was to resell the service. This may be attributable to the ephemeral nature of a service, as opposed to the sale of property which can be tracked at each level of sale. [Eff 1/22/99](Auth: HRS §§231-3(9), 237-8)(Imp: HRS §237-13) § 18-237-13(6)-02 Summary of the rules. The intermediary services rate of one-half per cent is applicable to the gross income received or derived when: (1) A service business provides services (“Service Provider”); (2) Upon the request or order of another service business which acts as an “Intermediary” between the Service Provider and the ultimate recipient of the services (“Customer”); (3) Both Service Provider and Intermediary are licensed persons in this State; (4) There are at least three parties (Service Provider, Intermediary, and Customer); and (5) The gross income received from Customer by Intermediary is subject to the general excise tax at the four per cent rate on all the gross income received for or derived from those services. [Eff 1/22/99](Auth: HRS §§231-3(9), 237-8)(Imp: HRS §237-13) § 18-237-13(6)-03 Definitions; generally. For purposes of sections 18-237-13(6)-01 to 18-237-13(6)-09: “Customer” means the person who is the ultimate recipient of the services of Service Provider. The term “Customer” is used regardless of whether the payment received by Service Provider qualifies for the intermediary services rate. “Intermediary” is defined in section 18-237-13(6)-06. The term “Intermediary” is used regardless of whether the payment received by Service Provider qualifies for the intermediary services rate. “Service Provider” means the taxpayer claiming the one-half per cent intermediary services rate who provides the services to Customer. The term “Service Provider” is used regardless of whether the payment received qualifies for the intermediary services rate. [Eff 1/22/99] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) § 18-237-13(6)-04 “Service business,” defined. (a) “Service business” means a person who engages in a service business or calling, as defined in section 237-7, HRS. A service business or calling is defined in section 237-7, HRS, as “all activities engaged in for other persons for a consideration which involve the rendering of a service as distinguished from the sale of tangible property or the production and sale of tangible property.” Example 1: Intermediary, a photographic studio, contracts with Customers to provide photographic services at Customers’ wedding in Hawaii. Intermediary contracts with Service Provider, another photographic studio, to provide the photographic services at the wedding. Service Provider provides the photographic services at the wedding and bills Intermediary. Intermediary bills Customers. Customers pay Intermediary and Intermediary pays Service Provider. HRS §237-13(6) HRS §237-13(6) HRS §237-13(6) HRS §237-13(6) § 18-237-13(6)-04 GENERAL EXCISE TAX LAW 237- 34 (Unofficial Compilation as of 12/31/2025) In order for Service Provider to be eligible for the intermediary services rate, both Service Provider and Intermediary must be engaged in service businesses. Both Service Provider and Intermediary are engaged in service businesses because photography is a service business or calling as defined in section 237-7, HRS. Example 2: Intermediary, a corporation organized to render professional medical services, contracts to provide medical services to Customers (Intermediary’s patients). Intermediary contracts with Service Providers to provide the medical services. Service Providers provide the medical services and bill Intermediary. Intermediary bills Customers. Customers pay Intermediary and Intermediary pays Service Providers. In order for Service Providers to be eligible for the intermediary services rate, both Service Providers and Intermediary must be engaged in service businesses. Both Service Providers and Intermediary are engaged in service businesses because professional medical services is a service business or calling as defined in section 237-7, HRS. (b) “Service business” does not include a person who is not engaged in a service business or calling as defined in section 237-7, HRS. (1) “Service business” does not include a person subject to tax under section 237-13(3), HRS, relating to the taxation of contracting. Example 3: Intermediary, a general contractor, enters into a contract with Customer to construct a building. Intermediary subcontracts with Service Provider, a solar company, to install solar heating and another Service Provider, an electrician, to install the wiring in the building. Both Service Providers bill Intermediary and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Providers. In order for Service Providers to be eligible for the intermediary services rate, both Service Providers and Intermediary must be engaged in service businesses. Service Providers and Intermediary are not engaged in a service business because they are engaged in contracting activities subject to tax under section 237-13(3), HRS. The intermediary services rate is not applicable to the payments that Service Providers receive from Intermediary. Service Providers are subject to the general excise tax at the rate of four per cent on the payments received from Intermediary. Intermediary may be allowed a subcontract deduction for the payments to Service Providers if Intermediary fulfills the requirements of section 237-13(3) (B), HRS. (2) “Service business” does not include a person subject to tax under section 237-13(5), HRS, relating to the taxation of a sales representative receiving commissions. Example 4: Intermediary, a manufacturer’s sales representative, receives commissions from Customer, a manufacturer, for sales of goods. Intermediary contracts with Service Provider, another sales representative, to assist Intermediary in selling the goods. Customer pays Intermediary commissions and Intermediary pays the commissions to Service Provider. In order for Service Provider to be eligible for the intermediary services rate, both Service Provider and Intermediary must be engaged in service businesses. Both Service Provider and Intermediary are not engaged in service businesses because they are sales representatives and their commission income is subject to tax under section 237-13(5), HRS. The intermediary services rate is not applicable to the payment that Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent on the payment received from Intermediary. (3) “Service business” does not include a person subject to tax under section 237-13(10), HRS, relating to the taxation of other business, such as a licensing business. Example 5: Intermediary, through licensing agreements, franchises fast-food restaurants in Hawaii to Customers. The licensing agreements provide that Customers shall have the right, license, and privilege to use Intermediary’s system at restaurants and that Intermediary shall provide management services. Intermediary and Service Provider enter into an agreement which specifies that Service Provider will provide the management 237- 35 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW § 18-237-13(6)-05 services to Customers. Service Provider bills Intermediary and Intermediary bills Customers. Customers pay Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, both Service Provider and Intermediary must be engaged in service businesses. Intermediary is not a service business because Intermediary is engaged in a licensing business subject to tax as other business under section 237-13(10), HRS. The intermediary services rate is not applicable to the payment that Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent on the payment received from Intermediary. (4) Service business” does not include a person subject to tax under section 237-13(10), HRS, relating to the taxation of other business, such as rental activity. Example 6: Intermediary enters into an agreement with Customer to rent Intermediary’s ballroom. Intermediary then contracts with Service Provider, an audio visual company, to provide the audio visual services required by Customer. Service Provider bills Intermediary and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, both Service Provider and Intermediary must be engaged in service businesses. Intermediary is not engaged in a service business because Intermediary is engaged in a rental business subject to tax under section 237-13(10), HRS. The intermediary services rate is not applicable to the payment that Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent on the payment received from Intermediary. (5) “Service business” does not include a person subject to tax under chapter 239, HRS, relating to the public service company tax. Example 7: Intermediary, a moving and storage company licensed by the Public Utilities Commission, enters into an agreement with Customer to transport goods. To complete the job, Intermediary obtains laborers through Service Provider, an employee leasing company. Service Provider bills Intermediary and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, both Service Provider and Intermediary must be engaged in service businesses. Service Provider is a service business. Intermediary, however, is not a service business because Intermediary is engaged in a public service company business subject to the public service company tax under chapter 239, HRS. The intermediary services rate is not applicable to the payments that Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent on the total payments received from Intermediary. [Eff 1/22/99] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) § 18-237-13(6)-05 “Licensed person in this State, defined. ” (a) “Licensed person in this State” means a person subject to the taxing jurisdiction of the State and licensed under chapter 237, HRS; (b) “Licensed person in this State” does not include a person who is not subject to the taxing jurisdiction of the State. Example 1: Intermediary, a consulting company located in California, enters into an agreement with Customer. Intermediary contracts with Service Provider, located in Hawaii, to perform services in Hawaii for Customer. Intermediary, however, does not perform any services in Hawaii. Service Provider bills Intermediary and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, both Service Provider and Intermediary must be licensed persons in this State. Intermediary, however, is not a licensed person in this State because Intermediary is not subject to the taxing jurisdiction of the State. The intermediary services rate is not applicable to the payment Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four HRS §237-13(6) § 18-237-13(6)-06 GENERAL EXCISE TAX LAW 237- 36 (Unofficial Compilation as of 12/31/2025) per cent on the total payments received from Intermediary. [Eff 1/22/99] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) § 18-237-13(6)-06 “Intermediary” between Service Provider and Customer. In order for Service Provider to be eligible for the intermediary services rate, the person requesting or ordering the service from Service Provider must act as or act in the nature of an Intermediary between Service Provider and the ultimate recipient of the benefits of such services (Customer). The person requesting or ordering the service from the Service Provider acts as or acts in the nature of an Intermediary when there is a direct flow of services from Service Provider through Intermediary (or Intermediaries) and then to Customer. As a mere conduit for the services en route to Customer, Intermediary does not alter, use, or otherwise consume the services provided by Service Provider. Service Provider’s services are altered, used or consumed if the services constitute a portion of the total services performed by Intermediary for Customer, or Service Provider’s services are incorporated into services performed by other persons for Customer. Example 1: Intermediary provides salon services. Customer requests a facial. Intermediary contracts with Service Provider to provide Customer with the facial. Service Provider bills Intermediary. Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be a direct flow of services from Service Provider to Customer, the ultimate recipient of the benefits. There is a direct flow of services because the total services requested by Customer were performed by Service Provider; Service Provider’s services were not incorporated in other services performed for Customer. Example 2: Intermediary is a magician. Customer requests the performance of Intermediary. Intermediary contracts with Service Provider, another magician, to perform for Customer. Service Provider bills Intermediary. Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be a direct flow of services from Service Provider to Customer, the ultimate recipient of the benefits. There is a direct flow of services because the total services requested by Customer were performed by Service Provider; Service Provider’s services were not incorporated in other services performed for Customer. However, if Intermediary contracted to put on a gala event which includes a piano performance by Service Provider, there would not be a direct flow of services because Service Provider’s services would be incorporated in other services performed for Customer. Service Provider would be subject to the general excise tax at the rate of four per cent. Example 3: Intermediary, an automobile dealer, sells an automobile to Customer. Intermediary contracts with Service Provider to perform cleaning, repairing, and restoring services on the automobile. Service Provider bills Intermediary. Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be a direct flow of services from Service Provider to Customer, the ultimate recipient of the benefits. There is no direct flow of services from Service Provider to Customer because the total services requested by Customer were not performed by Service Provider; rather, Service Provider’s services were incorporated as part of the sale of the automobile to Customer. Moreover, Intermediary, is engaged in the sale of goods (automobiles), rather than a service business. The intermediary services rate of one-half per cent is not applicable to the payment Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent. Example 4: Intermediary, a graphic design firm, contracts with Customer to develop an advertisement. Intermediary contracts with Service Provider to provide illustrations. Service Provider bills Intermediary. Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be a direct flow of services from Service Provider to Customer, the ultimate recipient of the benefits, or another person who acts as or acts in the nature of an Intermediary. There is no direct flow of services from Service Provider to Customer because the total services requested by Customer were not performed by Service Provider; rather, Service Provider’s services were incorporated in the advertisement with other services performed for Customer. The intermediary services rate of one- half per cent is not applicable to the payment Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent. HRS §237-13(6) 237- 37 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW § 18-237-13(6)-07 Example 5: Intermediary, a management consultant, enters into a contract with Customer to study the reason for Customer’s declining sales. Intermediary contracts with Service Provider, a marketing company, to do part of the study. Service Provider bills Intermediary. Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be a direct flow of services from Service Provider to Customer, the ultimate recipient of the benefits, or another person who acts as or acts in the nature of an Intermediary. There is no direct flow of services from Service Provider to Customer because the total services requested by Customer were not performed by Service Provider; rather, Service Provider’s services were incorporated in the study with other services performed for Customer. The intermediary services rate of one-half per cent is not applicable to the payment Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent. [Eff 1/22/99](Auth: HRS §§231-3(9), 237-8)(Imp: HRS §237-13) § 18-237-13(6)-07 Three parties required. (a) In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties - Service Provider, Intermediary, and Customer (the ultimate recipient of the services). Example 1: Intermediary, an auto body and fender shop, enters into an agreement with Customer to paint Customer’s car. Intermediary contracts with Service Provider, an auto paint shop, to paint Customer’s car. Service Provider bills Intermediary and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. There are three parties in this example: Service Provider, Intermediary, and Customer. (b) There are at least three parties when there is a direct flow of services from Service Provider through Intermediary (or Intermediaries) and then to Customer, the ultimate recipient of the benefits, regardless of the number of Intermediaries. Both Service Provider and each Intermediary, except for the Intermediary providing the final services to the Customer, may qualify for the one-half per cent intermediary services rate. Example 2: Q, a provider of parking services, contracts with Customer to provide those services at an event. Q contracts with R to provide the parking services. R then contracts with S to provide the parking services. S bills R, R bills Q, and Q bills Customer. Customer pays Q. Q pays R and R pays S. In order for a Service Provider to be eligible for the intermediary services rate, there must be at least three parties. With respect to R’s eligibility for the intermediary services rate, there are three parties: R (the Service Provider); Q (intermediary); and Customer. With respect to S’s eligibility for the intermediary services rate, there are four parties: S (the Service Provider); R (intermediary); Q (intermediary); and Customer. (c) Service Provider is eligible for the intermediary services rate when Service Provider receives payment from a third-party payer, rather than Customer. Example 3: Intermediary, an auto body and fender shop, enters into an agreement to paint Customer’s car. Customer is insured by Insurance Company. Intermediary contracts with Service Provider, an auto paint shop, to paint Customer’s car. Service Provider bills Intermediary and Intermediary bills Insurance Company. Insurance Company pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Service Provider is eligible for the intermediary services rate when Intermediary receives payment from a third-party payer, rather than Customer. There are four parties: Service Provider, Intermediary, Insurance Company (the third- party payer who pays Intermediary for the services furnished to Customer), and Customer. (d) The intermediary services rate is not applicable when there are only two parties. (1) There are two parties when Intermediary is an agent of Service Provider. Example 4: Intermediaries, which are various hotels, provide laundry services to Customers, who are guests at the hotels. Service Provider is engaged in the business of providing laundry services. Intermediaries enter into agreements with Service Provider HRS §237-13(6) § 18-237-13(6)-07 GENERAL EXCISE TAX LAW 237- 38 (Unofficial Compilation as of 12/31/2025) to provide those services. The agreements expressly state that Intermediaries shall be agents of Service Provider. Customers fill out laundry slips and turn over the slips along with the laundry to Intermediaries which turn them over to Service Provider. Service Provider does the laundry, returns it to Intermediaries, and bills Intermediaries for its services. Intermediaries collect from Customers and remit the amounts billed by Service Provider, retaining 35 per cent of the billing as commission. Other than for negligence of Intermediaries or its employees, Intermediaries are neither liable nor responsible to Customers for any loss or damage to Customers’ laundry. All claims for losses or damages and questions regarding charges are directed to Service Provider. All uncollectible amounts are charged to Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Intermediaries in this example are agents for Service Provider because they act on behalf of and subject to the control of Service Provider. Therefore, there are only two parties in this example (1) Service Provider and (2) Customers and the intermediary services rate is not applicable to the payments Service Provider receive from Intermediaries. Service Provider is subject to the general excise tax at the rate of four per cent on the total amounts billed by Intermediaries to Customers. (2) There are two parties when Service Provider is an agent of Intermediary. Example 5: Intermediary, through licensing agreements, franchises fast-food restaurants in Hawaii to Customers. The licensing agreements provide that Customers shall have the right, license, and privilege to use Intermediary’s system at restaurants and that Intermediary shall provide management services. Intermediary and Service Provider, a subsidiary company, enter into an agreement which specifies that Service Provider will provide the management services to Customers. Intermediary, however, is engaged in a licensing business rather than a service business. Service Provider bills Intermediary and Intermediary bills Customers. In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Service Provider in this example is an agent for Intermediary because Service Provider acts on behalf of and subject to the control of Intermediary. Under the contract Customers are looking to Intermediary only to provide the services. Intermediary provides the services to Customers through Service Provider, a subsidiary company of Intermediary. Intermediary would never entrust its management system to an independent third party, especially in the highly competitive fast-food industry. Therefore, there are only two parties in this example: (1) Intermediary; and (2) Customers. The intermediary services rate is not applicable to the payment Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent on the amounts received from Intermediary. (3) There are two parties when Service Provider is an employee of the “intermediary.” Example 6: Intermediary, an insurance adjusting company, adjusts claims for Customer, an insurance company. Intermediary enters into a contract with Service Provider, an insurance adjuster, to adjust claims. The contract provides that Service Provider is controlled or directed by Intermediary as to the means and manner of performance, has fixed time schedules, a fixed salary or rates, and is furnished an office and supplies. Service Provider bills Intermediary, and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Service Provider in this example is an employee of Intermediary because Service Provider acts on behalf of and subject to the control of Intermediary. See, Chapter 233, HRS, relating to Tax Classification of Certain Business Relationships. Therefore, there are only two parties in this example: (1) Intermediary and (2) Customer. The intermediary services rate is not applicable to the payments Service Provider receives from Intermediary. Service Provider’s salaries and wages, however, are exempt from the general excise tax under section 237-24(6), HRS. Intermediary is subject to the general 237- 39 (Unofficial Compilation as of 12/31/2025) GENERAL EXCISE TAX LAW § 18-237-13(6)-08 excise tax at the rate of four per cent on the total amounts received from Customer. [Eff 1/22/99] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) § 18-237-13(6)-08 Gross income received from Customer by Intermediary subject to general excise tax at the four per cent rate. (a) In order for Service Provider to be eligible for the intermediary services rate, the gross income received from Customer by Intermediary must be subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services. Example 1: Intermediary, a service station, enters into an agreement with Customer to recap Customer’s tires. Intermediary contracts with Service Provider to recap Customer’s tires. Service Provider bills Intermediary for recapping the tires and Intermediary bills Customer. Customer pays Intermediary, which is subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services. Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, the gross income received from Customer by Intermediary must be subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services. Here, Intermediary is subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services furnished to Customer. Example 2: Assume the same facts as in Example 20 above, except that Service Provider arranges for W to recap the tire. W bills Service Provider, Service Provider bills Intermediary, and Intermediary bills Customer. Customer pays Intermediary. Intermediary pays Service Provider and Service Provider pays W. In order for Service Provider to be eligible for the intermediary services rate, the gross income received from Customer by Intermediary must be subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services. W is eligible for the intermediary services rate because Intermediary is subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services furnished to Customer, notwithstanding that Service Provider also is subject to the one-half per cent intermediary services rate. (b) Service Provider is not eligible for the intermediary services rate if there are only three parties and Intermediary is not subject to the general excise tax. Example 3: Intermediary, a tax-exempt hospital under section 237-23(a)(6), HRS, contracts with Service Provider to provide counseling services to Customers (Intermediary’s patients). Service Provider provides the counseling services and bills Intermediary. Intermediary bills the Customer’s insurers. The insurers pay Intermediary and Intermediary pays Service Provider. In order for Service Provider to be eligible for the intermediary services rate, the gross income received from Customer by Intermediary must be subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services. The gross income received from Customer is not subject to the general excise tax at the rate of four per cent because Intermediary is exempt from the general excise tax. The intermediary services rate is not applicable to the payments Service Provider receives from Intermediary. Service Provider is subject to the general excise tax at the rate of four per cent. (c) The Service Provider is not eligible for the intermediary services rate if income is divided between the Service Provider and another person under section 237-18, HRS. Example 4: Intermediary, a Realtor, enters into an agreement with Customer to sell Customer’s real estate. Service Provider, a licensed real estate agent with Intermediary, sells the real estate. The income received by Intermediary is divided between Intermediary and Service Provider, pursuant to section 237-18, HRS. In order for Service Provider to be eligible for the intermediary services rate, the gross income received from Customer by Intermediary must be subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services. The gross income received from Customer is not subject to the general excise tax at the rate of four per cent on all the gross income received for or derived from those services because Intermediary, pursuant to section 237-18, HRS, has split its income with Service Provider. The intermediary services rate is not applicable to the payment Service Provider receives. Service Provider is subject to the general excise tax at the rate HRS §237-13(6) § 18-237-13(6)-09 GENERAL EXCISE TAX LAW 237- 40 (Unofficial Compilation as of 12/31/2025) of four per cent on Service Provider’s share of the income. [Eff 1/22/99] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) § 18-237-13(6)-09 Burden of proof on Service Provider. (a) Service Provider has the burden of providing evidence satisfactory to the Department that Service Provider qualifies for the intermediary services rate of one-half per cent. Whether Service Provider qualifies for the intermediary services rate is determined by all the factual circumstances; no single factor is controlling. (b) Some of the relevant factors include the following: (1) Whether there is a written contract identifying the customer for whom Intermediary is purchasing Service Provider’s services, the services performed by the Intermediary for Customer, and the services performed by Service Provider at the request of Intermediary; (2) Whether there has been a separate charge or bill by Intermediary for Service Provider’s services; and (3) Whether Intermediary has executed a certificate on a form prescribed by the Department that states that Intermediary will not alter, use, or otherwise consume Service Provider’s services. Intermediary may execute a certificate which is applicable to every purchase of services from Service Provider, unless it is specified in writing that the certificate does not apply or until the certificate is revoked by notice in writing. Example 1: Intermediary provides salon services. Customer requests hair styling services. Intermediary contracts with Service Provider to provide Customer with the hair styling; a written contract identifies Customer and the services performed by Service Provider. Intermediary executes the certificate that states that Intermediary will not alter, use, or otherwise consume Service Provider’s services. Service Provider bills Intermediary. Intermediary bills Customer and includes a separate charge for the services of Service Provider. Intermediary is subject to the general excise tax at the four per cent rate. Customer pays Intermediary and Intermediary pays Service Provider. Service Provider has the burden of providing evidence satisfactory to the Department that Service Provider qualifies for the intermediary services rate of one-half per cent. The written contract identifying Customer and the services performed by Service Provider, the separate billing by Intermediary, and the executed certificate are among the relevant factors that the Department will consider in determining whether Service Provider qualifies for the intermediary services rate. [Eff 1/22/99] (Auth: HRS §§231-3(9), 237-8) (Imp: HRS §237-13) §18-237-14 to §18-237-15 (Reserved)