Haw. Code R. § 18-237-13-02.01

Current through March, 2024

Section 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 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 percent if the tangible personal property is intended for resale at retail, four percent 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 percent. S is also subject to the general excise tax at four percent 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 percent.

(f) The following is an example of a drop shipment that involves three parties and is treated as two separate transactions.

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 percent.

(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 percent. 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 percent.

(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 percent. The sale from S to H is a retail sale. S's gross income is taxable at four percent. 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 percent. 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 percent. 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.

Haw. Code R. § 18-237-13-02.01

[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))