HAR § 18-235-110.6 — Example 1: Taxpayer uses a pickup truck to deliver fish to market

The fuel used to operate the pickup truck is not directly related to the operation of the fishing vessel, and therefore, taxes paid on the fuel do not qualify for the credit. Example 2: Taxpayer uses an airplane to scout the ocean for fish. Upon spotting a school of fish, a fishing vessel is dispatched for the haul. Taxes paid upon the fuel used to operate the airplane do not qualify for the credit; only taxes paid on fuel for the operation of the fishing vessel may be included in calculating the credit. Example 3: Taxpayer conducts research and performs experiments for the University of Hawaii to improve commercial fishing techniques, methodology, and practices, for which the taxpayer receives payment. Because this is not primarily a commercial fishing endeavor, tax paid on fuel used in a research or experimental expedition shall not be included for credit. (3) The fuel tax credit shall not apply to fuel used in the operation of charter fishing boats and the like, where the income is derived from fees and other sources rather than from commercial fishing. (4) The fuel tax credit shall not apply to an individual or an electing small business corporation (S corporation) for fuel tax paid for fuel used in the operation of a fishing vessel where the activity is not engaged in for profit, as provided in section 183, IRC, (activities not engaged in for profit). Example: Taxpayer retired and moved to Hawaii. She purchased a cabin cruiser which is used by taxpayer and her friends for fishing. When the catch of fish is in excess of the taxpayer’s needs, the excess is sold. During the taxable year, the taxpayer grossed $35,000 from the sale of fish and received $50,000 of income exempt from state income tax. The taxpayer attached schedule “C” (Profit or (Loss) from Business or Profession) to both her state and federal individual income tax returns, resulting in a net loss from the fishing activity of $15,000. Taxpayer claimed a refundable credit for the amount of fuel tax paid on fuel used to operate the fishing vessel. The Internal Revenue Service reviewed the taxpayer’s tax return and the loss was disallowed under section 183, IRC, as an activity not engaged in for profit. Conclusion: The taxpayer’s activity does not qualify for the fuel tax credit. The fishing activity is considered a hobby for purposes of section 183, IRC, not a commercial fishing operation. (b) To qualify as a principal operator in order to claim the fuel tax credit under section 235-110.6, HRS, at least fifty-one per cent of the taxpayer’s gross annual income must be derived from commercial fishing operations. Gross income, for purposes of this subsection, shall not include nontaxable income such as pensions, social security, welfare payments, and excluded interest. Example: Taxpayer is retired from the military and receives a pension of $15,000 and interest from United States bonds of $2,000 for the taxable year. He leased a boat and engaged in commercial fishing for eight months of the taxable year. His gross income, taxable by Hawaii, from fishing was $16,000. Conclusion: Since the taxpayer derived at least fifty-one per cent of his gross annual income from commercial fishing operations, he qualifies for the fuel tax credit in an amount equal to the fuel tax that he paid on fuel used to operate the commercial fishing vessel for the taxable year. (c) For the purpose of determining whether commercial fishing activities make up at least fifty-one per cent of the taxpayer’s gross annual income, only the gross income of the principal operator will be considered. The application of this provision is illustrated by the following examples: Example 1: H and W (husband and wife) file a joint tax return for the taxable year. H is retired and receives a pension of $20,000 for the taxable year. His other income includes $10,000 in interest and $400 in dividends. During the taxable year H also derives $30,000 from commercial fishing operations. W receives $18,000 in wages and $12,000 in rent from rental property owned solely by her.