HAR § 18-235-37-01 — Sales factor; sales other than sales of tangible personal property in this State

(a) Section 235-37, HRS, provides for the inclusion in the numerator of the sales factor of gross receipts HRS §235-36 HRS §235-37 §18-235-37-01 from transactions other than sales of tangible personal property (including transactions with the United States Government). Under this section, gross receipts are attributed to this State if the income producing activity which gave rise to the receipts is performed wholly within this State. Also, gross receipts are attributed to this State if, with respect to a particular item of income, the income producing activity is performed within and without this State but the greater proportion of the income producing activity is performed in this State, based on costs of performance. (b) As used in this section: “Costs of performance” means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer. “Income producing activity” applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining gains or profit. Income producing activity does not include transactions and activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, income producing activity includes but is not limited to the following: (1) The rendering of personal services by employees or the utilization of tangible and intangible property by the taxpayer in performing a service; (2) The sale, rental, leasing, licensing, or other use of real property; (3) The rental, leasing, licensing, or other use of tangible personal property; and (4) The sale, licensing, or other use of intangible personal property. The mere holding of intangible personal property is not, of itself, an income producing activity. (c) Receipts (other than from sales of tangible personal property) in respect to a particular income producing activity are in this State if: (1) The income producing activity is performed wholly within this State; or (2) The income producing activity is performed both in and outside this State and a greater proportion of the income producing activity is performed in this State than in any other state, based on costs of performance. (d) The following are special rules for determining when receipts from the income producing activities described below are in this State: (1) Gross receipts from the sale, lease, rental, or licensing of real property are in this State if the real property is located in this State. (2) Gross receipts from the rental, lease, or licensing of tangible personal property are in this State if the property is located in this State. The rental, lease, licensing, or other use of tangible personal property in this State is a separate income producing activity from the rental, lease, licensing, or other use of the same property while located in another state; consequently, if property is within and without this State during the rental, lease, or licensing period, gross receipts attributable to this State shall be measured by the ratio which the time the property was physically present or was used in this State bears to the total time or use of the property everywhere during that period. Example: Taxpayer is the owner of ten rental motor vehicles. During the year, the total of the days during which each motor vehicle was present in this State was fifty days. The receipts attributable to the use of each of the motor vehicles in this State are a separate item of income and shall be determined as follows: 10 vehicles x 50 days x Total Receipts = Total Hawaii Receipts 10 vehicles x 365 days (3) Gross receipts for the performance of personal services are attributable to this State to the extent that such services are performed in this State. If services relating to a single item of income are performed partly within and partly without this State, the gross receipts from the performance of such services shall be attributable to this State only if the greater proportion of the services were performed in this State, based on costs of performance. Usually, where services are performed partly within and partly without this State, the services performed in each state will constitute a separate income producing activity; in such cases, the gross receipts from the performance of services attributable to this State shall be measured by the ratio which the time spent in performing the services in this State bears to the total time spent in performing the services everywhere. Time spent in performing services includes the amount of time expended in the performance of a contract or other obligation which gives rise to those gross receipts. Personal service not directly connected with the performance of §18-235-38-02 the contract or other obligation, as for example time expended in negotiating the contract, is excluded from the computations. Example 1: Taxpayer, a road show, gave theatrical performances at various locations in State X and in this State during the tax period. All gross receipts from performances given in this State are attributed to this State. Example 2: The taxpayer, a public opinion survey corporation, conducted a poll by means of its employees in State X and in this State for the sum of $9,000. The project required six hundred employee hours to obtain the basic data and prepare the survey report. Two hundred of the six hundred employee hours were expended in this State. The receipts attributable to this State are $3,000: 200 x $9,000 = $3,000 600