HAR § 18-235-5-02 — Allocation and separate accounting

(a) Taxpayers described in section 18-235-5- 01(b) who are required to determine Hawaii source income shall determine Hawaii source income by allocation and separate accounting so far as practicable as required by section 235-5(b), HRS. (1) If the nature of the taxpayer’s activity renders direct allocation impracticable, or the taxpayer’s books of account and records do not clearly reflect income properly taxable by Hawaii, income shall be allocated or apportioned under sections 235-21 to 235-39, HRS. (2) If the taxpayer’s activity within the State is an integral part of a unitary business carried on within and without the State, income shall be allocated or apportioned under sections 235- 21 to 235-39, HRS. For purposes of this paragraph, “integral part of a unitary business” means the activity is central to the activity of the taxpayer such that allocation and separate accounting is not practicable. (b) When the separate accounting method is used, separate records shall be maintained for sales, cost of sales, and expenses which are attributable to activity within Hawaii. Overhead expenses not directly allocable to activity within or without Hawaii shall be allocated according to the facts and circumstances, and in conformity with generally accepted accounting principles. (c) A change in the taxpayer’s allocation method or apportionment formula is a change in the taxpayer’s method of accounting within the meaning of sections 446 (with respect to methods of accounting) and 481 (with respect to adjustments required by changes in method of accounting), IRC.