HAR § 18-238-2 — Imposition of tax, exemptions

(a) Wholesaler, jobber, manufacturer. Section 238- 2(1), HRS, provides that if the importer or purchaser is licensed under the general excise tax law, chapter 237, HRS, and is (1) a wholesaler or jobber, importing or purchasing tangible personal property exclusively for the purposes of resale at wholesale or (2) a manufacturer importing or purchasing material to be incorporated by the manufacturer into a finished product, which, when sold, will result in a further tax on the activity of the manufacturer as a manufacturer or as a wholesaler, and not as a retailer, there shall be no tax. If the importer or purchaser as set forth in (1) or (2) above is also engaged in business as a retailer, subsection (b) shall apply to the importer or purchaser, but the director shall refund to the importer or purchaser in the manner provided under section 231-23(d), HRS, such amount of tax as the importer or purchaser shall, to the satisfaction of the director, establish to have been paid by the importer or purchaser on such imports or purchases which were sold by the importer or purchaser as a wholesaler or as a manufacturer. See subsection (h) for deduction and credit procedures, other than refund method provided in HRS §238-1 HRS §238-2 § 18-238-2 section 231-23(d), HRS, which a wholesaler or manufacturer who is also a retailer is permitted to use in determining tax liability under chapter 238, HRS. (b) Retailer or any other person not exempted by subsection (a). Section 238-2(2), HRS, provides that if the importer or purchaser is licensed under the general excise tax law, chapter 237, HRS, and is (1) a retailer or other person importing or purchasing for purposes of resale and not exempted by subsection (a), or (2) a manufacturer as set forth in subsection (a)(2) except for the fact that the manufacturer sells his products at retail, or (3) a contractor incorporating imported or purchased material or commodities into the finished work or project, the tax shall be one-half of one per cent of the purchase price of such tangible personal property, if the purchase and sale are consummated in Hawaii, or, if there is no purchase price applicable thereto, or if the purchase or sale is consummated outside of Hawaii, then one-half of one per cent of the landed value of such property imported into Hawaii. For taxes on sales of tangible personal property by an out-of-state seller, including drop shipments and definitions, see §18-237-13-02.01. See subsection (g) for rules relating to basis of property. (c) Certain scientific contracts with the United States. Notwithstanding the provisions of subsection (b) of this rule, the tax imposed by chapter 238, HRS, shall not apply to any use of property exempted by section 237-26, HRS. Thus, no use tax shall be levied or collected on tangible personal property which is to be affixed to, or to become a physical, integral part of the scientific facility, or which is to be entirely consumed during the performance of the service required by the contract or subcontract. (d) All others. HRS section 238-2(3) provides that in all other cases, the tax shall be four per cent of the landed value of such tangible personal property. For taxes on sales of tangible personal property by an out-of-state seller, including drop shipments and definitions, see §18-237-13-02.01. See subsection (g) for rules relating to basis of property. (e) Producers. See §18-238-4 relating to producers. (f) Application of the rules contained in subsections (a), (b), (c), (d) and (e) of this section may be illustrated by the following examples. Example 1: “A” purchases and imports a container load of merchandise from an out-of-state seller for resale in Hawaii to “X”, a retail discount store. “A’s” records further disclose that other imports and purchases made by “A” are sold to various other retail stores. Thus, because all sales are at the wholesale level, all such imports and purchases from an out-of-state seller are exempt from the use tax. Example 2: “B”, who is in the business of manufacturing food items, imports food preservatives and food containers. The preservatives are to be incorporated into the manufactured product while the containers are used to make the finished product marketable. “B” has an agreement to sell all of his manufactured products exclusively to “S”, a large retail supermarket with many branches. Because all sales are at the wholesale level, “B” is exempt from the use tax. “B”, however, will be taxed on the activity of a manufacturer as provided under the general excise tax law. Example 3: “C” is engaged in a scientific contract with the United States. To complete this construction project, certain scientific equipment and supplies which are to become an integral part of the project are imported because they are not available in Hawaii. On the basis of the fact that the imported properties are to become an integral part of the project, no use tax shall be levied or collected on the equipment and supplies imported by “C”. Example 4: Assume the same facts in Example 3 except that “C” is engaged in an operation and maintenance scientific contract with the United States and imports supplies which are to be entirely consumed during the performance of the service contract. On the basis of the fact that the imported supplies are to be entirely consumed in the performance of the contract, no use tax shall be levied or collected on the supplies imported by “C”. Example 5: If “A” and “B” in Examples 1 and 2 were also engaged in selling their merchandise and products at the retail level, use tax at the rate of one-half of one per cent would apply on the imports and purchases (for resale at retail) plus four per cent general excise tax on their subsequent sale at the retail level. If “C” in Example 3 is involved in other construction projects which do not meet the provisions of section 237-26, HRS, “C” would be subject to the use tax at the rate of one-half of § 18-238-2 one per cent on the landed value of the tangible personal property imported and incorporated into such nonscientific projects. If “C” in Example 4 is involved in other operation and maintenance contracts which do not meet the provisions of section 237-26, HRS, “C” would be subject to the use tax at the rate of four per cent on the landed value of the supplies imported for use in such nonscientific contracts. Example 6: Service business. A tire recapper, “D”, who recaps tires belonging to other persons is subject to the use tax at the rate of four per cent in respect of tangible personal property (that is consumed in performance of a service) which: (1) “D” imports and incorporates into such tires; or (2) is transferred to “D” by another person who is not taxable under the in respect of such transfer and which is incorporated into such tires. Example 7: Manufacturer. A tire recapper, “E”, who recaps tires for “E’s” own stock for resale is not subject to the use tax in respect of tangible personal property which: (1) “E” imports or acquires and incorporates into such tires; or (2) is transferred to “E” by another person who is not taxable under the in respect of such transfer and which is incorporated into such tires. (g) Basis of Property. (1) Purchase price or landed value. Except as provided in paragraph (2), for purposes of section 238-2, HRS, and these rules, the basis of property shall be the purchase price of the tangible personal property if the purchase and sale are consummated in Hawaii or landed value of the tangible personal property if the purchase and sale are consummated outside of Hawaii or if there is no purchase price applicable thereto. (2) Deduction for trade-in; depreciation, etc. The time of accrual of the tax in the case of an automobile imported into the State for use shall be at the time the automobile comes to rest in the State and ceases its character as an article in interstate commerce. The landed value for purposes of the use tax basis shall be the landed cost in the State. Such landed cost shall consist of invoice price plus freight, insurance, custom duty, and any other charges incident to landing the motor vehicle in the State, less: (1) trade-in allowance for old car; (2) any charges for license plates outside Hawaii; and (3) a depreciation allowance of ten per cent for normal use outside Hawaii, but this rate may be adjusted depending upon the mileage and condition of the car. The landed value of the motor vehicle shall not include any retail sales tax paid to another state or local government. (A) When the motor vehicle has been used prior to bringing it into the State, the landed value for purposes of the use tax basis may be reduced by applying a depreciation allowance for normal use of the motor vehicle outside of the State. The depreciation allowed depends on the mileage and condition of the motor vehicle. No depreciation is allowed for a motor vehicle brought in to the State within 90 days of its date of purchase. The 90 day period shall not include any shipping time or any time during which a motor vehicle was placed in storage prior to its import into the State. (B) For purposes of depreciation, the calculation of the landed value of a motor vehicle used prior to its importation into the State also may include the cost of any repairs or replacement parts added to the motor vehicle to maintain or increase its value during the taxpayer’s use of the motor vehicle prior to shipping the motor vehicle into the State. The department of taxation may require an explanation and supporting information for any depreciation reduction of the landed value of a motor vehicle. Taxpayers who believe a depreciation allowance is warranted may use the depreciation schedule printed on the back of the Use Tax Return (Form G-26). (C) Section 238-3(h), HRS, allows a credit against the Hawaii use tax for the combined amount of sales or use taxes imposed by and paid to another state (or any subdivision thereof) on tangible personal property before it is imported into the State. Accordingly, a taxpayer may receive a credit up to the amount of Hawaii use tax due (4 percent of the landed value of the motor vehicle) for any sales or use taxes paid by the taxpayer to another state upon the purchase or use of the motor vehicle. The calculation of the credit shall not include any other taxes paid to other states, such as taxes on manufacturing, license fees, or transfer taxes. The amount of credit also shall not exceed the amount of use tax imposed by the State of Hawaii on such tangible personal property. To substantiate the claim for the credit allowance, the