Hawaii Administrative Rules Title 18 — Department of Taxation
HAR § 18-241-4-01
Apportionment and allocation
# (a)
Except as otherwise specifically provided, a financial institution whose business activity is taxable both within and without this State shall allocate and apportion its net income as provided in this section. All items of nonbusiness income (income which is not includable in the apportionable income tax base) shall be allocated pursuant to the provisions of part II of chapter 235, HRS. A financial institution organized under the laws of a foreign country, the Commonwealth of Puerto Rico, or a territory or possession of the United States whose effectively connected income (as defined under the Internal Revenue Code) is taxable both within this State and within another state, other than the state in which it is organized, shall allocate and apportion its net income as provided in this section.
# (b)
All business income (income which is includable in the apportionable income tax base) shall be apportioned to this State by multiplying such income by the apportionment percentage. The apportionment percentage is determined by adding the taxpayer’s receipts factor (as described in section 18-241-4-03), property factor (as described in section 18-241-4-04), and payroll factor (as described in section 18-241-4-05) together and dividing the sum by three. If one of the factors is missing, the two remaining factors are added and the sum is divided by two. If two of the factors are missing, the remaining factor is the apportionment percentage. A factor is missing if its denominator is zero.
# (c)
Each factor shall be computed according to the method of accounting (cash or accrual basis) used by the taxpayer for the taxable year.
# (d)
If the allocation and apportionment provisions of sections 18-241-4-01 to 18-241-4-05 do not fairly represent the extent of the taxpayer’s business activity in this State, the taxpayer may petition for or the department of taxation may require, in respect to all or any part of the taxpayer’s business activity, if reasonable:
# (1)
Separate accounting;
# (2)
The exclusion of any one or more of the factors;
# (3)
The inclusion of one or more additional factors which will fairly represent the taxpayer’s business activity in this State; or (4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income.
# (e)
The income that is subject to tax under chapter 241, HRS, only includes income that may be subject to taxation by the State under the Constitution and laws of the United States. The rules in sections 18-241-4-01 to 18- 241-4-05: (1) Do not apply to any taxpayer which, under applicable federal law, may not be subjected to tax under chapter 241, HRS; and (2) Shall not be construed as the department’s interpretation of applicable federal law. Example: H, a financial institution domiciled in Hawaii, makes a loan secured by Hawaii real property. F, a financial institution domiciled in a foreign country, purchases a participation in that loan. F has no offices, employees, agents, or other presence in Hawaii, and engages in no other activity in Hawaii. H continues to administer the loan. Under applicable federal constitutional principles, F does not have sufficient nexus with Hawaii to support state taxation of any of F’s income. Although section 18-241-4-03(d)(1) states that the numerator of the receipts factor includes interest from loans (including participations) that are secured by Hawaii real property, no part of F’s income from the participation is subject to tax under chapter 241, HRS.
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In this chapter (6 sections)
- 18-241-3.5-01 · International banking facilities; coordination with…
- 18-241-4-01 · Apportionment and allocation
- 18-241-4-02 · Definitions
- 18-241-4-03 · Receipts factor
- 18-241-4-04 · Property factor
- 18-241-4-05 · Payroll factor