Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 237 - GENERAL EXCISE TAX LAW
Subchapter 2 - LICENSES; TAX; EXEMPTIONS
Section 18-237-13-06.16 - Tax on service business; telecommunication services

Universal Citation: HI Admin Rules 18-237-13-06.16

Current through November, 2023

(a) Scope. This section is intended to provide uniform rules of administrative procedure to govern the taxation of the telecommunication industry pursuant to section 237-13(6), HRS, of the general excise tax law. This section shall not apply to gross income that is taxable under chapter 239, HRS, the public service company tax law.

(b) Definitions. As used in this section, unless the context otherwise requires:

"Directly related to Hawaii" means geographically located within Hawaii or allocated to Hawaii according to generally accepted accounting principles and practices.

"Foreign common carrier" means any person operating under the legal jurisdiction of a country other than the United States which provides telecommunication service to the public in general or to specified classes of the public.

"Gross income" means the gross receipts, as defined in section 237-3, HRS, of a long distance carrier.

"Hawaii billed income" means the gross income received or accrued by a long distance carrier from telecommunication service which is originated or terminated in this State and is charged to a telephone number, customer, or account in this State.

"Interexchange carrier" means any person which provides telecommunication service between local access transport areas.

"Interstate telecommunications" means all telecommunications that either originate or terminate outside of this State.

"Intrastate telecommunications" means all telecommunications that originate and terminate within this State.

"Local access transport area" means any local intrastate calling area.

"Long distance carrier" means any interexchange carrier, reseller, or foreign common carrier which purchases, installs, rents, or leases a telephone system, telecommunication system, or telecommunications service for the interexchange carrier, reseller, or foreign common carrier's own use to provide the interexchange carrier, reseller, or foreign common carrier or other persons with telephonic interstate or international telecommunication service which is wholly or partially independent of any local exchange system or any intrastate or interstate interexchange network or which is a substitute for any dedicated facility by which an interexchange or foreign common carrier provides a telephonic communication path in the State.

"Reseller" means any person which provides telecommunication service through the use of facilities or services owned or provided by another telecommunication service provider.

"Telecommunication service" means the transmission, conveyance, routing, or reception of any electronic, electromagnetic interactive transmission, or any other kind of energy force variations of information in any form, including but not limited to voice, image, data, or printed copy signal by means of wires, cables, radio waves, laser microwaves, satellites, fiber optics, any combination of these media, or any other method now in existence or that may be devised.

(c) Application.

(1) This section shall apply to all long distance carriers conducting business, by providing telecommunication service, in the State.

(2) The income of a long distance carrier that is subject to tax is that portion of gross income received by any long distance carrier from telecommunication service which is originated or terminated in this State and is charged to a telephone number, customer, or account in this State.

(3) Apportionment. Under the Constitution and laws of the United States, the entire gross income as determined in paragraph (2) cannot be included in the measure of tax; such gross income shall be apportioned by using the apportionment formula in subsection (e)(1).

(d) Apportionment factor.

(1) The apportionment factor shall be as follows:

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HBI = Hawaii Billed Income originating or terminating in the State and charged to a telephone number, customer, or account in the State.

HCOP = Hawaii Cost of Operations includes those costs charged, under a long distance carrier's normal method of accounting, to the following tax return and Federal Communication Commission-prescribed account titles or their equivalents, which are directly related to Hawaii.

- Cost of Operations

- Contributions

- Bad Debts

- Operating Expenses

- Hawaii Originating or Terminating Connection Expenses or Access Fees or Costs

- General and Administrative Expenses

- Advertising Expenses

- Leases

- Payroll

- Maintenance, including repair to:

Cables

Central Office Equipment Buildings and Grounds Maintenance of Transmission Power Other Maintenance Expenses

- Depreciation and Amortization Expenses

- Traffic Expenses

- Commercial Expenses other than advertising

- General Office Salaries and Expenses other than general and administrative expenses and payroll

- Insurance

- Accidents and Damages

- Operating Rents

- Relief and Pensions

- Operating Taxes

- Miscellaneous Deductions From Income

NBI = Nationwide Billed Income received from providing telecommunication service.

NCOP = Nationwide Cost of Operations includes the tax return and Federal Communication Commission-prescribed account titles or equivalents described by HCOP above. NCOP specifically excludes costs included in HCOP, NHOA, NHTA, and connection expenses or access fees not included in HCOP, NHOA, or NHTA.

NHOA = Non-Hawaii Originating Access Cost relating to HBI, which may be

(1) The actual non-Hawaii originating access cost relating to a specific call resulting in Hawaii billed income; or

(2) A reasonable estimate derived by using the nationwide or average Hawaii trunk access cost per unit to originate calls multiplied by the number of calls terminating in Hawaii resulting in Hawaii billed income; or

(3) A reasonable estimate using the proportional relationship of the Hawaii originating and terminating access costs to derive the non-Hawaii originating access costs as a proportion of the total Hawaii terminating access costs.

NHTA = Non-Hawaii Terminating Access Cost relating to HBI, which may be

(1) The actual non-Hawaii terminating access cost relating to a specific call resulting in Hawaii billed income; or

(2) A reasonable estimate derived by using the nationwide or average Hawaii trunk access cost per unit to terminate calls multiplied by the number of calls originating in Hawaii resulting in Hawaii billed income; or

(3) A reasonable estimate using the proportional relationship of the Hawaii originating and terminating access costs to derive the non-Hawaii terminating access costs as a proportion of the total Hawaii originating access costs.

Example: ABC Long Distance does not have figures for access costs for specific phone calls and decides it can reasonably estimate its non-Hawaii terminating access costs on a per unit basis as allowed by (2). For ABC Long Distance, the originating access cost is $.80 and the terminating access cost is $1.00 through the local exchange in Hawaii or on a nationwide basis for each call. If ABC Long Distance customers place 200,000 outgoing calls and receive 100,000 incoming calls during the reporting period, the NHTA would be estimated to be (200,000 X $1.00) $200,000 and the NHOA as (100,000 X $.80) $80,000.

Example: XYZ Long Distance decides to make its estimate for non-Hawaii terminating access costs on a proportional basis as allowed by (3). Assume the same cost relationship for Hawaii-located originating and terminating access costs exists for XYZ as in the above example. Therefore, if it costs $1.00 to terminate a call in Hawaii and $.80 to originate a call, the originating access cost is equivalent to eighty percent of the terminating access cost. If XYZ Long Distance incurs $4,000,000 in originating access costs and $1,000,000 in terminating access costs in Hawaii, then XYZ Long Distance's non-Hawaii terminating access costs may be calculated as follows:

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XYZ Long Distance's non-Hawaii originating access costs may be calculated as follows:

$1.0M x .8 = $.8M or $800,000

(2) The apportionment factor shall be multiplied by the Hawaii billed income of each long distance carrier to determine the portion of gross income subject to tax.

(3) The apportionment factor shall be uniformly applied to the Hawaii billed income of all long distance carriers conducting business within and outside of the State.

(4) The director may periodically review, evaluate, and adjust the apportionment factor to reflect any changes in the industry as necessary.

(e) Apportionment formula.

(1) The apportionment formula shall be as follows:

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AHGI = Apportioned Hawaii Gross Income received from providing telecommunication service in the State.

All other components are as described in subsection (d)(1).

Example: Aloha Communications, a local long distance carrier with no portion of its operations located out-of-Hawaii, provides long distance telephone service exclusively to customers in Hawaii. The billings total for all long distance telephone calls that originate or terminate in Hawaii and which are billed to a customer, telephone number, or account in Hawaii is $10,000,000. Aloha's nationwide billings total is also $10,000,000 as all of its billings are made to Hawaii customers. The Hawaii cost of operations amount to $7,000,000. The nationwide cost of operations, which excludes the Hawaii cost of operations, is zero. The non-Hawaii originating access costs related to the Hawaii-billed calls income is $150,000. The non-Hawaii terminating access costs relating to Hawaii-billed calls is $1,500,000.

The gross income received from telephone calls originating or terminating in Hawaii and billed to a customer, number, or account in Hawaii is apportioned as follows:

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The factor set out in subsection (d)(1) multiplied by the long distance carrier's Hawaii billed calls income of $10,000,000, equals the amount of gross income that is subject to tax, in this instance, $8,092,485.55.

Example: ABC Long Distance Company, an out-of-state long distance carrier that sells long distance telephone services to nationwide customers, has a branch office located in Hawaii which provides long distance telephone services in conjunction with its out-of-state offices. The amount of the Hawaii billed calls income is $100,000,000. The Hawaii cost of operations is $70,000,000. The nationwide billed income is $8,000,000,000. The nationwide cost of operations, excluding the Hawaii cost of operations, Hawaii-related originating and terminating access costs, and non-Hawaii-related access cost, is $3,000,000,000. The non-Hawaii originating access cost relating to Hawaii billed calls income is $1,500,000. The non-Hawaii terminating access cost relating to Hawaii billed calls income is $15,000,000.

The gross income received from telephone calls originating or terminating in Hawaii and billed to a customer, number, or account in Hawaii is apportioned as follows:

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The factor set out in subsection (d)(1), multiplied by the long distance carrier's Hawaii billed calls income of $100,000,000, equals the amount of gross income that is subject to tax, in this instance, $56,451,612.90.

(2) The apportionment formula shall be uniformly applied to the gross income received or accrued from telecommunication service by all long distance carriers conducting business within and outside of the State.

(3) The director may periodically review, evaluate, and adjust the apportionment formula to reflect any changes in the industry as necessary.

(f) Industry apportionment factor.

(1) On or before February 15 or August 15 of each year, each long distance carrier shall calculate its apportionment factor and apportioned Hawaii gross income based upon the long distance carrier's Hawaii billed income and costs of the preceding twelve months (January 1 through December 31 or July 1 through June 30, respectively) and shall submit to the department a report for the applicable reporting period ending on December 31 or June 30. The report shall include the long distance carrier's formula, the resulting apportionment factor, and any supporting information, worksheets, or other documentation as may be required by the director. The department may review the calculation of each apportionment factor for reasonable compliance with subsection (d) and may make any necessary adjustments to the factor.

(2) The department may calculate an industry apportionment factor for uniform application to the Hawaii billed income of each long distance carrier providing telecommunication service in Hawaii, based upon not less than ninety percent of the total Hawaii billed income received by all long distance carriers doing business in the State for any reporting period, by weighting the apportionment factors submitted in accordance with paragraph (1) in proportion to the long distance carriers' shares of the total Hawaii billed income received by all long distance carriers doing business in the State for the period. Any adjustment to the industry apportionment factor shall be made by amending this rule and shall be effective on the July 1 or January 1 following the reporting periods set forth in paragraph (1).

(3) Each long distance carrier shall multiply the industry apportionment factor by the long distance carrier's Hawaii billed income to determine the portion of the long distance carrier's gross income subject to tax.

(4) If the department does not receive sufficient information as required under paragraph (1) during any reporting period to enable the department to calculate an industry apportionment factor, or if the department's calculation of a industry apportionment factor is challenged by the filing of a tax return with payment under protest or the filing of a civil complaint in any court of competent jurisdiction by a long distance carrier whose proportion of the total Hawaii billed income is not less than five percent, or if the application of an industry apportionment factor is determined to be unauthorized under the constitution or laws of this State or the United States, the director may suspend the application of the industry apportionment factor, and each long distance carrier shall apply the apportionment factor calculated in accordance with subsection (d) to the long distance carrier's Hawaii billed income. If a determination to suspend is made, the director shall publish, not less than twenty days prior to the date on which use of the industry apportionment factor shall be suspended, notice of the suspension of the use of the industry apportionment factor at least once in a newspaper of general circulation in the State and at least once in a financial newspaper of general circulation in the United States. On the first day of the month following the publication of the notice of suspension, use of the industry apportionment factor shall cease and long distance carriers shall revert to use of the apportionment factor calculated in accordance with subsection (d).

Example: In January, 1989, Alpha, Beta, and Delta, three long distance carriers, submit to the department the following Hawaii-billed incomes and individual apportionment factors for the previous twelve-month period ending on December 31, 1988:

TWELVE MONTH HAWAII-BILLED INCOMEINDIVIDUAL APPORTIONMENT FACTOR
Alpha$ 50 Million.60
Beta$ 75 Million.50
Delta$ 25 Million.75
TOTAL$150 Million

Thereafter, the department determines the industry apportionment factor by using a proportionate representation based on each long distance carrier's share of the total Hawaii-billed income as follows:

Alpha $50 / 150 x .60 = .200
Beta $75 / 150 x .50 = .250
Delta $25 / 150 x .75 = .125

The industry apportionment factor equals (.200 + .250 + .125) or .575 or 57.5%.

Thus, beginning on July 1, 1989, the apportioned Hawaii gross income (AHGI) of each long distance carrier will be set at 57.5 percent of the long distance carrier's Hawaii-billed income (until the industry apportionment factor is changed effective the next January 1). For example, the tax due for the month of July may be calculated as follows:

Alpha
Hawaii Billed Income$ 5.0 M
Industry Apportionment Factor.575
Apportioned Hawaii Income$2.875 M
Tax Rate4%
Tax Due$115,000

Beta
Hawaii Billed Income$ 7.5M
Industry Apportionment Factor.575
Apportioned Hawaii Income$4.3125M
Tax Rate4%
Tax Due$172,500

Delta
Hawaii Billed Income$ 2.5M
Industry Apportionment Factor.575
Apportioned Hawaii Income$1.4375M
Tax Rate4%
Tax Due$ 57,500

In this example, if Alpha, Beta, or Delta had failed to furnish the department with the data required to determine an industry apportionment factor, the ninety percent requirement would not have been met, and long distance carriers would not be able to use an industry apportionment factor. Each long distance carrier would be required instead to use an apportionment factor calculated under subsection (d) to determine the portion of its Hawaii-billed income subject to the general excise tax.

(5) Beginning on January 1, 1993, the industry apportionment factor shall be 0.4786.

(g) Unfair competition; bilhng.

(1) No long distance carrier shall advertise or hold out to the public in any manner, directly or indirectly, that the tax hereby imposed upon the long distance carrier is not considered as an element in the price to the purchaser.

(2) A separately stated tax on any billing to a customer, number, or account reflecting the tax imposed on gross income under this paragraph shall be designated: "4.00% STATE TAX - HAWAII INCOME".

[Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren § 18-237-13-06.16, 12/27/90; am 1/1/92; am 1/1/93] (Auth: HRS §§ 231-3(9), 237-8) (Imp: HRS § 237-13)

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