Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 237 - GENERAL EXCISE TAX LAW
Subchapter 2 - LICENSES; TAX; EXEMPTIONS
Section 18-237-13(6)-07 - Three parties required
Current through February, 2024
(a) In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties - Service Provider, Intermediary, and Customer (the ultimate recipient of the services).
Example 1: Intermediary, an auto body and fender shop, enters into an agreement with Customer to paint Customer's car. Intermediary contracts with Service Provider, an auto paint shop, to paint Customer's car. Service Provider bills Intermediary and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider.
In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. There are three parties in this example: Service Provider, Intermediary, and Customer.
(b) There are at least three parties when there is a direct flow of services from Service Provider through Intermediary (or Intermediaries) and then to Customer, the ultimate recipient of the benefits, regardless of the number of Intermediaries. Both Service Provider and each Intermediary, except for the Intermediary providing the final services to the Customer, may qualify for the one-half percent intermediary services rate.
Example 2: Q, a provider of parking services, contracts with Customer to provide those services at an event. Q contracts with R to provide the parking services. R then contracts with S to provide the parking services. S bills R, R bills Q, and Q bills Customer. Customer pays Q. Q pays R and R pays S.
In order for a Service Provider to be eligible for the intermediary services rate, there must be at least three parties. With respect to R's eligibility for the intermediary services rate, there are three parties: R (the Service Provider); Q (intermediary); and Customer.
With respect to S's eligibility for the intermediary services rate, there are four parties: S (the Service Provider); R (intermediary); Q (intermediary); and Customer.
(c) Service Provider is eligible for the intermediary services rate when Service Provider receives payment from a third-party payer, rather than Customer.
Example 3: Intermediary, an auto body and fender shop, enters into an agreement to paint Customer's car. Customer is insured by Insurance Company. Intermediary contracts with Service Provider, an auto paint shop, to paint Customer's car. Service Provider bills Intermediary and Intermediary bills Insurance Company. Insurance Company pays Intermediary and Intermediary pays Service Provider.
In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Service Provider is eligible for the intermediary services rate when Intermediary receives payment from a third-party payer, rather than Customer. There are four parties: Service Provider, Intermediary, Insurance Company (the third-party payer who pays Intermediary for the services furnished to Customer), and Customer.
(d) The intermediary services rate is not applicable when there are only two parties.
Example 4: Intermediaries, which are various hotels, provide laundry services to Customers, who are guests at the hotels. Service Provider is engaged in the business of providing laundry services. Intermediaries enter into agreements with Service Provider to provide those services. The agreements expressly state that Intermediaries shall be agents of Service Provider. Customers fill out laundry slips and turn over the slips along with the laundry to Intermediaries which turn them over to Service Provider. Service Provider does the laundry, returns it to Intermediaries, and bills Intermediaries for its services. Intermediaries collect from Customers and remit the amounts billed by Service Provider, retaining 35 percent of the billing as commission. Other than for negligence of Intermediaries or its employees, Intermediaries are neither liable nor responsible to Customers for any loss or damage to Customers' laundry. All claims for losses or damages and questions regarding charges are directed to Service Provider. All uncollectible amounts are charged to Service Provider.
In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Intermediaries in this example are agents for Service Provider because they act on behalf of and subject to the control of Service Provider. Therefore, there are only two parties in this example (1) Service Provider and (2) Customers and the intermediary services rate is not applicable to the payments Service Provider receive from Intermediaries. Service Provider is subject to the general excise tax at the rate of four percent on the total amounts billed by Intermediaries to Customers.
Example 5: Intermediary, through licensing agreements, franchises fast-food restaurants in Hawaii to Customers. The licensing agreements provide that Customers shall have the right, license, and privilege to use Intermediary's system at restaurants and that Intermediary shall provide management services. Intermediary and Service Provider, a subsidiary company, enter into an agreement which specifies that Service Provider will provide the management services to Customers. Intermediary, however, is engaged in a licensing business rather than a service business. Service Provider bills Intermediary and Intermediary bills Customers.
In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Service Provider in this example is an agent for Intermediary because Service Provider acts on behalf of and subject to the control of Intermediary. Under the contract Customers are looking to Intermediary only to provide the services. Intermediary provides the services to Customers through Service Provider, a subsidiary company of Intermediary. Intermediary would never entrust its management system to an independent third party, especially in the highly competitive fast-food industry. Therefore, there are only two parties in this example:
Example 6: Intermediary, an insurance adjusting company, adjusts claims for Customer, an insurance company. Intermediary enters into a contract with Service Provider, an insurance adjuster, to adjust claims. The contract provides that Service Provider is controlled or directed by Intermediary as to the means and manner of performance, has fixed time schedules, a fixed salary or rates, and is furnished an office and supplies. Service Provider bills Intermediary, and Intermediary bills Customer. Customer pays Intermediary and Intermediary pays Service Provider.
In order for Service Provider to be eligible for the intermediary services rate, there must be at least three parties. Service Provider in this example is an employee of Intermediary because Service Provider acts on behalf of and subject to the control of Intermediary. See, Chapter 233, HRS, relating to Tax Classification of Certain Business Relationships. Therefore, there are only two parties in this example:
