Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 237 - GENERAL EXCISE TAX LAW
Subchapter 2 - LICENSES; TAX; EXEMPTIONS
Section 18-237-16.5-03 - Deduction for sublease of real property or space

Universal Citation: HI Admin Rules 18-237-16.5-03

Current through November, 2023

(a) General Rule. A Lessee who subleases real property or space shall be allowed a deduction from the amount of gross proceeds or gross income received from the Sublessee. The deduction shall be the total amount paid by the Lessee to the Lessor, subject to the requirements and allocations provided under section 237-16.5, HRS, and sections 18-237-16.5-03 to 18-237-16.5-06, at the maximum allowable rate. The allowable rate to be used in computing the deduction is as follows:

(1) For gross proceeds or gross income paid in the months of October, November, and December, 1998, 0.125;

(2) In calendar year 1999, 0.25;

(3) In calendar year 2000, 0.375;

(4) In calendar year 2001, 0.50;

(5) In calendar year 2002, 0.625;

(6) In calendar year 2003, 0.75; and

(7) In calendar year 2004, and thereafter, 0.875.

Example 4: Lessor L leases real property X to lessee A for $1,000 a year and lessee A subleases the same real property X under a written sublease to sublessee B for $2,500 a year. B subleases the same real property to "sub-sublessee" C for $2,500 a year.

A's deduction would be $1,000 multiplied by the maximum allowable rate listed above. Using a maximum allowable rate of 0.875 (or 87.5 percent), A's deduction would be $875 ($1,000 x 0.875). A would be subject to a general excise tax of $65 (($2,500 - $875) x 4 percent tax rate).

B's deduction would be $2,187.50 ($2,500 x 0.875). B would be subject to a general excise tax of $12.50 (($2,500 -$2,187.50) x 4 percent tax rate). L would be subject to a general excise tax of $40 ($1,000 x 4 percent tax rate).

(b) Percentage leases. Where real property or space is leased under a percentage lease, the amount of gross proceeds or gross income received by the Lessor will vary from period to period because the amount paid by the Lessee to the Lessor is based upon a percentage of the gross sales or net profits of the Lessee's business. There may be a stipulated minimum lease amount. A percentage lease includes a percentage lease with a fixed minimum lease amount, a percentage lease with no minimum lease amount, and a combination percentage lease with a fixed minimum lease amount or percentage lease with no minimum lease amount, whichever is higher.

Example 5: Assume the same facts as Example 4 above except that A subleases to B for $2,500 and 10 percent of C's sales. B subleases to C for $2,500 and 20 percent of C's sales. If C's sales for the period were $4,000, the percentage of sales would be $400 ($4,000 x 10 percent) which would be added to the $2,500 fixed minimum lease payment. $2,900 ($2,500 + $400) would be paid by B to A and reported by A. Assuming a maximum allowable rate of 87.5 percent, A's deduction would be $875 ($1,000 x 87.5 percent). A would be subject to a general excise tax of $81 (($2,900 - $875) x 4 percent tax rate).

Because C's sales for the period are $4,000, the percentage of sales would be $800 ($4,000 x 20 percent) which is added to the $2,500 fixed minimum lease payment paid by C to B. $3,300 ($2,500 + $800) would be reported by B. B's deduction would be $2,537.50 ($2,900 x 87.5 percent). B would be subject to a general excise tax of $30.50 (($3,300 -$2,537.50) x 4 percent tax rate).

L would be subject to a general excise tax of $40 ($1,000 X 4 percent tax rate).

Example 6: Assume the same facts as Example 4 above except that A subleases to B for 10 percent of C's sales with no fixed lease payment. B subleases to C for 20 percent of C's sales with no fixed lease payment. If C's sales for the period were $20,000, the percentage of sales would be $2,000 ($20,000 x 10 percent) which would be paid by B to A and reported by A. Assuming a maximum allowable rate of 87.5 percent, A's deduction would be $875 ($1,000 x 87.5 percent). A would be subject to a general excise tax of $45 (($2,000 - $875) x 4 percent tax rate).

Because C's sales for the period are $20,000, the percentage of sales would be $4,000 ($20,000 x 20 percent) which would be paid by C to B and reported by B. B's deduction would be $1,750 ($2,000 x 87.5 percent). B would be subject to a general excise tax of $90 (($4,000 - $1,750) x 4 percent tax rate).

L would be subject to a general excise tax of $40 ($1,000 X 4 percent tax rate).

[Eff 10/01/98] (Auth: HRS §§ 231-3(9), 237-8) (Imp: HRS § 237-16.5)

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