Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 237 - GENERAL EXCISE TAX LAW
Subchapter 2 - LICENSES; TAX; EXEMPTIONS
Section 18-237-16.5-04 - Allocation - sublease of less than one hundred percent of the real property or space
Current through August, 2024
(a) If the Lessee subleases less than one hundred percent of the real property or space that was leased from the Lessor, the Lessee shall allocate the total amount of gross proceeds or gross income paid by the Lessee for that real property or space based upon the percentage of real property or space subleased, or the fair rental value as determined by the factors in section 18-237-16.5-06. The director of taxation may redetermine the amount of the Lessee's deduction under section 237-16.5(d), HRS, if the director finds that the basis for the allocation is not reasonable or that redetermination is necessary to prevent the avoidance of taxes. The total amount allocated by the Lessee to all subleases shall not exceed the total amount of gross proceeds paid by the Lessee to the Lessor.
(b) The Lessee's allocation may be based upon the percentage of the real property or space subleased by the Lessee when it is reasonable under the circumstances.
Example 7: Lessor L leases real property XYZ, which is divided into spaces X, Y, and Z, to lessee A for $20,000 (space X at $10,000 + space Y at $5,000 + space Z at $5,000). Lessee A subleases less than one hundred percent of Spaces X (50 percent) and Y (40 percent). If reasonable under the circumstances, Lessee A may allocate the $20,000 paid to Lessor L and compute its tax in the following manner.
Space X
Step (1) A subleases fifty percent of Space X for $7,000. The percentage of Space X subleased (50 percent) multiplied by the amount of rent paid by A to L for Space X ($10,000) is $5,000.
Step (2) Assuming a maximum allowable rate of 0.875, A's deduction would be $4,375 ($5,000 x 87.5 percent). A would be subject to a general excise tax of $105 (($7,000 - $4,375) x 4 percent tax rate) on the income from subleasing fifty percent of Space X.
Space Y
Step (1) A subleases forty percent of Space Y for $3,000. The percentage of Space Y subleased (40 percent) multiplied by the amount of rent paid by A to L for Space Y ($5,000) is $2,000.
Step (2) Assuming a maximum allowable rate of 0.875, A's deduction would be $1,750 ($2,000 x 87.5 percent). A would be subject to a general excise tax of $50 (($3,000 - $1,750) x 4 percent tax rate) on the income received from subleasing forty percent of Space Y.
L would be subject to a general excise tax of $800 ($20,000 x 4 percent tax rate).
(c) The Lessee's allocation shall be based upon fair rental value as determined by the factors in section 237-16.5-06 if an allocation based upon the percentage of the real property or space subleased is not reasonable under the circumstances.
Example 8: Lessor L leases real property Y to lessee A for $5,000 a month. Y consists of ground floor retail real property (which has a fair rental value of $7,500) and upper floor office real property (which has a fair rental value of $2,500) equal in size to the ground floor retail real property. Lessee A subleases only the upper floor office real property to sublessee B for $2,500 a month.
Step (1) The property subleased represents twenty five percent of the fair rental value of real property Y ($2,500 divided by ($2,500 + $7,500)). A's deduction is $1,250 (25 percent multiplied by $5,000 (the gross income paid to L for real property Y)).
Step (2) Assuming a maximum allowable rate of 0.875, A's deduction would be $1,093.75 ($1,250 x 87.5 percent). A would be subject to a general excise tax of $56.25 (($2,500 - $1,093.75) x 4 percent tax rate).
L would be subject to a general excise tax of $200 ($5,000 x 4 percent tax rate).
