Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 237 - GENERAL EXCISE TAX LAW
Subchapter 2 - LICENSES; TAX; EXEMPTIONS
Section 18-237-20-06 - "For or on behalf of Reimbursing Party", defined
Current through August, 2024
(a) A payment of a cost or advance is "for or on behalf of Reimbursing Party" when done at the request or direction of Reimbursing Party.
(b) A cost or advance is done at the request or direction of Reimbursing Party if:
(c) "The payment is made pursuant to a preexisting contract between Reimbursing Party and Third Party that creates a direct obligation for Reimbursing Party to pay Third Party for property or services" is illustrated as follows:
Example 11: Taxpayer manages owner's (Reimbursing Party) rental unit under a management agreement that requires owner's approval for major expenditures relating to the rental unit. Taxpayer locates a contractor (Third Party) to replace the carpet. The written contract with contractor is entered into in the name of owner, rather than Taxpayer, and the contract provides that owner, not Taxpayer, is to pay for the services provided by contractor. Conclusion: The contract between owner and contractor is a preexisting contract that creates a direct obligation for owner to pay contractor for the carpet.
Example 12: Taxpayer manages owner's (Reimbursing Party) rental unit under a management agreement that requires owner's approval for major expenditures relating to the rental unit. The management agreement provides that owner, not the Taxpayer, ultimately is to pay for all major expenditures. Taxpayer locates a contractor (Third Party) to replace the carpet. The carpet replacement is a major expenditure under the terms of the management agreement that owner ultimately is liable for, and the Taxpayer secures owner's approval for the carpet replacement. The written contract with contractor is entered into in the name of the Taxpayer. Taxpayer pays the Contractor's bill and is reimbursed by Reimbursing Party with no additional consideration. Conclusion: The payment is made pursuant to a preexisting contract between Reimbursing Party and the Taxpayer whereby Taxpayer pays Third Party for property or services to satisfy an obligation of Reimbursing Party.
Example 13: Taxpayer, the owner of an office building, leases a portion of the office building to tenant (Reimbursing Party) and agrees to provide janitorial services for tenant. Taxpayer contracts with a company providing janitorial services (Third Party) to clean the office building, including the portion leased to tenant. Taxpayer pays the janitorial services company. Tenant pays Taxpayer rent and its share of the expenses for janitorial services. Conclusion: Neither the lease nor the janitorial services contract is a preexisting contract that creates an obligation, direct or otherwise, for tenant to pay the janitorial services company for the janitorial services.
Example 14: Taxpayer leases real property from landlord (Third Party) and subleases the real property to a hamburger franchisee (Reimbursing Party). The sublease agreement specifies that franchisee's sublease rent is equal to or less than the amount of lease rent that Taxpayer is required to pay landlord (no additional monetary consideration received by Taxpayer). Franchisee pays its sublease rent to Taxpayer. Taxpayer pays its lease rent to landlord. Taxpayer's lease rent payment to landlord is not made for or on behalf of franchisee because the payment satisfies Taxpayer's obligation to pay rent to landlord under its lease and does not satisfy an obligation of franchisee to landlord. Pursuant to its sublease, franchisee has an obligation to pay sublease rent to Taxpayer. Conclusion: The sublease is not a preexisting contract that creates a direct obligation between franchisee and landlord. This sublease also does not qualify as a preexisting cost splitting contract under section 18-237-20-6(e) as discussed in Example 32. However, Taxpayer may be eligible for the sublease deduction under section 237-16.5, HRS.
Example 15: Assume the same facts as in Example 14, except that instead of Taxpayer directly paying its lease rent to landlord (Third Party), Taxpayer discharges its rental obligation to landlord by requiring franchisee (Reimbursing Party) to directly pay sublease rent it owes Taxpayer to landlord as a condition of the sublease. Conclusion: Franchisee's sublease rent payment is not considered a payment by Taxpayer made for or on behalf of franchisee because the sublease obligates franchisee to Taxpayer and not to landlord. Because the payment also discharges Taxpayer's underlying obligation to landlord, the payment is not a reimbursement of a cost or advance for or on behalf of franchisee to landlord. The sublease merely requires that franchisee's sublease rent payment be directed to landlord to satisfy Taxpayer's lease rent obligation. Franchisee's sublease rent payment directly to landlord is a payment for or on behalf of Taxpayer and not for or on behalf of franchisee. The sublease is not a preexisting contract that creates a direct obligation for franchisee to pay landlord the sublease rent. However, Taxpayer may be eligible for the sublease deduction under section 237-16.5, HRS.
(d) "The payment is made pursuant to a preexisting contract between Reimbursing Party and Taxpayer whereby Taxpayer pays Third Party for property or services to satisfy an obligation of Reimbursing Party" is illustrated as follows:
Example 16: Taxpayer is in the business of selling and performing warranty work on machinery. Manufacturer (Reimbursing Party) directs Taxpayer to perform warranty work on customer's machinery. Taxpayer is unable to do such work so it pays another company (Third Party) to do the warranty work. Conclusion: These warranty work expenses are paid pursuant to a preexisting contract between Taxpayer and manufacturer whereby Taxpayer pays Third Party for property or services to satisfy an obligation of manufacturer.
Example 17: Taxpayer, an attorney, enters into an agreement to represent Client (Reimbursing Party). The agreement is considered an agency agreement because Taxpayer has the power to bind Client, Taxpayer acts as a fiduciary for Client, and Taxpayer is subject to the control of Client. Taxpayer advances fees required by law (recording fees, filing fees, sheriff's fees, witness fees, fees paid to court reporters, and fees paid for publishing legal notices) to Third Parties during the course of representing Client. Conclusion: These fees are paid pursuant to a preexisting contract between Taxpayer and Client whereby Taxpayer pays Third Parties for property or services to satisfy an obligation of Client.
Example 18: Assume the same facts as in Example 17, except that Taxpayer passes-on to Client the costs paid for traveling expenses (lodging, transportation, and meals), long-distance telephone calls, and the cost of reproduction to Third Parties. Conclusion: These costs are not the obligation of client. These costs are the obligation of Taxpayer because they are necessarily incurred by Taxpayer to allow Taxpayer to perform legal services for Client. Taxpayer uses, consumes, or alters Third Parties' services to perform legal services. See section 18-237-20-6(f).
Example 19: Taxpayer, an automobile dealer, sells a car to Customer (Reimbursing Party). As part of the sales agreement, Taxpayer advances the automobile registration fee and Customer's taxes to Third Parties. Conclusion: The fees and taxes are paid pursuant to a preexisting contract between Taxpayer and Customer whereby Taxpayer pays Third Parties for property or services to satisfy obligations of Customer.
Example 20: Taxpayer, an advertising agency, agrees to produce a brochure for customer (Reimbursing Party). Taxpayer will receive a fee and the costs paid to Third Parties. Third Parties develop photographs and print the brochure and send invoices to Taxpayer. Taxpayer pays the invoices and then bills customer for Taxpayer's services and the exact amount of costs paid to Third Parties. Conclusion: While the costs of developing photographs and printing the brochure are paid pursuant to a preexisting contract between Taxpayer and customer, Taxpayer uses, consumes, or alters Third Parties' services to produce the brochure. See section 18-237-20-06(f).
(e) "The payment is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays Third Party for property or services provided to both Taxpayer and Reimbursing Party, and Taxpayer receives from Reimbursing Party a payment proportionate to Reimbursing Party's share of the cost of the property or services based upon an actually calculable factor that has an economic basis (e.g., quantity of property, square footage, time spent, lines of advertising)" is illustrated as follows:
Example 21: Taxpayer sells equipment. Taxpayer and one of the equipment manufacturers (Reimbursing Party) enter into a cooperative advertising agreement to equally share the expenses of advertising Taxpayer's dealership and manufacturer's equipment. The advertising is expected to equally benefit Taxpayer and manufacturer. The preexisting cost-splitting contract provides that: Taxpayer will initially pay an advertising agency (Third Party) for all the advertising costs, Taxpayer will provide manufacturer with an invoice reflecting all advertising costs, and manufacturer will repay Taxpayer for fifty percent of the advertising costs, without including any amount for Taxpayer's overhead, salaries, incidental expenses, or profit. Conclusion: The payment to advertising agency is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays agency for property or services provided to both Taxpayer and manufacturer. Taxpayer receives from manufacturer a payment proportionate to manufacturer's share of the cost of the property or services based upon an actually calculable factor that has an economic basis because Taxpayer and manufacturer will benefit equally from the advertising.
Example 22: Taxpayer, a real estate broker, and its real estate sales agents (Reimbursing Parties), classified as independent contractors for tax purposes, enter contracts regarding sharing of sales commissions and preexisting cost splitting contracts relating to the cost of advertising real property listings in Third Party's newspaper. Taxpayer and each agent agree to place orders to advertise all of the agents' listings in a single advertisement in the newspaper. Taxpayer pays for the portions of the advertisement that refer generally to Taxpayer. All of the advertising work, except for the copy that is submitted by each agent to Taxpayer and then to Third Party, is performed by Third Party. The contract provides that Taxpayer will initially pay Third Party for all the advertising costs. Each agent will repay Taxpayer a portion of the advertising costs based upon the total number of lines of advertising that are attributable to each agent's listings without including any amount for Taxpayer's overhead, salaries, incidental expenses, or profit. Conclusion: The payment to Third Party is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays Third Party for property or services provided to both Taxpayer and each agent, and Taxpayer receives from each agent a payment proportionate to the agent's share of the cost of the property or services based upon an actually calculable factor that has an economic basis.
Example 23: Assume the same facts as in Example 22, except that Taxpayer and the agents enter into preexisting cost-splitting contracts to equally share the cost of business cards. Taxpayer hires a printing company (Third Party) to print business cards for the agents. The cards have the name of agents as well as the name and logo of Taxpayer. Taxpayer pays the printing company for all the costs to print the agents' cards and each agent repays Taxpayer fifty percent of the amount paid to the printing company for the agent's cards without including any amount for Taxpayer's overhead, salaries, incidental expenses, or profit. Conclusion: The payment to the printing company is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays the printing company for property or services provided to both Taxpayer and each agent, and Taxpayer receives from each agent a payment proportionate to the agent's share of the cost of the property or services based upon an actually calculable factor that has an economic basis.
Example 24: Assume the same facts as in Example 22, except that the real estate broker is the Reimbursing Party and real estate agents are Taxpayers. The real estate broker enters into preexisting cost-splitting contracts with real estate agents to equally share the cost of brochures that advertise the agents' services and affiliation with the real estate broker. The contract provides that agents will initially pay the printing company for all the brochure costs following broker's approval of the form and content of a sample brochure. Broker will repay agents for fifty percent of the brochure costs, without including any amount for agents' overhead, salaries, incidental expenses, or profit. Conclusion: The payments to the printing company are made pursuant to preexisting cost-splitting contracts whereby agents pay the printing company for property or services provided to agents and broker, and agents receive from broker a payment proportionate to broker's share of the cost of the property or services based upon an actually calculable factor that has an economic basis.
Example 25: Assume the same facts as in Example 22, except that Taxpayer (real estate broker) enters into preexisting cost-splitting contracts with real estate sales agents (Reimbursing Parties) to share the cost of errors and omissions insurance arranged by Taxpayer. The insurance premium paid to the insurance company (Third Party) is increased as each agent receives insurance coverage, and the agent repays Taxpayer one-half of the insurance premium attributable to the agent without including any amount for Taxpayer's overhead, salaries, incidental expenses, or profit. Conclusion: The payment to the insurance company is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays the insurance company for property or services provided to both Taxpayer and the agent, and Taxpayer receives from each agent a payment proportionate to the agent's share of the cost of the property or services based upon an actually calculable factor that has an economic basis.
Example 26: Assume the same facts as in Example 22, except that broker (Taxpayer) and agents (Reimbursing Parties) participate in the Multiple Listing Service's (MLS) (Third Party) central property advertisement and other services. Taxpayer and agents enter into preexisting cost-splitting contracts that provide that the fee for "loading" each real estate listing is initially paid by Taxpayer. The agent who has the listing repays Taxpayer one-half of the fee for "loading" the listing without including any amount for Taxpayer's overhead, salaries, incidental expenses, or profit. Conclusion: The payment to the MLS is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays the MLS for property or services provided to both Taxpayer and the agent, and Taxpayer receives from each agent a payment proportionate to agent's share of the cost of the property or services based upon an actually calculable factor that has an economic basis.
Example 27: Assume the same facts as in Example 22, except that broker (Taxpayer) and agents (Reimbursing Parties) participate in the Multiple Listing Service's (MLS) (Third Party) central property advertisement and other services. The annual dues, MLS participation fee, and cost for MLS books are assessed to Taxpayer and each of the agents, but the invoices are sent to Taxpayer. Taxpayer and the agents enter into preexisting cost-splitting contracts that provide that Taxpayer will initially pay the MLS dues, fee, and cost for books for Taxpayer and the agent. The agent will repay Taxpayer the exact amount Taxpayer pays to the MLS that is attributable to each agent without including any amount for Taxpayer's overhead, salaries, incidental expenses, or profit. Conclusion: The payment to the MLS is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays the MLS for property or services provided to both Taxpayer and the agent, and Taxpayer receives from each agent a payment proportionate to the agent's share of the cost of the property or services based upon an actually calculable factor that has an economic basis.
Example 28: Assume the same facts as in Example 22, except that Taxpayer and the agents (Reimbursing Parties) enter into preexisting cost-splitting contracts relating to the use of Taxpayer's telephones by the agents to make long-distance telephone calls at Taxpayer's office. Taxpayer makes some long-distance calls. Taxpayer pays the phone company (Third Party) for Taxpayer's and the agents' long-distance charges and collects from each agent the exact amount attributable to each agent at the end of each month without including any amount for Taxpayer's overhead, salaries, incidental expenses, or profit. Conclusion: The payment to the phone company is made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays the phone company for property or services provided to both Taxpayer and the agent, and Taxpayer receives from the agent a payment proportionate to the agent's share of the cost of the property or services based upon an actually calculable factor that has an economic basis.
Example 29: Taxpayer, an architect, enters into a contract with client (Reimbursing Party). The contract provides that Taxpayer will receive, in addition to a fee for professional services, the costs paid to Third Parties. These costs include traveling expenses (lodging, transportation, and meals), long-distance telephone calls, the cost of reproduction, and postage and handling of drawings and specifications incurred in connection with projects for client. Taxpayer pays Third Parties and breaks down the billing to client into professional services and the exact amount of these incidental costs paid to Third Parties. Conclusion: The payments to Third Parties are not made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays Third Parties for property or services provided to both Taxpayer and Reimbursing Party, and Taxpayer receives from client a payment proportionate to client's share of the cost of the property or services based upon an actually calculable factor that has an economic basis. These services are provided to Taxpayer to allow Taxpayer to fulfill its contract with client; the services are not provided to both Taxpayer and client.
Example 30: Taxpayer, the owner of an office building, leases the office building to tenants (Reimbursing Parties) and agrees to provide janitorial services for the tenants. Taxpayer contracts with a company providing janitorial services (Third Party) to clean the office building. Taxpayer pays the janitorial services company. Tenants pay Taxpayer rent and a share of the amount paid by Taxpayer to the janitorial services company. Conclusion: The payment to the janitorial services company is not made pursuant to a preexisting cost-splitting contract whereby Taxpayer pays the janitorial services company for property or services provided to both Taxpayer and tenants, and Taxpayer receives from tenants a payment proportionate to tenants' share of the cost of the property or services based upon an actually calculable factor that has an economic basis. These janitorial services are provided to Taxpayer to allow Taxpayer to fulfill its contract with tenants. The amounts received by Taxpayer for these janitorial services are deemed to be part of the rent received by Taxpayer and do not qualify as a nontaxable reimbursement.
Example 31: Assume the same facts as in Example 30, except that the owner of the office building (Taxpayer) contracts with a property management company to rent and maintain the building and the property management company contracts with a janitorial services company (Third Party) to clean the office building. Conclusion: The reimbursement exemption is not applicable to either Taxpayer or the property management company.
Example 32: Assume the same facts as in Example 14. Conclusion: Franchisee's (Reimbursing Party) sublease rent payment is made pursuant to a sublease between Taxpayer and franchisee, not pursuant to a preexisting cost-splitting contract. Unlike a preexisting cost-splitting contract involving three parties where Taxpayer and Reimbursing Party agree to proportionately share the cost of property or services provided by Third Party to both Taxpayer and Reimbursing Party, a sublease is a contract between only two parties where one party (the franchisee/Reimbursing Party) agrees to pay rent to another (Taxpayer) in return for the use and possession of property. In this lease-sublease arrangement, the landlord (Third Party) provides the use and possession of property to Taxpayer in exchange for rent. Subsequently, Taxpayer provides the use and possession of the property to franchisee/Reimbursing Party in exchange for rent. The property is not provided to Taxpayer and franchisee at the same time, and the cost of using real property is not shared by Taxpayer and franchisee.
(f) "Taxpayer does not use, consume, or alter the property or services provided by Third Party" is illustrated as follows:
Example 33: Taxpayer is in the business of selling and performing warranty work on machinery. Manufacturer (Reimbursing Party) directs Taxpayer to perform warranty work on customer's machinery. Taxpayer is unable to do such work so it pays Third Party to do the warranty work. Conclusion: Taxpayer does not use, consume, or alter Third Party's services because the warranty work is not incorporated into or combined with Taxpayer's property or services. Third Party's warranty work is provided to manufacturer's customer.
Example 34: Assume the same facts as in Example 29, relating to the architect. Conclusion: The traveling expenses, long-distance telephone calls, the reproduced items, and postage are used, consumed, or altered because these incidental services are incorporated into or combined with Taxpayer's architectural services.
Example 35: Taxpayer, an interior decorator, is hired to decorate customer's (Reimbursing Party) house. Taxpayer buys rugs and furnishings from a furniture store (Third Party) for customer. Conclusion: Taxpayer uses, consumes, or alters Third Parties' property because the property is incorporated into or combined with Taxpayer's interior decoration services.
Example 36: Taxpayer, an accounting firm, is hired by customer (Reimbursing Party) to audit its financial records. Because the audit requires more personnel hours than could be performed by Taxpayer's personnel, Taxpayer contracts with another accounting firm (Third Party) to perform part of the audit work, and combines that work with the work of Taxpayer's auditors. Taxpayer pays the other accounting firm. Conclusion: Even if Taxpayer separately bills customer for the exact amount paid to the other accounting firm, Taxpayer uses, consumes, or alters the other accounting firm's services because the services are incorporated into or combined with Taxpayer's services.
(g) A cost or advance cannot be made for or on behalf of Reimbursing Party if Taxpayer makes the cost or advance before a request by Reimbursing Party.
Example 37: Assume the same facts as in Example 16, relating to warranty work on customer's machinery. Conclusion: The payment for warranty work is a cost or advance because Taxpayer makes the cost or advance (payment of expenses) after a request by Reimbursing Party.
Example 38: Taxpayer signs a contract with Third Party that provides Taxpayer unlimited access to a research database. Taxpayer subsequently allows Reimbursing Party to access the database using Taxpayer's account and charges Reimbursing Party one-half of the access fee. Conclusion: The access fee is not a cost or advance for or on behalf of Reimbursing Party because Taxpayer makes the cost or advance (purchase of access to the data base) prior to any request by Reimbursing Party.
