Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 238 - USE TAX LAW
Section 18-238-2 - Imposition of tax, exemptions
Current through August, 2023
(a) Wholesaler, jobber, manufacturer. Section 238-2(1), HRS, provides that if the importer or purchaser is licensed under the general excise tax law, chapter 237, HRS, and is (1) a wholesaler or jobber, importing or purchasing tangible personal property exclusively for the purposes of resale at wholesale or (2) a manufacturer importing or purchasing material to be incorporated by the manufacturer into a finished product, which, when sold, will result in a further tax on the activity of the manufacturer as a manufacturer or as a wholesaler, and not as a retailer, there shall be no tax. If the importer or purchaser as set forth in (1) or (2) above is also engaged in business as a retailer, subsection (b) shall apply to the importer or purchaser, but the director shall refund to the importer or purchaser in the manner provided under section 231-23(d), HRS, such amount of tax as the importer or purchaser shall, to the satisfaction of the director, establish to have been paid by the importer or purchaser on such imports or purchases which were sold by the importer or purchaser as a wholesaler or as a manufacturer. See subsection (h) for deduction and credit procedures, other than refund method provided in section 231-23(d), HRS, which a wholesaler or manufacturer who is also a retailer is permitted to use in determining tax liability under chapter 238, HRS.
(b) Retailer or any other person not exempted by subsection (a). Section 238-2(2), HRS, provides that if the importer or purchaser is licensed under the general excise tax law, chapter 237, HRS, and is (1) a retailer or other person importing or purchasing for purposes of resale and not exempted by subsection (a), or (2) a manufacturer as set forth in subsection (a)(2) except for the fact that the manufacturer sells his products at retail, or (3) a contractor incorporating imported or purchased material or commodities into the finished work or project, the tax shall be one-half of one percent of the purchase price of such tangible personal property, if the purchase and sale are consummated in Hawaii, or, if there is no purchase price applicable thereto, or if the purchase or sale is consummated outside of Hawaii, then one-half of one percent of the landed value of such property imported into Hawaii. For taxes on sales of tangible personal property by an out-of-state seller, including drop shipments and definitions, see § 18-237-13-02.01. See subsection (g) for rules relating to basis of property.
(c) Certain scientific contracts with the United States. Notwithstanding the provisions of subsection (b) of this rule, the tax imposed by chapter 238, HRS, shall not apply to any use of property exempted by section 237-26, HRS. Thus, no use tax shall be levied or collected on tangible personal property which is to be affixed to, or to become a physical, integral part of the scientific facility, or which is to be entirely consumed during the performance of the service required by the contract or subcontract.
(d) All others. HRS section 238-2(3) provides that in all other cases, the tax shall be four percent of the landed value of such tangible personal property. For taxes on sales of tangible personal property by an out-of-state seller, including drop shipments and definitions, see § 18-237-13-02.01. See subsection (g) for rules relating to basis of property.
(e) Producers. See § 18-238-4 relating to producers.
(f) Application of the rules contained in subsections (a), (b), (c), (d) and (e) of this section may be illustrated by the following examples.
Example 1: "A" purchases and imports a container load of merchandise from an out-of-state seller for resale in Hawaii to "X", a retail discount store. "A's" records further disclose that other imports and purchases made by "A" are sold to various other retail stores. Thus, because all sales are at the wholesale level, all such imports and purchases from an out-of-state seller are exempt from the use tax.
Example 2: "B", who is in the business of manufacturing food items, imports food preservatives and food containers. The preservatives are to be incorporated into the manufactured product while the containers are used to make the finished product marketable. "B" has an agreement to sell all of his manufactured products exclusively to "S", a large retail supermarket with many branches. Because all sales are at the wholesale level, "B" is exempt from the use tax. "B", however, will be taxed on the activity of a manufacturer as provided under the general excise tax law.
Example 3: "C" is engaged in a scientific contract with the United States. To complete this construction project, certain scientific equipment and supplies which are to become an integral part of the project are imported because they are not available in Hawaii. On the basis of the fact that the imported properties are to become an integral part of the project, no use tax shall be levied or collected on the equipment and supplies imported by "C".
Example 4: Assume the same facts in Example 3 except that "C" is engaged in an operation and maintenance scientific contract with the United States and imports supplies which are to be entirely consumed during the performance of the service contract. On the basis of the fact that the imported supplies are to be entirely consumed in the performance of the contract, no use tax shall be levied or collected on the supplies imported by "C".
Example 5: If "A" and "B" in Examples 1 and 2 were also engaged in selling their merchandise and products at the retail level, use tax at the rate of one-half of one percent would apply on the imports and purchases (for resale at retail) plus four percent general excise tax on their subsequent sale at the retail level.
If "C" in Example 3 is involved in other construction projects which do not meet the provisions of section 237-26, HRS, "C" would be subject to the use tax at the rate of one-half of one percent on the landed value of the tangible personal property imported and incorporated into such nonscientific projects.
If "C" in Example 4 is involved in other operation and maintenance contracts which do not meet the provisions of section 237-26, HRS, "C" would be subject to the use tax at the rate of four percent on the landed value of the supplies imported for use in such nonscientific contracts.
Example 6: Service business. A tire recapper, "D", who recaps tires belonging to other persons is subject to the use tax at the rate of four percent in respect of tangible personal property (that is consumed in performance of a service) which:
Example 7: Manufacturer. A tire recapper, "E", who recaps tires for "E's" own stock for resale is not subject to the use tax in respect of tangible personal property which:
(g) Basis of Property.
Example 1: A contract is executed in Hawaii by a local consumer and a dealer doing business in Hawaii with the place of delivery in San Francisco and the purchaser arranging for the shipment of the merchandise into Hawaii directly with a common carrier. The use tax of four percent is applicable. Because the sale is consummated outside of Hawaii, the tax shall be based on the landed value of the merchandise; such value shall include the freight, insurance and handling charges and the seller is required to collect such taxes as provided by section 238-6, HRS, and § 18-238-6.
Example 2: A local wholesaler purchases machinery through a dealer doing business in Hawaii. Although the transaction is F.O.B. San Francisco (the purchaser ultimately paying the freight), the actual place of delivery of the merchandise is in Honolulu. Because the dealer is doing business in Hawaii and the sale is consummated in Hawaii, the use tax is not applicable. However, the general excise tax is applicable to the dealer and the gross receipts of the dealer should include the freight, insurance and handling charges.
(h) Deduction and Credit Procedures.
|Example - A car dealer|
|1.||Total retail sales for the month||$75,000|
|2.||Total wholesale sales for the month||$15,000|
|3.||Total imports and purchases from unlicensed sellers for the month||$50,000|
|4.||Compute cost of automobiles and accessories sold at wholesale during the month which has been included in item 3, item by item, or category by category||Cost|
|Model "X" sedans||$4,000|
|Model "Y" delivery trucks||6,000|
|Model "Z" station wagons||2,000|
|Total cost of wholesale sales to be excluded from the use tax basis||$13,000|
|5.||Balance subject to the use tax||$37,000|
|1.||Total retail sales for the month||$85,000|
|2.||Total wholesale sales for this month||$15,000|
|3.||Total imports and purchases from unlicensed sellers for the month||$50,000|
|4.||Percentage of wholesale sales to total sales ($15,000 ÷ $100,000)||15%|
|5.||Total purchases to be excluded from the use tax base ($50,000 x fifteen percent)||$ 7,500|
|6.||Imports and purchases subject to the use tax for the month ($50,000 - $7,500)||$42,500|
It will be permissible for a taxpayer to use the cost of sales to arrive at the percentage ratio for the exclusion of imports or purchases from unlicensed sellers for wholesale sales to compute the use tax base, if the taxpayer has accurate records to support these costs of sales figures. A schedule of these computations must be attached to the monthly tax returns.
|1.||Total imports and purchases from unlicensed sellers for the month||$50,000|
|2.||Total wholesale sales for the month||$10,000|
|The average gross profit percentage as determined by taxpayer's records||40%|
|Gross profit on wholesale sales||$ 4,000|
|3.||Cost of wholesale sales for the month ($ 10,000 - $4,000)||6,000|
|4.||Balance subject to use tax for the month||$44,000|
Method C may be utilized only if taxpayer has good records and accounting data to compute proper gross profit percentage.
[Eff 2/16/82; am 5/26/98] (Auth: HRS §§ 231-3(9), 238-16) (Imp: HRS §§ 238-2, 238-4)