NEIL ABERCROMBIE

FREDERICK D. PABLO

GOVERNORDIRECTOR OF TAXATIONBRIAN SCHATZRANDOLF L. M. BALDEMORLT. GOVERNOR

DEPUTY DIRECTOR

STATE OF HAWAII

DEPARTMENT OF TAXATIONP.O. BOX 259
HONOLULU, HAWAII 96809

PHONE NO: (808) 587-1510
FAX NO: (808) 587-1560

June 15, 2011

DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2011-09
RE:Act 105, Session Laws of Hawaii 2011, Relating to Taxation

On June 9, 2011, Governor Neil Abercrombie signed into law Senate Bill 754 SD1, HD1,
CD1 as Act 105, Session Laws of Hawaii 2011.
This Act suspends temporarily the exemptions for certain persons and certain amounts ofgross income or proceeds from the general excise and use tax and requires the payment of bothtaxes at a four per cent rate. The persons and amounts for which exemption under the general
excise tax has been suspended are as follows:
1. Amounts deducted from the gross income received by contractors as describedunder section 237-13(3)(B);
2. Reimbursements received by federal cost-plus contractors for the costs ofpurchased materials, plant, and equipment as described under section 23713(3)(C);
3. Gross receipts of home service providers acting as service carriers providing
mobile telecommunications services to other home service providers as describedunder section 237-13(6)(D);
4. Amounts deducted from the gross income of real property lessees because ofreceipt from sublessees as described under section 237-16.5;
5. The value or gross income received by nonprofit organizations from certain
conventions, conferences, trade show exhibits, or display spaces as describedunder section 237-16.8;
6. Amounts received by sugarcane producers as described under section 237-24(14);
7. Amounts received from the loading, transportation, and unloading of agriculturalcommodities shipped interisland as described under section 237-24.3(1);8. Amounts received from the sale of intoxicating liquor, cigarettes and tobacco
products, and agricultural, meat, or fish products to persons or common carriers
engaged in interstate or foreign commerce as described under section 237-24.3(2);9. Amounts received or accrued from the loading or unloading of cargo as describedunder section 237-24.3(4)(A);
10. Amounts received or accrued from tugboat and towage services as describedunder section 237-24.3(4)(B);
11. Amounts received or accrued from the transportation of pilots or government
officials and other maritime-related services as described under section 237-Department of Taxation Announcement No. 2011-09
June 15, 2011
Page 2 of 424.3(4)(C);
12. Amounts received by labor organizations for real property leases as describedunder section 237-24.3(10);13. Amounts received as rent for aircraft or aircraft engines used for interstate airtransportation as described under section 237-24.3(12);14. Amounts received by exchanges and exchange members as described undersection 237-24.5;
15. Amounts received as high technology research and development grants under
section 206M-15 as described under section 237-24.7(10);16. Amounts received from the servicing and maintenance of aircraft or constructionof aircraft service and maintenance facilities as described under section 237-24.9;
17. Gross proceeds from the sale of the following:(A) Intoxicating liquor to the United States (including any agency or
instrumentality of the United States that is wholly owned or otherwise soconstituted as to be immune from the levy of a tax under chapter 238 or
244D, but not including national banks) or any organization to which thesale is permitted by the proviso of "Class 3" of section 281-31 that is
located on any Army, Navy, or Air Force reservation as described under
section 237-25(a)(1);(B) Tobacco products and cigarettes to the United States (including anyagency or instrumentality thereof that is wholly owned or otherwise soconstituted as to be immune from the levy of tax under chapter 238 or245, but not including national banks) as described under section 23725(a)(2); and(C) "Other tangible personal property" to the United States (including any
agency, instrumentality, or federal credit union thereof, but not including
national banks) and any state-chartered credit union as described undersection 237-25(a)(3);
18. Amounts received by petroleum product refiners from other refiners for furtherrefining of petroleum products as described under section 237-27;
19. Gross proceeds received from the construction, reconstruction, erection,operation, use, maintenance, or furnishing of air pollution control facilities, asdescribed under section 237-27.5, that do not have valid certificates of exemption
on July 1, 2011;
20. Gross proceeds received from shipbuilding and ship repairs as described under
section 237-28.1;
21. Amounts received by telecommunications common carriers from call center
operators for interstate or foreign telecommunications services as described under
section 237-29.8;
22. Gross proceeds received by qualified businesses in enterprise zones, as describedunder section 209E-11, that do not have valid certificates of qualification from thedepartment of business, economic development, and tourism on July 1, 2011; and23. Gross proceeds received by contractors licensed under chapter 444 forconstruction within enterprise zones performed for qualified businesses within theenterprise zones or businesses approved by the department of business, economic

Department of Taxation Announcement No. 2011-09
June 15, 2011
Page 3 of 4
development, and tourism to enroll into the enterprise zone program, as describedunder section 209E-11.
The persons and amounts for which exemption under the use tax has been suspended are
as follows:
1. The leasing or renting of aircraft or keeping of aircraft solely for leasing orrenting for commercial transportation of passengers and goods or the acquisition
or importation of aircraft or aircraft engines by a lessee or renter engaged ininterstate air transportation, as described under paragraph (6) of the definition of"use" in section 238-1;
2. The use of oceangoing vehicles for passenger or passenger and goods
transportation from one point to another within the State as a public utility, asdescribed under paragraph (7) of the definition of "use" in section 238-1;
3. The use of material, parts, or tools imported or purchased by a person licensed
under chapter 237 that are used for aircraft service and maintenance or theconstruction of an aircraft service and maintenance facility, as described underparagraph (8) of the definition of "use" in section 238-1;
4. The use or sale of intoxicating liquor and cigarette and tobacco products imported
into the State and sold to any person or common carrier in interstate commerce,
whether ocean-going or air, for consumption out of State by the person, crew, orpassengers on the shipper's vessels or airplanes, as described under section 2383(g);5. The use of any vessel constructed under section 189-25 prior to July 1, 1969, as
described under section 238-3(h); and6. The use of any air pollution control facility subject to section 237-27.5 as
described under section 238-3(k).
This Act also requires that, beginning July 1, 2011, taxpayers provide information
reporting on any general excise or use tax exclusions or exemptions. The Act provides some
exceptions to the information reporting requirement. There will be no information reporting onamounts exempt under section 237-24(1) through (7), which includes amounts received fromsome types of insurance policies, gifts, compensatory tort damages, employee wages, andalimony. The Department will provide forms to gather this information.
Following are some noteworthy issues arising from this legislation:
RATE - The suspension means that currently exempt amounts such as, e.g., amounts
deducted from the gross income received by a contractor (the "subcontractor deduction"), will nolonger be exempt from general excise tax beginning July 1, 2011 and will be taxable at the 4%
rate. However, amounts for which the general excise tax exemption is temporarily suspended
under this bill will continue to be exempt from the county surcharge of 0.5%.
GRANDFATHERING - The bill specifically states that gross income from "binding
written contracts entered into prior to July 1, 2011, that do not permit the passing on of increased

Department of Taxation Announcement No. 2011-09
June 15, 2011
Page 4 of 4
rates of taxes" will be exempt from GE tax even if the amounts would be made taxable by thesuspension of an exemption under this bill. In order to be saved from paying tax by thisgrandfathering clause, a taxpayer must keep several things in mind. First, the contract must not
permit the increase in the tax to be passed on to the consumer. Second, the contract must be inwriting. Third, the contract must be binding prior to July 1, 2011. If these three conditions aremet, any change orders relating to the original contract will be treated as entered into before July
1, 2011.
ACCOUNTING METHOD ISSUE - Gross proceeds for business transactions that occur
prior to July 1, 2011 could be subject to different tax rates depending on the accounting methodof the taxpayer. Generally, cash basis accounting method taxpayers report their gross income in
the taxable year in which payments are actually or constructively received. Generally, accrualbasis accounting method taxpayers report their income in the taxable year in which all events
that fix the right to receive the income have occurred and the amount of the income can bedetermined with reasonable accuracy.
This means that two different taxpayers entering into identical transactions could
potentially pay general excise tax at two different rates. If, for instance, all events that fix theright to receive income from a contract have occurred and the amount of income can bedetermined with reasonable accuracy on June 30, 2011 but cash payment is actually orconstructively received July 1, 2011, then a cash-basis accounting taxpayer would be subject tothe 4% GE tax rate on proceeds from the contract while an accrual-basis accounting taxpayer'sproceeds would be exempt. Note also that the cash-basis taxpayer's proceeds would still beexempt if they were received pursuant to a binding written contract that met the grandfatheringrules discussed above.
ENTERPRISE ZONES - The bill also suspends the exemption for gross receipts fromactivities conducted within enterprise zones. The same grandfathering considerations should betaken into account when determining whether gross proceeds from a construction contract within
an enterprise zone are exempt.
Act 105 takes effect July 1, 2011 and is repealed June 30, 2013.
For more information on this Act, please contact the Rules Office at 808-587-1577.

FREDERICK D. PABLO
Director of Taxation