NEIL ABERCROMBIE

FREDERICK D. PABLO

GOVERNORDIRECTOR OF TAXATIONSHAN TSUTSUIJOSHUA WISCH

LT. GOVERNOR

DEPUTY DIRECTOR

STATE OF HAWAII

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

PHONE NO: (808) 587-1530
FAX NO: (808) 587-1584

June 5, 2013

DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2013-04
RE:Sunset of 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 (Act 105). Act 105 suspends numerous General
Excise Tax (GE Tax) and Use Tax exemptions, exclusions and deductions, and also requires
information reporting on all GE and Use Tax exclusions, exemptions and deductions. Act 105
repeals on June 30, 2013, after which all GE and Use Tax exclusions, exemptions and deductions
under it will no longer be suspended.
Summary of Act 105
Act 105 suspends temporarily the exemptions for certain persons and certain amounts ofgross income or proceeds from the GE and Use tax and requires the payment of both taxes at a four
per cent rate. The persons and amounts for which the exemption under the GE Tax has beensuspended are as follows1:
1. Amounts deducted from the gross income received by contractors as described undersection 237-13(3)(B);
2. Reimbursements received by federal cost-plus contractors for the costs of purchasedmaterials, plant, and equipment as described under section 237-13(3)(C);
3. Amounts deducted from the gross income of real property lessees because of receipt
from sublessees as described under section 237-16.5;
4. The value or gross income received by nonprofit organizations from certain
conventions, conferences, trade show exhibits, or display spaces as described under
section 237-16.8;
5. Amounts received by sugarcane producers as described under section 237-24(14);1Note that Act 105 lists "Gross receipts of home service providers acting as service carriers providing
mobile telecommunications services to other home service providers as described under section 23713(6)(D)" as one of the exemptions temporarily suspended. However, these amounts are exempt underfederal law and thus remain exempt during the suspension period regardless of their inclusion in Act 105.
Please see Tax Information Release 2011-03 for more information.

Department of Taxation Announcement No. 2013-04
June 5, 2013
Page 2 of 6
6. Amounts received from the loading, transportation, and unloading of agriculturalcommodities shipped interisland as described under 237-24.3(1);7. 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);8. Amounts received or accrued from the loading or unloading of cargo as describedunder section 237-24.3(4)(A);
9. Amounts received or accrued from tugboat and towage services as described under
section 237-24.3(4)(B);
10. Amounts received or accrued from the transportation of pilots or government
officials and other maritime-related services as described under section 23724.3(4)(C);
11. Amounts received by labor organizations for real property leases as described under
section 237-24.3(10);12. Amounts received as rent for aircraft or aircraft engines used for interstate airtransportation as described under section 237-24.3(12);13. Amounts received by exchanges and exchange members as described under section
237-24.5;
14. Amounts received as high technology research and development grants under section
206M-15 as described under section 237-24.7(10);15. Amounts received from the servicing and maintenance of aircraft or construction ofaircraft service and maintenance facilities as described under section 237-24.9;
16. Gross proceeds from the sale of the following:(A) Intoxicating liquor to the United States (including any agency orinstrumentality 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 the saleis 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 23725(a)(1);(B) Tobacco products and cigarettes to the United States (including any agency orinstrumentality thereof that is wholly owned or otherwise so constituted as tobe immune from the levy of tax under chapter 238 or 245, but not including
national banks) as described under section 237-25(a)(2);(C) "Other tangible personal property" to the United States (including any agency,instrumentality, or federal credit union thereof, but not including nationalbanks) and any state-chartered credit union as described under section 23725(a)(3);
17. Amounts received by petroleum product refiners from other refiners for furtherrefining of petroleum products as described under section 237-27;
18. Gross proceeds received from the construction, reconstruction, erection, operation,

Department of Taxation Announcement No. 2013-04
June 5, 2013
Page 3 of 6use, maintenance, or furnishing of air pollution control facilities, as described under
section 237-27.5, that do not have valid certificates of exemption on July 1, 2011;
19. Gross proceeds received from shipbuilding and ship repairs as described under
section 237-28.1;
20. Amounts received by telecommunications common carriers from call center
operators for interstate or foreign telecommunications services as described under
section 237-29.8;
21. 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; and22. Gross proceeds received by contractors licensed under chapter 444 for construction
within enterprise zones performed for qualified businesses within the enterprisezones or businesses approved by the department of business, economic development,and tourism to enroll into the enterprise zone program, as described under 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 or renting
for commercial transportation of passengers and goods or the acquisition orimportation of aircraft or aircraft engines by a lessee or renter engaged in interstate
air transportation, as described under paragraph (6) of the definition of "use" insection 238-1;
2. The use of oceangoing vehicles for passenger or passenger and goods transportationfrom one point to another within the State as a public utility, as described underparagraph (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 underchapter 237 that are used for aircraft service and maintenance or the construction ofan aircraft service and maintenance facility, as described under paragraph (8) of thedefinition 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 238-3(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 describedunder section 238-3(k).
Act 105 also requires that, beginning July 2011, taxpayers provide information reporting on

Department of Taxation Announcement No. 2013-04
June 5, 2013
Page 4 of 6
any general excise or use tax exclusions or exemptions. The Act provides some exceptions to theinformation reporting requirement. There will be no information reporting on amounts exempt under
section 237-24(1) through (7), which includes amounts received from some types of insurance
policies, gifts, compensatory tort damages, employee wages, and alimony.
The Department issued Schedule GE-1, Survey of General Excise Tax Exemptions andDeductions, to meet this reporting requirement. Schedule GE-1 must be filed by any taxpayer
claiming exemptions or deductions under Chapters 237 and 238 for tax years 2010, 2011 and 2012.
However, nonprofit organizations which have applied for and received from the Department anexemption from the general excise tax will not be subject to this information reporting requirementand do not have to file a Schedule GE-1.
Schedule GE-1 is filed exclusively by means of electronic filing at www.ehawaii.gov/efile.
For more information about filing Schedule GE-1, please see the Schedule GE-1 Instructions andTax Announcement 2011-26, all of which can be found on the Department's website atwww.hawaii.gov/tax.
Grandfathering Guidelines
The Department has received numerous inquiries about how Act 105 will apply to grossreceipts received or accrued after June 30, 2013 pursuant to contracts entered into during thesuspension period of July 1, 2011 through June 30, 2013. Gross receipts received or accrued on
or after July 1, 2013 will be subject to all provisions suspended by Act 105, regardless of whether
the contract from which the gross receipts arise was entered into prior to July 1, 2013 (a.k.a., no"grandfathering-out"). In other words, the suspension of deductions, exemptions and exclusions
under Act 105 will not apply to any gross receipts received or accrued after June 30, 2013. Thefact that the receipts arise from a contract entered into before July 1, 2013 will not affect whether
the receipts are subject to an exemption or exclusion. The controlling factor is the date theincome is received or accrued. Please see the section titled "Accounting Methods" below for
more discussion of cash vs. accrual method with respect to Act 105.
The Department notes that Act 105 contains provisions stating that the suspension of theexemptions and exclusions does not apply to gross income from certain binding written contracts
entered into prior to July 1, 2011. In other words, contracts can be "grandfathered in" and grossreceipts arising pursuant to such contracts would remain exempt or excludable even if received
after June 30, 2011. Please see Tax Announcement 2011-10 for more information about
grandfathering guidelines.
Act 105 contains no similar "grandfathering out" provisions. Therefore, gross receipts
received or accrued on or after July 1, 2013 will be subject to all applicable exemptions andexclusions suspended under Act 105, regardless of when the taxpayer enters into the contract
which gives rise to the income.

Department of Taxation Announcement No. 2013-04
June 5, 2013
Page 5 of 6
EXAMPLE. A general contractor (Contractor) enters into a contract with a developer(Developer) June 15, 2013 to build a building for $1 million. On June 20, 2013, Contractor
enters into a subcontract with Subcontractor A to install the glass windows for $100,000. On
June 25, 2013 Subcontractor A enters into a subcontract with Subcontractor B to install a portionof the windows for $25,000. All parties are licensed pursuant to Chapters 237 and 444, Hawaii
Revised Statutes, are contractors as that term is defined under Section 237-6, and are on a cashbased accounting method. Developer pays Contractor $1 million on July 1, 2013. Contractor pays
Subcontractor A $100,000 on July 2, 2013. Subcontractor A pays Subcontractor B $25,000 on
July 3, 2013. Contactor may claim the subcontract deduction under section 237-13(3)(B) for
payments made to Subcontractor A, even though the contract between Contractor andSubcontractor A was entered into before July 1, 2013. Subcontractor A may claim thesubcontract deduction for payments made to Subcontractor B even though the contract between
Subcontractors A and B was entered into before July 1, 2013.
Accounting Methods
Gross proceeds for business transactions that occur prior to July 1, 2013 could be subject todifferent tax rates depending on the accounting method of the taxpayer. Generally, cash basis
accounting method taxpayers report their gross income in the taxable year in which payments areactually or constructively received. Generally, accrual basis accounting method taxpayers report theirincome 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 be determined with reasonable accuracy.
This means that two different taxpayers entering into identical transactions could potentiallypay general excise tax at two different rates. If, for instance, all events that fix the right to receive
income from a contract have occurred and the amount of income can be determined with reasonableaccuracy on June 30, 2013 but cash payment is actually or constructively received July 1, 2013, thena cash-basis accounting taxpayer would be exempt from GE tax on proceeds from the contract while
an accrual-basis accounting taxpayer's proceeds would be subject to GE tax at the 4% rate.
Additional Information
The Department has several publications on the subject of Act 105. Below is a list of thosepublications and short summary of each:
1. Tax Information Release 2011-02 clarifies the application of the GE tax to sales oftangible personal property to the federal government due to Act 105, and clarifies thegrandfathering rules of Act 105 for requests for proposals issued by a local, state orfederal government.
2. Tax Information Release 2011-03 clarifies that gross receipts of Hawaii mobile
telecommunications service providers acting as serving carriers providing interstateDepartment of Taxation Announcement No. 2013-04
June 5, 2013
Page 6 of 6

3.

4.
5.

6.
7.

8.
9.

or foreign mobile telecommunications services to non-Hawaii home service providers
are exempt from GE tax under federal law and are not affected by Act 105's
suspension of section 237-13(6)(D).
Tax Announcement 2011-09 discusses Act 105 in general, and also discusses
applicable rate, grandfathering rules, accounting method issues, and enterprise zone
issues in more detail.
Tax Announcement 2011-10 discusses Act 105's grandfathering rules in more detailand creates additional guidance with respect to government contracts.
Tax Announcement 2011-22 clarifies that income exempt prior to the enactment of
Act 105 is subject to the GE tax at a rate of four per cent, and is not subject to Oahu's
0.5 per cent country surcharge.
Tax Announcement 2011-26 discusses Act 105's information reporting requirements,
specifically who must file, how to file and what information must be reported.
Tax Announcement 2011-27 clarifies that division of income under section 237-18 is
not an exemption or deduction and therefore a person who splits income undersection 237-18 is not subject to Act 105's information reporting requirements.
Letter Ruling No. 2012-08 discusses whether a government contract qualifies for Act
105's grandfathering exception.
Letter Ruling No. 2013-02 discusses whether a taxpayer's contract qualifies for Act
105's grandfathering exception.

For more information related to this Announcement, please contact the Department ofTaxation's Rules Office at 808-587-1577.

/s/
FREDERICK D. PABLO
Director of Taxation