Title: In re Tax Appeal of Subway Real Estate Corp. v. Director of Taxation, State of Hawaii.

State: hawaii

Issuer: Hawaii Supreme Court

Document:

LAW UBaanY

‘***F0R PUBLICATION*#*
IN THE SUPREME COURT OF THE STATE OF HAWAT'T

00.

 

IN THE MATTER OF THE TAX APPEAL
oF

SUBWAY REAL ESTATE CORP.,
‘Taxpayer-Appellee/Cross-Appeilant

aad

vs.

9:8 WY 829345002

 

DIRECTOR OF TAXATION, STATE OF HAWAT'T,
Appellant /Cross-Appellee

No. 26488

APPEAL FROM THE TAX APPEAL COURT
(TAX APPEAL CASE NO, 99-0145)

FEBRUARY 28, 2006

MOON, C.J., LEVINSON, NAKAYAMA, ACOBR, AND DUFFY, JJ.

Director
March 9,
that (1)

apply in

OPINION OF THE COURT BY ACOBA, J.

We hold in this appeal by Appellant-Cross-Appellee
of Taxation, State of Hawai" (the Director) from the
2004 final judgment of the Tax Appeal Court (the court)?
the rule of strict construction of statutes does not

this case to Hawai'l Revised Statutes (HRS) § 237-2

‘The Honorable Gary ¥.B. Chang presided.
‘***FOR PUBLICATION*#*
(2001 Repl.);? (2) the Director’s assessment of Hawai'l general

excise taxes (GET) on the subleasing activities of Taxpayer-
Appellee-Cross Appellant Subway Real Estate Corp. (Taxpayer) was
proper inasmuch as (a) Taxpayer gained or economically benefitted
under HRS § 237-2 from said activities, and (b) the substance-
over-forn doctrine enunciated in In re Tax Appeal of Hawaiian
Tel. Cos, 57 Haw. 477, 559 P.2d 283 (1977), does not apply to the

present case; and (3) the reimbursement provisions of HRS § 237-

 

20 (2001 Repl.)? do not apply to the present case. Because the
court ruled to the contrary as to Taxpayer's Ge? liability for
its subleasing activities, we vacate the court's March 9, 2004
Final judgment, and remand with instructions to enter judgment in
favor of the Director. With regard to Taxpayer's cross-appeal,
we hold the record is insufficient to resolve Taxpayer's GET
liability for services, Therefore we also remand to the court
for a determination of Taxpayer's GET liability, if any, for
ervices.

1

a

Doctor's Associates, Inc. (DAI) is the franchisor of

Subway Sandwich shops throughout the United States. According to

Taxpayer, Franchise Real Estate Leasing Corporation (FRELC), is

 

+ the text of Hawai's Revised Statutes (HRS) § 237-2 (2001 Repl.) is
reproduced intra.

>the rele:
reproduces intza’

wnt provisions of HRS § 237-20 2003 Repl.) are

 

2
‘+*4F0R PUBLICATION*#*
an “affiliate” of DAI, and negotiates the master leases and

subleases for the locations of the Subway shops on behalf of DAL,
the prospective franchisees, and two other companies, Subway
Restaurants, Inc. and Subway Sandwich Shops Inc., both nominal
holders of certain leases and subleases. Taxpayer, Delaware
corporation, states that, as an affiliate of DAI and a wholly-
owned subsidiary of FRELC, it is responsible for signing and
maintaining the leases and subleases for each Subway Sandwich
shop in the United States. As of December 31, 1991, thirty-nine
Subway Sandwich shops were in operation in Hawai'i.

In its Franchise offering Circular (circular) DAT lists
‘Taxpayer a3 a corporation that may act as a sublessor of
restaurant premises, states that Taxpayer is empowered to
terminate the subleases and to require the franchisee to vacate
the premises through legal action, and may be involved in
Litigation in various jurisdictions with respect to certain
leases and subleases, In order to establish a Subway Sandwich
shop, a franchisee must sign the “Franchise Agreement” (the
agreement) with DAI. The pertinent provisions in the agreement
relating to Taxpayer's subleasing activities (1) oblige the
franchisee to sublease property from Taxpayer: (2) permit
taxpayer to charge the franchisee @ higher rent for portions of
the property that aze not used as a Subway Sandwich shop; and
(3) direct the franchisee to indemnify Taxpayer for acts of

negligence or fault.
‘**+FOR PUBLICATION*#*
Taxpayer directly leases real property from a landlord

through 2 master lease agreenent (lease agreement). Taxpayer
then subleases the real property through @ sublease agreement to
2 franchisee to establish a shop. Under the sublease agreenent,
all sublease rent is paid directly by the franchisee to the
landlord rather than to Taxpayer. Section twenty-eight of the
lease agreenent, entitled “Limitation of Liability of Persons and
Entities Affiliated With Tenant,” stated that “Landlord
recognizes and acknowledges that the (Taxpayer) is a Delaware
corporation and that (Taxpayer's) assets consist almost
exclusively of leases, subleases, and options to purchase leased
premises.” Although Taxpayer states that FRELC is responsible
for negotiating the leases and subleases, the lease agreement
provides that Taxpayer was in the business of “negotiating and

drafting leases with a view towards subletting the leased

 

premises to franchisees (or) licensees of (DAI].” (Boldfaced
font omitted.)
..
on Wovenber 28, 1998, pursuant to HRS § 237-13(10),*
the Director assessed Taxpayer for GET, interest, and penalties

in the total amount of $26,805.47 as unreported income arising

from Taxpayer's 1992 subleasing activity. According to the

 

+ pormer HRS § 237-13(20) (Supp, 1998) (now HRS § 237-13(9) (Supp.
2005), authorizes the State to inpose a four-percent (48) general excise tex
Get) on persons “engaging or continuing within the state in any busin

trade, activity, cecupation, cr calling” and not subject to special assessment
provisions under HRS chapter 237.” The current version of HRS § 237-13(3)
Fetaine the same language.

   

 
‘***FOR PUBLICATION***

Director, the amount assessed was based on four percent of the
“gross income” at the rate indicated in the leases and subleases.
‘raxpayer appealed the assessment to the Board of Review, First
Taxation District (Board of Review).

on January 14, 1999, the Board of Review upheld that
tax assessment in the amount of $23,092.80 and waived the penalty
of $3,712.67. On February 2, 2000, Taxpayer appealed the Board
of Review's decision to the court.

on August 10, 2000, Taxpayer moved for sunmary
judgment, arguing that its subleasing activity in Hawai'i was not
subject to the GET because (1) there was no object of gain or
economic benefit; (2) it did not receive any fee or other
consideration; and (3) Taxpayer's primary purpose was to sign
leases and subleases for all franchise properties in the United
States and nothing else. Alternately, Taxpayer argued, if it was
engaged in a business activity subject to the GET, the gross
receipts were exempt under HRS § 237-20.°

on the sane date, the Director moved for summary
Judgment asserting that Texpayer’s subleasing activity is subject

to the GET under HRS §§ 237-13 and 237-2.¢

 

+ an relevant part, HRS § 237-20 states that “[tJhe reinbursenent of
costs or advances gade fer of on behalf of one person by ansther shall not.
Sonstitate gross incone of the fatter, Uilaut ibe narich ceceivins such

Sizes oragvanges "(Emphases eased)

‘Rs § 237-2 defines the term “business” to include “all activities
(personal, professions, or corporate),

h the cbbect of iit either directo rbot
Goes not incluse casual sales.” (Eapheses sddea.| Furthernare, the term
“engaging,” a2 seed in HRS chapter 237, “with reference to engaging or

(Continued...)

 

 
‘***FOR PUBLICATION*#*

 

on August 28, 2000, during the hearing on the motions
for summary judgment, the court indicated that the GET should
have been assessed based on the value of services instead of the
value of the lease rent amounts.

on October 12, 2000, the court entered two orders.
one order granted in part and denied in part the Director's
motion for summary judgment as follows:

(2), [t]he Director's Motion for Summary Judgment
IN| PART with respect to the Director's power to
against Taxpayer based upon the value of aay services that
Taxpayer provided » 7 and (2) the Director's Notion for
Scamaty Judgment iz DENIED IN PART with respect. to the
Sizector's sasesenent of (GET) agetnst Taxpayer based upon
the sublease incone.

 

(Some capitalization omitted.) The other order granted in part
and denied in part Taxpayer's motion for summary judgment:

(2), [Texpayer’s} Motion for Summary Judgnent is granted in
part, to the extent that the [Director's] assessment of
ck?) based upon the sublease incone waa not proper, and
(2) Irexpayer's) Hotson fer Summary Josgnent Ss denied in
part, to the extent that. . the (Director) has the power
Eoiadsess (GET) against (Zaxpayer] based upon the value of
services, if any, provided by [Taxpayer].

 

 

 

on October 23, 2000, the Director moved for
reconsideration of the court's two orders issued on October 12,
2000.

on April 25, 2001, Taxpayer moved for sunmary judgment
arguing that under In re C, Brewer, 65 Haw. 240, 649 P.2d 1155
(2982), the value of any services provided was no more than

$6875.00 and not taxable because the service:

 

were performed

outside of Hawai'i. The Director opposed the motion, arguing

 

S(. continued)
continuing in Busine
powers.” Id

 

(1 also tnetuds

 

the exercise of corporate or franchise
‘***P0R PUBLICATION***

that the facts and evidence did not support Taxpayer’s position

on the value of services provided and the location of the

services performed.

On November 8, 2001, the parties entered into and filed

a stipulation. The pertinent parts of the stipulation state as

follows:

(Emphases

 

[Flor the purpose of agreeing on factual issues that renain
in controversy, [the parties) stipulate as follows:

1."""on Gctober 12, 2000, this (clourt entered its
order Granting in Part and Denying in Part (Taxpayer’ =)
Motion for Summary Judgment Filed August 10, 2000 and its
Order Grantine in Fart snd Denying in Part [Director's]
Motion for Summary Judgment, both of which provide chat the
Director's sssessnent of (GET) based Upon sublease income
was not proper, but thot the Director has the power to
Sssess (GET) against (Texpeyer) based upon the value of
jervices, if any, provided by (Taxpayer) pursuant to the
Hawaii Supreme Court's decision in (Jn I

2.) ht a hearing held on Septenber 24, 2001, this
clourt denied (Taxpayer's) Motion for Summary Judgment
Filed April 25, 2001, on the basis that the proper measure
of the valve of services provided by (Taxpayer) pursuant to
the Brewer case might by an saeue remaining in dispute. An
Order has been lodged with thie [cJourt-

5.) “For purposes of (Taxpayer's) 1992 tax year, and
that tax year lone, [Taxpayer] and the Director stipulate
that the value accruing from any benefit conferred by
[Taxpayer] ‘on (DAI) was $10,875, although no cost
consideration therefore (sit), vas received by (Taxpayer!

 

 

 

 

 

Eyanchisess to the landlord uncer any nester lease agreement
executed by (Toxpayer] as the lessee in 1957 was not -gublect

EO IGES! af crose income to” [expayer|, nora sdniscion or

tal income taxable to

added.)

on November 27, 2001, the court denied Taxpayer's

motion for summary judgment filed April 25, 2001. On the same

date, the

court denied the Director’s motion for reconsideration

filed October 23, 2000.
‘++*POR PUBLICATION***

on December 7, 2001, Taxpayer moved for reconsideration
of the order denying its motion for summary judgment, arguing
that there was no genuine issue of fact in light of the
stipulation.

on March 9, 2004, the court granted Taxpayer’ s motion
for reconsideration, stating thet “[alny services provided by any
affiliate of (Taxpayer) are attributable to (Taxpayer].” The
court stated that “(flor the tax year 1992, [Taxpayer] is liable
for (GBT) in the anount of $435.00. [Taxpayer] is entitled to
refund in the amount of $26,370.47, plus interest thereon as
provided by law.”

on April 1, 2004, the Director filed its appeal and on
April 13, 2004, Taxpayer filed its cross-appeal.

1m.
on appeal, the Director contends that (1) the business

of subleasing is subject to the GET and that (2) the facts on

 

record show that (a) Taxpayer was engaged in @ business activity
subject to the GET inasmuch as the activity in question resulted

(b) in substance, Taxpayer's

 

in gain or economic benef
business activity ie subject to the GETy and (c) any gross
receipts from rental income are not exempt from the GET under HRS
§ 237-20.

In its answer, Taxpayer does not dispute that the
business of subleasing is subject to the GET, However, Taxpayer

asserts that (1) it was not engaged in a taxable business
+**FOR PUBLICATION*#*

 

activity inasmuch as (a) HRS § 237-2 must be strictly construed
against the Tax Department and (b) the subleasing arrangement was
not done with “the object of gain or economic benefit (, 1”

(2) the substance-over-forn doctrine applies in its favor because
(a) in substance, the subleases were security instruments for DAI
and (b) its GET liability should be based on the substance,
rather than the form, of DAI's franchise arrangement; (3) if
Taxpayer is deemed to be engaged in a business activity, any
gross receipts are exenpt under the reimbursement provisions of
HRS § 237-20 because (a) its transaction satisfied the Tax
Department’s requirements for treatment as a nontaxable
reimbursement, (b) if it constructively received the rent, which
‘the Tax Department attributes to Taxpayer, it should be treated
as a reimbursable cost, and (c) Taxpayer's position is supported
by recently issued proposed reimbursement rules.

In reply, the Director (1) urges this court to
disregard Taxpayer's argument that HRS § 237-2 should be strictly
construed against the Director because thie argument was never
presented to the court, and that Taxpayer fails to recognize the
essential elements for the application of the doctrine of strict
construction of @ taxing statute, (2) reasserts that Taxpayer’ s
leasing activity is @ business pursuant to HRS § 237-2,

(3) argues that Taxpayer receives income subject to the GET,
(4) maintains that the sublease agreements are not a security

interest for DAI, and (5) contends that the reimbursement
‘+**FOR PUBLICATION***
ee

exemption under HRS § 237-20 is not applicable since (a) HRS
§ 237-20 never encompassed subleasing and (b) Taxpayer does not
satisfy the provisions of HRS § 237-20 because it never
reinbursed any cost or made an advance for or on behalf of a
party, and did not receive a reimbursenent of a cost or advance
from anyone. Accordingly, the Director requests that this court
reverse the order and judgment entered by the court and uphold
its assessment of GET, as modified by the Board of Review,
against Taxpayer’s subleasing activities in the amount of
$23,092.80.

In its cross-appeal, Taxpayer argues that the court
erred (1) in concluding that it was engaged in a taxable business
activity for the services rendered by FRELC and (2) in finding
Taxpayer lieble for GET in the amount of $435.00 because the
services, if any, were rendered by FRELC and were totally
performed outeide of Hawai'i inasmuch as (a) the plain language
of HRS § 237-13 Limits the taxing power of the Tax Department to
activities within the state and (b) the apportionment rules limit
the imposition of taxes on services to those performed within the
state. Taxpayer requests that this court reverse the court's
decision to the extent that it concluded that Taxpayer had any
GET liability.

In its answer, the Director contends that Taxpayer was
engaged in 2 taxable business activity for the services rendered

by FRELC and that the broad scope of the GET laws permit the

10
‘***FOR PUBLICATION*#*

 

imposition of virtually all business activity in Hawai'i unless
specifically exempted, and in this case, the GET laws encompassed

Taxpayer's business.
ur.

The standards of review applicable to this case are
correctly set forth by both parties. The grant or denial of a
motion for summary judgment is reviewed on appeal de nove under
the same standards applied by the trial court. Ince Tax Appeal
of Baker & Tavlor, Inc. v. Kawafuchi, 103 Hawai'i 359, 364, 82
P.3d 804, 809 (2004); Roxas v, Marcos, &9 Hawai'i 91, 116, 969
P.2d 1209, 1234 (1998). An order granting or denying a motion
for reconsideration is reviewed for abuse of discretion. Ass'n
of Apartment Ouners of Wailea Elua v, Wailea Resort Co., 100
Hawai'i 97, 110, 58 P.3d 608, 616 (2002); Amfac, Inc, vs Waikiki
Beachcomber Inv, Co., 74 Haw. 85, 114, 839 P.2d 10, 26 (1992). An
abuse of discretion occurs where “the [circuit] court has clearly
exceeded the bounds of reason or has disregarded rules or
Principles of law or practice to the substantial detriment of a
party litigant.” UFJ Bank Ltd. v, Teda, 109 Hawai'i 137, 142,
123 P.3d 1232, 1237 (2005) (citing Roxas, 89 Hawai'i at 115, 969
P.2d at 1233) (brackets in original).

wv.

Inasmuch as the parties do not dispute that the
business of subleasing is subject to the GET, we need not reach
the Director's first argument. Accordingly, we address the

parties’ remaining contentions.

uu
‘+*+FOR PUBLICATION*#*

v

As to Tampayer’s argument 1(a), for strict construction
of HRS § 237-2, we note that Taxpayer never presented this issue
before the court, We have held that “[als a general rule, if @
party does not raise an argument at trial, that argument will be
deemed to have been waived on appeals this rule applies in both
criminal and civil cases." State v. Moses, 102 Hawai'i 449, 456,
77 P.3d 940, 967 (2003). We have also previously stated that
issues not raised at trial will not be considered on appeal
wunless justice so requires.” y ice Dep't,
96 Hawai'i 243, 251, 30 P.3d 257, 265 (2001). Taxpayer proffers
no reason for us to address this issue.”

vr.
a

In support of Director's argunent 2(a), that Taxpayer
was engaged in a business activity with the object of gain or
economic benefit, the Director contends that the lease agreement
between Taxpayer and the landlords provided Taxpayer with several
rights including (1) Limiting the landlord from renting other
properties within a one-mile radius to companies in direct
competition with Taxpayer, (2) allowing Taxpayer to assign a

sublease without prior consent of the landlord to another

 

   

our xe
unambiguous and,
Anapposite.

ng of HRS § 237-2 indicates thet the statute is plain and
jochy Taxpayer's argument for strict construction is

 

12
‘***FOR PUBLICATION*#*
franchisee, and (3) giving Taxpayer responsibility for liability

or enforcement of the provisions in the agreement.
The Director further asserts that the sublease
agreenent between the Taxpayer and the franchisees provided
Taxpayer the economic benefits of (1) relieving Taxpayer from
monetary responsibilities contained in the lease agreement such
as advance rental payment, monthly rental payment, utility fees,
security deposit payments, common area charges, maintenance fees,
insurance fees, liens, taxes, and rental escalations, and

imposing these responsibilities on the franchisee; (2) absolving

 

‘Taxpayer from performing all obligations under the lease
agreement including obtaining fire and liability insurance,
indennifying the landlord for certain acts, obtaining the proper
permits and licenses to operate the Subway Sandwich shop, and
repairing and maintaining the property, and placing the
obligations on the franchisees (3) authorizing Taxpayer to
terminate the sublease on ten days’ written notice to the
franchisee upon the non-perfornance of certain terms of the
sublease agreement, and upon termination of the sublease,
requiring the franchisee to surrender the leased premises to
Taxpayer as well as directing that the franchisee be liable to
the Taxpayer for the balance of the rent; (4) providing that the
franchisee seek the consent of Taxpayer in order to sublease the
property to another franchisee and that Taxpayer’s consent not

release the franchisee from its obligations under the sublease

13
‘#+*FOR PUBLICATION*#*
a
agreement; (5) authorizing Taxpayer to enforce the provisions of
the lease agreement with the landlord for the benefit of the
franchisee; and (6) allowing Taxpayer to terminate and evict @
franchisee expeditiously.

In response, under its argument 1(b), Taxpayer avers
that it “did not purport to be engaged in @ business activity for
gain or economic benefit." According to Taxpayer, “[ilt had no
assets, employees, or offices in Hawaii(,] . - « [and] did not
treat the subleases as assets on its books, nor recognize{]
rental incone or rental expense from its passive role in DAI's
franchise agreement.” Furthermore, Taxpayer asserts that it “did
nothing more than sign the [master lease(,)” without an intent
to receive compensation, and “did not receive any fees or other
consideration from either DAI or the franchisees for its role in
facilitating the franchise arrangement.” Taxpayer maintains that
the examples of economic benefit cited by the Director “describes
benefits that run to DAI,” and not to itself.

8
HRS § 237-13 (Supp. 2005) provides in relevant part

that “[t]here is hereby levied and shall be assessed and

collected annually privilege taxes against persons on account of
ths and other activities measured by the

application of [prescribed] rates against values of products,

14
‘+*4FOR PUBLICATION*#*

ee

gross proceeds of sales, or gross income{.]"' As stated supra,

HRS § 237-2 includes within the term “business” “all activities

 

(personal, professional, or corporate), engaged in or caused to
be engaged in eB aii nomic bs ithe
direct or indixect, but does not include casual sales.”

(Enphases added.) As previously noted, HRS § 237-13(10) levied
*[ulpon every person engaging or continuing within the State in
any business, trade, activity, occupation, or calling . . . a tax

equal to four percent of the gross income thereof.”

 

We have previously stated that “Hawaii’s [GET] is 2
gross receipts tax on the privilege of doing business in Hawai'i,
thus Hawaii's (GET) tax is a privilege tax.” Baker & Tavlor, 103
Hawas's at 365, 82 P.3d at 810. See also In re Tax Appeal of
Grave Land Escrow, Ltd., 57 Haw. 436, 447, 559 P.2d 264, 272
(1977) (holding that the GET “is based on the privilege or
activity of doing business within the State and not on the fact

of domicile”). “In enacting . . . (the GET), the legislature

 

+ ins § 237-3 (2001 Repl.) defines the term “gross income,” in
pertinent part, as follows

 

 

{6} 08
as compensation for personal services

ceipts, cash or accrued, of the taxpayer received
the cross receipts

Sise*gnd the value proceeding or accruing from the sale of

Esngibie pecsone) property, oF services or both, and ald

 

 

‘Hisnaed ine including interest, diecount, rentals,
Poyaities, fees, or other exclurents however designated and
Without any deductions on account of the cost of property
Bolg" tne ost of materials uses, labor cost, taxes,

ror discount paid or any other expenses

 

 

(tphases added.)

15
+**FOR PUBLICATION*+*

 

cast a wide and tight net.” In re Tax Appeal of Island Holidavs,
Ltd., 59 Haw. 307, 316, 582 P.2d 703, 708, reh'a denied, 59 Haw.
408, 582 P.2d 709 (1978). The tax is “imposed upon entrepreneurs
for the privilege of doing business,” and “applies at all levels
of economic activity . . . and to virtually all goods and
services.” In re Tax Appeal of Cent. Union Church, 63 Haw. 199,
202, 624 P.2d 1346, 1349 (1981).

In Baker & Taylor, the taxpayer, a Delaware corporation
with its principal place of business in Charlotte, North
Carolina, argued that the assessment of GET on the sale of goods
was in error because title of the goods passed on the mainland
and, thus, no sale of goods occurred in Hawai'i to justify the
imposition of the GET. 103 Hawai'i at 365-66, 82 P.3d at 810-11.
Although the taxpayer in Baker ¢ Tavlor did not have any offices,
employees, or real property in Hawai'i, we held that, inasmuch as
the taxpayer actively engaged in soliciting sales within this
state, the taxpayer received the “benefits and protections of the
laws of the [S]tate, including the right to resort to the courts

for the enforcement of its rights.” Id. at 366-67, 82 P.3d at

811-12 (quoting Int’ Shoe Co. v. Washinaton, 326 U.S. 310, 320,
(1945)). Accordingly, we concluded that a sufficient basis

existed in that case to impose the GET. Id. at 367, 82 P.3d at
ei2.
‘The Director asserts that Taxpayer does have assets

within Hawai‘l, namely, the various lease and sublease agreements

16
‘***FOR PUBLICATION*®

 

which Taxpayer declared as assets in its federal income taxes.
We also note that the standard form lease agreement does state
that “[Taxpayer’s) assets consist almost exclusively of leases,
subleases, and options to purchase leased premises.”

However, Taxpayer maintains that no gain or econonic
benefit accrued because it did not treat the subleases as assets,
nor realized income on such activities. In In re C, Brewer, the
taxpayer performed managerial and adninistrative services for
wholly-owned subsidiaries. 65 Haw. at 241, 649 P.2d at 1156. In
performing the services, the taxpayer incurred certain “overhead
and administrative expenses.” Id. at 241 n.1, 649 P.2d at 1156
nul, Such expenses were treated as contributions to capital of
the wholly owned subsidiaries and no consideration was paid to
the taxpayer. Ids at 242-43, 649 P.2d at 1157. After the
Director assessed the GET, the taxpayer paid under protest and
appealed to the tax appeal court, which affirmed the Director's
determination. Id. at 243, 649 P.2d at 1157,

On appeal, this court held that, despite the lack of
compensation, reimbursement, or other consideration from the
taxpayer’ s wholly-owned subsidiaries, or the fact that no income
was accrued on the taxpayer's books and records, the GET was
properly imposed. Id. at 241, 649 P.2d at 1156. In re C, Brewer
reasoned that “[t)hough it may be axiomatic that 2 texpayer can
order ite affairs in any manner not proscribed by law to minimize

the impact of taxation, the Director is by no means bound by its

vv
‘+**FOR PUBLICATION*#*

 

accounting practices[,]" id. at 246, 649 P.2d at 1158-59, and
that the “[a]ctualities and consequences of a comercial
transaction, rather than the method employed in doing business,
are controlling factors in determining Liability(,]" id. at 246,
649 P.2d at 1159 (quoting In-xe Kobayashi, 44 Haw. 54, 590, 358
P.2d $39, $43 (1961)).

c.

In response to Taxpayer’s contention that it did not
realize rental income for its passive role in the leasing
transactions, the Director states that “[w]hile the (Taxpayer)
@id not physically receive the sublease rental payments pursuant
to the [sublease agreements,) . . . the [Taxpayer] constructively
keceived these amounts by virtue of being the sublessor.”
(Emphasis in original.) The Director argues that “{Taxpayer]
does not need to receive physically the rental payments for the

Payments to be treated as gross income.” Citing to this court’s
opinion in In re Tax Appeal of Aloha Airlines, Inc., 56 Haw. 626,
547 P.2d 586 (1976), the Director maintains that “income is taxed
to the party who earns it and that lability may not be avoided
by an anticipatory assignment of income.” See also Lucas v.

Earl, 281 U.S. 111, 113-14 (1930) (holding that husband’s entire
salary was taxable notwithstanding agreement with wife to hold
any acquired property as joint tenants); Palmieri v. Comm'r, 27
T.C. 720, 721 (1957) (concluding that “one who truly possesses

the right to receive incone is taxable thereon even though the

38
‘++*P0R PUBLICATION*#*

 

actual receipt of the income is channeled directly into the hands
of another”); Fouche v. Comm'c, 6 T.C. 462, 469 (1946) (holding
that under the doctrine of constructive receipt, actual receipt
of payment is not required for the recognition of income).

In Aloha Airlines, the taxpayer airline authorized its
agents to sell air passenger transportation in exchange for a
commission based on a percentage of the fares and charges. 56
Haw. at 626, 547 P.2d at 586-87. Under the agreement between the
taxpayer and the agents, proceeds of the sale of airline tickets,
less the applicable commissions, were to be held in trust for the
taxpayer until accounted for by the taxpayer. Id, at 627, 547
P.2d at 587. The agents were not entitled to a commission unless
the passenger was actually transported under the terms of the
airline ticket. Id, The commissions were not required to be
remitted by the agents and never came into the taxpayer’s
possession. Ids

The taxpayer in Aloha Airlines was subjected to gross
income tax under HRS chapter 239, based on an amount which
included the commissions to the agents. Id. The taxpayer argued
that the commissions never became property of the taxpayer and
therefore should not have been included as part of its taxable
gross income. Id, On appeal, this court noted that “the agents
were not entitled to their commissions unless and until the
service was actually rendered by taxpayer.” Id. Hence, the
court stated that such amounts constituted gross income of the
taxpayer. Ide

1s
***FOR PUBLICATION***

 

‘The instant case, like Aloha Airlines, demonstrates the
application of the anticipatory assignment doctrine. Under this
doctrine, Taxpayer cannot be excused from its liability for GET
by channeling the sublease payments directly to the landlords.
To permit Taxpayer to do so would directly subvert the overall
scheme of HRS chapter 237 to tax “all levels of economic
activity.” Cent, Union Church, 63 Haw. at 202, 624 P.2d at 1349.
Furthermore, we are not convinced that Taxpayer had a “passive
role” in the subleasing transactions involved. As discussed
infra, Taxpayer alone may enforce the sublease agreements and
derives economic benefits from these agreements. Moreover, we

are not persuaded by Taxpayers argument that its claimed

 

“passive role” in the subleasing transaction excuses Taxpayer
from its GET liability.
D

n afforded

 

The words “gain or economic benefit” have b

broad meaning in other jurisdictions. In CBET Operations Co, ws.

 

Tax Comm’: of the State of W, Virginia, 564 S.E.2d 408 (W.Va,
2002), a case concerning the imposition of an excise tax’ for the
leasing of data-processing equipment, the Supreme Court of

Appeals of West Virginia, quoting its previous decision in So.

States Coop., Inc. v. Dailey, 280 $.£.2d 821, 628 (W.Va. 1981),
% the statute involved in CBT Operations Co. vs Tax Com'r of the

State of W Virainia, 564 5.6.24 408 (W.Va. 2002), ie ciniler to MRS § 237-2
and defined “business,” in relevant part, as “any’ activity engaged in by any
persone " a ben
Advantage, and includes any purposefua revenue generating activity «+
Nac Coae § 1i-15a1(1) (1986) (emphasis added).

 

20
‘+*#FOR PUBLICATION*#*
noted that the phrase “gain or economic benefit” should be

afforded broad meaning:

It cannot seriously be contended that Southern states
derives no gain or economic benefit from its wholessle
trensactione with its affiliated cooperstivess It is true

the transfers of property from Southern States to its
local cooperatives are nade on an actus) cost basis, and
therefore Southern States derives no direct prosit from the
trensaction

SLCC Goss not refer te “erofit’, but to “asin or

Ey and includes the benefits Southern
States receives fve= deaiings with ite cooperatives.

 

 

 

     

   

 

BET, 564 S.£.2¢ at 413-14 (emphasis added) (citations omitted).
See also Honnar-Vavter, Inc, v. Johnson, 173 A.2d 141, 144 (Me.
1961) (concluding that “[ojne may engage in a business activity
with an object of ‘gain, benefit or advantage’ and not
necessarily for profit"); State ex rel, City Loan & Sav. Co. of
Wapakoneta v. Zellner, 13 N.E.2d 235, 238 (Ohio 1938) (same).
Here, the Director assessed the GET against Taxpayer
for the gross income attributed to it from subleasing property to
DAI’s franchisees under HRS § 237-13(10) that was derived from
the lease and sublease rental rates. The record indicates that
Taxpayer, through its sublease agreements, acquired substantial

economic benefits from these agreements including, inter alia,

 

the power to prohibit landlords from leasing to DAI's

competitors, the right to assign subli

 

es without a landlord’ s
consent, the capacity to enforce provisions of the sublease
agreement, the benefit of being relieved from monetary
responsibilities arising from the sublease, the authority to

enforce terms of the lease against the franchisees by an

2a
‘+*4FOR PUBLICATION***
a

expedited eviction process, the power to hold 2 franchisee
responsible for obligations under the sublease agreement even if
the franchisee opts to sublease the property to another
franchisee, and the ability to enforce the terms of the sublease
agreement against the landlord on behalf of the franchisee, The
Director also correctly contends that “an out of state
corporation or individual does not have to be domiciled in the
State to be subject to the GET.” See Gravco, 57 Haw. at 447, 559
P.2d at 272 (stating that the GET “is based on the privilege of
doing business in the State and not on the fact of domicile”); In
re Tax Appeal of Heftel Broad, Honolulu, Inc., 57 Haw. 175, 182-
83, 554 F.2d 242, 247-48 (1976) (holding that an out-of-state
lessor who contracted with an in-state lessee for film and
telecast rights was engaged in an in-state activity subject to
the cer).

Hence, inasmuch as Taxpayer gained or economically
benefitted from the subleasing transactions at issue, we conclude

that the Director's assessment and imposition of the GET for

 

‘Taxpayer's subleasing activities was props

 

the Director algo states that the legislative history of HRS
chapter 257 “indicates thet the legislature recognized that leasing and
Soblessing of the same parcel of property resulted in the imposition of the
Get en borh the lessor's and sublessor’s rental income resulting in tax
pyreniding.”. {Citing Sen. Stand. Con. Rep. No. 804, in 1997 Senate Journal,
Et ieit and Hee, Stand. Com. Rep. to. 2665, in 1997’ House Journal, at 1755)
Bas € 237-16-2 (Supp. 2005) was enacted in order to “alleviate the pyreniding
Of the {GEt] on resi property lease erensactions.” Sen. Stand. Com. Rep, No.
G04, in 199? Senate vournel, st 1211. Under the statute, sublessors are
Silowed te reduce their gross incene from sublease rents on s phased-in basis
by-an anount up to sevenseighthe of the rent paid to their own lessors. HRS
ei257-16.5. ve chserve that “thie court has Used subsequent legislative
Ristory of amendments to confizm its interpretation of an earlier statutory
(continued:

 

 

 

 

 

22
‘***FOR PUBLICATION***
vit.

In its argument 2, Taxpayer states that the substance-
over-form doctrine should apply in the instant case. According
to Taxpayer, its subleases were security instruments for DAI and
therefore, its GET liability should be based on the substance,
rather than the form, of DAI’s franchise agreement. Taxpayer
relies on this court’s holding in In xe Tax Appeal of Hawaiian
Tel. Cox, supra, to support its position.

In Hawaiian Tel., -the taxpayer provided telephone
services to the United States Government (the Government) at
tariff rates approved by the Hawai'i Public Utilities Conmission.
57 Haw. at 479-82, 59 P.2d at 285-87. The parties entered into
an agreement wherein the taxpayer was permitted to utilize
existing teleconmunications equipment and facilities owned by the
Government. Id, The taxpayer would then bill the Government, in
@ net amount determined by applying a credit for the use of the

equipment to the approved rate. Id, at 482, 559 P.2d at 287.

 

SC, continues)
provision.” Franke v. Citv ¢ County of Honolulu, 74 Haw. 328, 340 n.6, 843

P.2d 668, 674 n-6 (1993). The legislative history confirms that the GET was
isposed at different levole of the sublessing chain:

Your Committee finds thet this bill solves a long-time
structural problen concerning the application of the [¢eT]
in multiple leasing siteations fe there
subles
andthe ping in-an solve
AIT of this tax i8 then pa

 

fo the consumer

‘his bill erovides that multiple taxation of the sane
arose roseede will not Soeur

Sen. Stand. Com. Rep. No, 804, in 1997 Senate Journal,
adsed) -

at 1211-12 (emphas

 

23
‘***FOR PUBLICATION***

 

‘This net amount was then used by the taxpayer as the basis for
determining its public service company tax," while applying
substantially the full amount of the credit to its “Rent for
Lease of Operating Property” account. Id.

In Hawaiian Tel., the Director argued that the taxpayer
should be responsible for the public service company tax on the
grose amount of its tariff charges, without a deduction for the
offsetting credit. According to the Director, two separate
transactions were involved, namely, (1) a service contract under
which taxpayer was paid the gross anount of its tariff charges
for the services it rendered, and (2) a lease arrangement whereby
the taxpayer paid rent to the Government for use of the equipment
and facilities. Id, at 486, 559 P.2d at 289, The tax appeal
court in Hawaiian Tel, agreed with the Director and concluded
that the assessment based on the gross amount was proper. Ids

On appeal, this court disagreed, stating that “tax
Liability is governed by the substance of a transaction, rather
than its form.” Id, at 488, $59 P.2d at 290 (citing Ince
Kobayashi, 44 Haw. at 590, 358 P.2d at $43). According to

 

ay thew of paying GET, public utilities were required to pay the
state a public service Company tak under HRS § 238-5(a) (Supp. 1989) which
stated, in pertinent part

‘there shall be levied and assessed upon each public utility
a 'tax of such rate per cent of its gross income each
year’ trom its public utility business ag shall be determined
Yn'the manner hereinafter provided. Zhe tax incoses by this
section is in lieu of ell taxes other than these below set

 

   

ug, and iv apeans of taxing the personal property of the
Public utility, tangible end intangible, incluaing going
fencers value...
(emphasis added.)

24
+**FOR PUBLICATION*#*

 

Hawaiian Tel., the substance-over-form doctrine may be asserted
by a taxpayer if it can be shown that a tax advantage was not the
motivating factor in the adoption of the form in controversy.
In

It was held that the taxpayer properly paid the tax on
the net amount less the credit because, in substance, the two
agreements were “inseparable parts of a single transaction.” Id.
This court observed that the equipment and facilities at issue
were not the taxpayer's properties, that the taxpayer was not
required to pay rent, credited anounts were not business expenses
of the taxpayer, tariff rates did not consider the fact that the
properties were owned by the Government, tariff rates were
scheduled for administrative convenience, the Federal
Communications Commission rules compelled the taxpayer to follow
the accounting methods it employed, and the accounting did not
reflect the substance of the transaction between the taxpayer and
the Government. Id, at 491, 559 P.2d at 292. Hence, this court
decided that although a lease agreement may have existed in form,
the substance of the transaction in that case dictated that the
gross income of the taxpayer was the net return from the
Government, as established by an agreed upon compensation
formula, and that the taxpayer’s tax liability should be based on
that net amount. Id. at 491-92, 559 P.2d at 292.

According to Taxpayer, similar to Hawaiian Tel., the

sublease transactions were fashioned as they were because DAL

25.
***FOR PUBLICATION*#*

 

uses “the same security arrangement for Hawaii franchisees that
was used for all other DAI franchisees nationwide” which “served
an administrative convenience and consistency purpose to benefit
DAI.” Taxpayer further states that “(t]his is not @ typical
leasing transaction,” and that, like Hawaiian Tel., the lease and
subleases were “inseparable parts of a single transaction.”
Taxpayer also relies on this court's holding in In ze
‘Jax Appea) of Ulupalakua Ranch, Inc. 52 Haw. 557, 481 P.2d 612
(1972). In Ulupalakua Ranch, the seller of ranch property

required that the purchase be in the form of a sale of the
holding company’s capital stock, rather than by @ direct sale of
assets, including the livestock. Id. at 558, 481 P.2d at 613.
Because the prospective purchasers, the Coberlys, lacked the
capital to purchase the capital stock outright, they approached
Erdman, who would later form Ulupalakua Ranch, Inc. (URI), the
taxpayer, proposing that he acquire the capital stock using the
Coberlys’ funds supplemented by funds of his own. Id, Under the
agreement, after the sale was consummated, the Coberlys would
have the right to purchase a portion of the ranch along with the
Livestock therein for a specified amount from URI. Ids.
According to Erdman, he decided to use a corporation so that he
could operate the remaining portion of the ranch in a corporate
form. Id, at $61, 481 P.2d at 614. Following the sale, (1) URI
dissolved the holding company, (2) a trustee in dissolution was

appointed by the state director of regulatory agencies, (3) the

26
‘+*+FOR PUBLICATION*#*

 

trustee conveyed to URI all the assets of the holding company
except for a portion reserved for payment of debts and expenses,
and (4) URI executed and delivered to the Coberlys a deed to a
portion of the ranch and @ bill of sale of the livestock thereon.
Id. at 559, 481 P.2d at 613.

In Ulupalakua Ranch, the Director assessed GET against
URI, positing that the transaction should be treated as a sale of
‘tangible personal property. The tax appeal court disagreed with
the Director, concluding that no sale in substance occurred
because an agreement between URI and the Coberlys existed for the
joint purchase of the assets of the ranch with the object of
dividing the assets between URI and the Coberlys. Id. at 560,
481 P.2d at 614. The tax appeal court found that the transfer of
the livestock was only made because the seller insisted that the
transaction be in the form of a stock sale instead of a direct
sale of assets. Ids

‘This court upheld the tax appeal court's decision,
indicating that the substance of the transaction, rather than its
form, governed in determining URI’s liability. Id, It was
decided that in order for URI to invoke the substance-over-form
doctrine, it must show “that consideration of a tax advantage was
not the motivating factor in the adoption of the form in
controversy.” Id, This court further concluded that “[wJhere @
taypayer resorts to a particular form to gain some specific tax
advantage for himself, he is held to abide by the form.” Ide

(citing Higgins v, Smith, 308 U.S. 473 (1940).
27
 

‘*FOR PUBLICATION*#*

 

The Ulupalakua Ranch court observed that URI and the
coberlys could have purchased the capital stock jointly, and
divided the assets between themselves in order to avoid the
formality of a sale. Id. at S61, 481 P.2d at 614. However,
because Erdman had chosen to run the ranch in a corporate form,
and for no other reason, there was a sufficient showing that tax
considerations were not the motivating factor behind the
formation of the cozporation and the form of the transaction.
Ida at 561-62, 481 P.2d at 614-15, Hence, this court concluded
that no taxable event occurred on the execution of the deed
between URI and the Coberlys to trigger the imposition of the
cer.

According to Taxpayer, both Hawaiian Tel. and
Wupalakua Banch are applicable to the instant case. Taxpayer

states that in these cases, this court “disregarded the form of

 

the transactions in favor of their actual substance

notwithstanding the fact that the [taxpayers in those cases]

 

derived clear economic benefit from the form u However, we
are not persuaded by this contention.
As noted before, Taxpayer argues that the transactions

were made simply for “administrative convenience and

 

 

consistency.” But as said earlier, under its circular, OA lists
‘Taxpayer as a corporation that may act as 2 sublessor of
restaurant premises, that Taxpayer is empowered to terminate the

subleases and require the franchisee to vacate the premises

28
‘+##P0R PUBLICATION*#*

 

through legal action, and may be involved in litigation in
various jurisdictions with respect to certain leases and
subleases. Hence, DAI has recognized that Taxpayer is 2 separate
corporate entity that can sue and be sued for breach of the lease
agreenents. Such arrangement goes beyond what Taxpayer terms
“administrative convenience and consistency,” and therefore, we
cannot agree with Taxpayer’ s argument.

We also do not concur with Taxpayer’s attempt to
characterize the subleases as security instruments for DAI. The
record indicates that DAI is not @ party to the subleases and
that any default in the subleases may only be enforced by
Taxpayer. As the Director points out, the primary arrangement
between DAI and its franchisees is contained in the franchise
agreenent. In the event of a default of the franchise agreement,
DAT is provided with renedies under that document, including the
reversion to DAI of any rights conferred on the franchisee, the
right to recover any lost royalties, and the right to recover
costs and expenses in reestablishing the franchise. If a

security interest exists between DAI and its franchisees, the

 

interest arises from the franchise agreement and not from the
subleases. Accordingly, we hold that the substance-over-form
doctrine is not applicable to the instant case.
vii.
In its argument 3(a) and (b), Taxpayer contends that

assuming, arquendo, it was engaged in a business activity, any

23
+**FOR PUBLICATION*#*
gross receipts from rental income are exempt under the

reimbursement provisions of HRS § 237-20. As earlier stated, HRS

§ 237-20 provides, in pertinent part, that “(t]he reimbursement

of costs or advances made for or on behalf of one person by
another shall not constitute gross income of the latter, unless
ving su nt a: ves additi
si n .dvances.”

(Emphases added.) We first note that, in general, “exemptions
from taxation are strictly construed against the taxpayer.”
Grace Bus. Dev. Corp, vy, Kamikawa, 92 Hawai'i 608, 613 n.4, 994
P.2d 540, $45 n.4 (2000) (quoting In _re Tax Apes) of Aloha
Motors, 56 Haw. 321, 326, 536 P.2d S1, 94 (1975)

In Aloha Motors, this court considered whether payments
received by a taxpayer, seller of automobiles, for warranty work
performed pursuant to an agreement with the manufacturer of the
vehicles, qualified as reimbursements under HRS § 237-20 or
constituted gross income subject to the GET. This court
explained that HRS § 237-20 provides an exemption from the GET
for reimbursements. 56 Haw. at 326, 536 P.2d at 95, It was

said:

 

‘The relevant provision does not modify the general
proposition that in the imposition of the [GET], costs are
Tneluded as part of one’s gross income. The statute
provides: “reimbursement of costs or advances... shall
fot constitute gross incone of the latter, unless the person
Feceiving such reisbursenent also receives additional
monetary considerstion for making such costs or advances.”

‘Thus, the exemption {ron the IGET prevails unless the
‘fecipient is paid “addielons] sonetary consideration for
making such costa or advances”, In other words, it the
[acipient i2-reinbursea the ‘costs or asvances” D1uE

 

 

30
‘+**POR PUBLICATION***

ladditiona} monetary consideration for making such costs or
3

 

 

Id at 326-27, 536 P.2d at 95 (quoting HRS $ 237-20) (emphasis
added). Utilizing that analysis, this court held that the
payments made to the taxpayer did not constitute reimbursements
under HRS § 237-20 because that statute “was intended to cover
ervil m d party to the

pavers for wh: ration
and were then subsequently reinbu: bs “od
at 327, 536 P.2d at 95 (emphasis added). Furthermore, the tax
appeal court strictly construed HRS § 237-20 by defining the term
“costs” as used in that statute to mean “a monetary amount paid
out by the Taxpayers for a property or service furnished by a
third party,” that did not include indirect expenses. Id. at
331, $36 P.26 at 97-96. On appeal, this court adopted the
reasoning of the tax appeal court. With regard to the definition
of “costs,” this court, quoting the tax appeal court, stated as

follows

 

Ttens of expenses, direct or indirect, differ with each
Business entity and from business to business. -. -
Verification of these costs and expenses could weil ‘be
costly on the part the Director. The result will be to
Impose upon the Director the erenen

Financial burden of audsting and ex
expense, direct or indirect, for each piece of warranty
work. Such an administrative task would make it extremely
Gifticult, if not impossible, to adninister and to entorce
‘the tax laws... . Economy in administration ies proper
factor for conaideration in the assessment cf taxes

Henueford v. Silas Mason Co., 300 0.5. 577, 588 (1937).
Id. Accordingly, this court affirmed the tex appeal court’s

 

 

 

decision.

31
‘**FOR PUBLICATION***

 

The exenption under HRS § 237-20 was determined by this
court to apply in Ince Tax Appeal of Pac. Mach, Inc, 65 Haw.
45, 647 P.2d 268 (1962) [hereinafter, Pacific]. In Bacitic, the
taxpayer entered inte an agreement with an advertising agency to
advertise the manufacturer’s equipment. Id. at 45-46, 647 P.2¢
at 289. Under a separate agreenent, the manufacturer,
caterpillar, agreed to bear fifty percent of the advertising
expenses. Id, at 46, 647 P.2d at 289. The taxpayer in that case
billed caterpillar for fifty percent of the advertising costs,
which Caterpillar reimbursed. Id, The Director assessed GET on
the reinbursemente the taxpayer received from Caterpillar. The
tax appeal court ruled in favor of the taxpayer, finding that the
billing to Caterpillar did not include any costs for overhead,
salaries, or other internal expenses or profit incurred by the
taxpayer. Id, The tax appeal court also found that the
reimbursements were not for payment for services perforned by the
taxpayer, or for internal costs incurred by the taxpayer in
connection with advertising Caterpillar products. Id, The tax

appeal court concluded that the taxpayer was not taxable on the

 

reimbursements. Jd. Based on the tax appeal court's finding:
this court affirmed.

In the instant case, Taxpayer avers that the
contractual relationships in Pacific “are very similar to the
contractual relationships in (Taxpayers case]." It appears that

‘Taxpayer characterizes the lease and sublease transactions as one

32
‘***FOR PUBLICATION*+*
eee

where the landlords provided rental space to Taxpayer, for which
‘Taxpayer paid a monetary consideration, and Texpayer was
reimbursed by the franchisees.

However, Taxpayer's analogy fails for two reasons.
First, Taxpayer has not paid any costs or made any advances to
the landlords. The record before us does not indicate that
Texpayer transmitted any monetary amounts to the landlords.
‘Taxpayer simply maintains that “the franchisee agrees in advance
to ‘reimburse’ [Taxpayer] for all rents and costs under the
[lease] by executing the [f]ranchise [algreement,” but fails to
demonstrate that any monetary advances were made for the
subleases in question. Second, the record does not indicate that
‘Taxpayer received a reimbursement of a cost or advance. The
sublease document required a franchisee to pay the landlord.
Accordingly, we hold that the reimbursement provision of HRS §
237-20 does not apply in the instant case.”

cra

With regard to Taxpayer's first argument on cross~
appeal, Taxpayer atates that any services that were performed
were performed by FRELC, and not by Taxpayer, for the benefit of
DAI and its franchisees. Taxpayer maintains that Taxpayer,
FRELC, and DAI “are legally separate and distinct entities{,]”

and that it was error for the court to impose tax liability based

 

 

% We agree with the Director's proposition that Taxpayer"
3c) need not be addressed as the Director correctly states that the
*[plroposed rules have not been adopted and do not have the force of lew."
Hence, we do not discuss this argument.

 

argunent

 

33
+**POR PUBLICATION*#*

 

on services performed by FRELC. However, the Director asserts
that [t]he stipulation resolved the issue of (Taxpayer's) tax
Liability based on the value of services that [Taxpayer]
provided.”

We first note that the parties are bound to the

stipulation unless such agreement is set aside. Office of
Disciplinary Counse] v, Lau, 79 Hawai'i 201, 204, 900 P.2d 777,
780 (1995). We recognize that stipulations may be set aside “in

 

order to prevent manifest injustice.” Id, The parties do not

argue that the stipulation must be set aside or proffer any
reason for doing so.

‘The imposition of the GET for services falls within the
purview of HRS § 237-13(6) (Supp. 2005) which states in pertinent

part as follows:

Upon every person engaging or continuing within the State in
any service Business cr calling including professional
Services not otherwise specifically Sader this,
chapter, there ie Iikeuise hereby levied and shall be
Sscessed and collected a tax equal to four per cent of the
Gross income of the business(.1

HRS § 237-13(6) (A). We note that, based on the discussion supra,

   

  

‘Taxpayer was involved in a “business” under HRS § 237-2.
However, the Director never imposed GET on services performed by
Taxpayer or FRELC. The court, sua sponte, determined that the

‘Taxpayer should be liable for GET on services performed.

 

‘The record before us is insufficient to decide the
issue of Taxpayer's lability for services rendered. While the
parties have stipulated to the value of services provided by

Taxpayer to DAL, genuine issues of material fact exist and were

34
‘*#*FOR PUBLICATION***
ee

not resolved or considered as to the location of the services,
the nature of the services, and the parties involved in these
services. For this reason, we remand for resolution of the

Assues involved in Taxpayer's cross-appeal.

 

For the foregoing reasons, we vacate the court’s
March 9, 2004 final judgment, and remand with instructions to
enter judgment in favor of the Director on the issue of
Taxpayer's GET liability for its subleasing activities, and for a
determination of Taxpayer's GET liability, if any, for services

as posed in Taxpayer's cross-appeal.

on the brief:

Hugh R. Jones and Damien A. Shwe ~—

Elefante, Deputy Attorneys
General, State of Hawai'i, 4
for appellant /cross-appellee. Cat Coane NA

Miki Okumura, Lindalee K.
Farm, and Donna H. Kalama qG—
(Goodsill Anderson Quinn &

Stifel) for taxpayer-appellee/ Voren.
cross-appellent. tte

 

35