Hawaii Administrative Rules › Title 18 - DEPARTMENT OF TAXATION › Chapter 237 - GENERAL EXCISE TAX LAW › Subchapter 1 - DEFINITIONS; ADMINISTRATION › Section 18-237-1 - Definitions

Current through June, 2024
(a) As used in this chapter:
"Asset used in a trade or business" means tangible personal
				  property, used in the trade or business, of a character which is or has been
				  subject to the allowance for depreciation provided in section 167 of the
				  Internal Revenue Code of 1954, as amended, and which is not property of a kind
				  which is ordinarily included in the merchandise inventory of the taxpayer if on
				  hand at the close of the taxable year, or property held by the taxpayer
				  primarily for sale to customers in the ordinary course of a trade or business.
				  The term shall include, but is not limited to, machinery and equipment or
				  furniture and fixtures used in a trade or business.
"Business, " "engaging in business" includes all activities
				  (personal, professional or corporate), engaged in or caused to be engaged in
				  with the object of gain or economic benefit either direct or indirect, but does
				  not include casual sales.
"Casual sale" means an occasional, isolated, irregular,
				  infrequent or incidental sale or transaction involving tangible personal
				  property which is not ordinarily sold in the usual course of trade or
				  business.
(1) Application. Section
				237-13, HRS,
				subjects virtually every economic activity to the general excise tax. The sale
				of tangible personal property may be taxed either by subsection (1), (2), (10)
				or by section 23716, HRS. Subsection (1) imposes a tax upon manufacturers.
				Subsection (2) specifically imposes a tax upon the sale of tangible personal
				property. Subsection (10) imposes a tax upon any person engaging in any trade,
				business, activity, occupation or calling not otherwise included in section
				237-13, HRS.
				Section
				237-16, HRS, imposes a
				tax upon all retailers. Casual sales of tangible personal property, however,
				are not deemed to constitute doing business or engaging in business.
(A) When a person engaged in trade or
				business sells tangible personal property which is not usually carried in his
				merchandise inventory and the sales thereof do not show a pattern of conduct
				that he sells tangible personal property other than inventory merchandise, the
				transaction will be deemed casual and the gross receipts derived therefrom
				shall not be deemed to constitute gross income.
(B) When a person engaged in trade or
				business either sells capital assets (furniture, fixtures, equipment) used in
				his trade or business because of (1) obsolence; (2) replacement; (3) damage or
				(4) such capital assets are used as trade-ins, the transaction will be deemed
				casual and the proceeds derived from the sale, or the trade-in value will not
				be deemed to constitute taxable gross receipts.
Example 1
:
ABC Corporation is engaged in the retail chain-grocery
				  business and needs new display equipment. Experience has indicated that new
				  display equipment has a useful life of seven years. Accordingly, the taxpayer
				  purchases the new equipment and sells the old equipment. The foregoing sale of
				  the old equipment is not subject to the general excise tax inasmuch as the sale
				  is considered a "casual sale."
Example 2:
Rapid Service Laundry, in an overall plan for modernizing and
				  renovating its existing facilities, sells most of its laundry and dry cleaning
				  equipment and purchases new equipment as replacements. The foregoing sale of
				  laundry and dry cleaning equipment is not subject to the general excise
				  tax.
Example 3:
Oahu Pineapple Company, engaged in the pineapple canning
				  business, decides to discontinue its operations due to competition and major
				  setback suffered as a result of numerous labor disputes. As a consequence, most
				  of its pineapple processing and canning equipment are sold to other pineapple
				  canneries. The foregoing sale of equipment is not subject to the general excise
				  tax.
(C) When a person
				engaged in a trade or business exchanges (or transfers) but does not sell,
				merchandise or assets used in his trade or business pursuant to a plan of
				partnership, incorporation, reorganization (including statutory merger or
				consolidation), liquidation, etc., where no gain or loss is recognized under
				the Internal Revenue Code, the transaction will be deemed a casual transaction
				such as may occur in the following situations:
(i) Sole proprietorship to partnership.
				(owner becomes a partner);
(ii)
				Sole proprietorship to corporation. (IRC section 351, eighty per cent or more
				controlled by the individual transferor);
(iii) Partnership to corporation. (IRC
				section 351, eighty per cent or more controlled by the transferor
				partners);
(iv) Statutory mergers,
				consolidations, acquisitions in exchange for stock, recapitalization, and the
				like. (IRC sections 354, 361, and 368);
(v) Corporate liquidations. (IRC sections 332
				to 337); or
(vi) Distribution or
				liquidations of assets of an estate or trust to beneficiaries.
(D) When a person engaged in a
				trade or business sells assets which are of like nature as those carried in his
				merchandise inventory, the transaction will be deemed to have occurred in the
				usual course of business and will not be deemed a casual transaction.
Example 4
:
Hawaii Typewriter Company is a dealer in typewriters, adding
				  machines and other related office machines. It accepts trade-ins of used office
				  machines which are reconditioned by the Company and eventually sold as "used
				  office machines." The Company also withdraws new typewriters and adding
				  machines from its inventory for use in its own business office. The Company
				  capitalizes the cost of the machines and claims deductions under IRC section
				  167 for income tax purposes. In the ordinary course of business these office
				  machines, which were used in its business office, are also reconditioned and
				  sold by the Company as "used office machines." The sale of these machines, used
				  in the trade or business, are assets which are of like nature as that carried
				  in the merchandise inventory of the taxpayer, and therefore is subject to the
				  general excise tax.
Example 5:
XYZ Motors, an automobile dealer, in the ordinary course of
				  business withdraws a number of new automobiles from its inventory for use as
				  "company cars." XYZ Motors capitalizes the cost of these automobiles and claims
				  depreciation thereon for income tax purposes. The "company cars" are eventually
				  sold by XYZ Motors as used cars. The foregoing sale of "company cars" is
				  subject to the general excise tax.
Example 6:
Range Dairy Company operates a dairy farm having
				  approximately 500 milking cows. The Company capitalizes the cost of the milking
				  cows and claims deductions under IRC section 167 for income tax purposes. In
				  addition to its regular sales, the Company sells the milking cows whenever they
				  have served their useful purpose. The sale of the milking cows is subject to
				  the general excise tax.
(E)
				Where a person engaged in a trade or business sells tangible property which is
				not usually carried in his merchandise inventory, but by reason of the
				frequency, number and size, the sales thereof show a pattern of conduct that he
				sells tangible property other than inventory merchandise, the transaction will
				be deemed to be in the usual course of business and not a casual transaction.
Example 7:
Rentals Incorporated is engaged in the automobile rental and
				  leasing activity. Every three years or thereabouts, taxpayer makes way for new
				  rental automobiles by selling the old rental automobiles. The sale of the old
				  rental automobiles is subject to the general excise tax. Although the taxpayer
				  is not engaged primarily in the business of selling rental automobiles, there
				  are a sufficient number of recurring sales as to constitute engaging in the
				  business of selling automobiles. Thus, such sales are not considered "casual
				  sales."
Example 8:
Playtime Company derives part of its income from various
				  amusement and vending machines - pinball, cigarette, candy and related machines
				  - located in stores and amusement parlors. Playtime Company has agreements with
				  the foregoing stores and amusement parlors to the effect that receipts from the
				  machines would be divided on a certain percentage. To attract new customers and
				  remain in the market competitively, Playtime acquires new pinball machines
				  every six months and sells the used pinball machines. The sale of those pinball
				  machines is subject to the general excise tax.
(F) Where a person engaged in trade or
				business sells his merchandise inventory in bulk, other than in the ordinary
				course of his trade or business, or where the sale in bulk occurs upon the
				termination of a business activity which is one of several activities conducted
				by the business, the transaction will be deemed to have occurred in the usual
				course of the taxpayer's business and will not be deemed to constitute a casual
				sale.
Example 9:
Subsequent to losing its lease, ABC Drug Store decides to
				  terminate its business. Accordingly, the entire merchandise inventory is sold
				  in bulk to another drug store. The foregoing sale of merchandise inventory is
				  subject to the general excise tax.
Example 10:
S & S Bicycle Shop is engaged in the business of selling
				  and servicing bicycles. Due to lack of store space and decline in sales, the
				  taxpayer decides to terminate the 'sales" and concentrate on the service
				  activity of the business. The inventory of bicycles is sold in bulk to a large
				  department store. The foregoing sale of merchandise inventory is subject to the
				  general excise tax.
"Employee" means any individual performing services for a
				  person if the relationship between the individual and the person for whom the
				  service is performed is the legal relationship of employer and employee. For
				  purposes of this chapter, whether the relationship of employer and employee
				  exists will in doubtful cases be determined upon an examination of the
				  particular facts of each case. Factors indicating the existence of an
				  employer-employee relationship include, but are not limited to:
(i) Control and direction of the individual
				who performs the service, not only as to the result to be accomplished by the
				work but also as to the details and means by which that result is
				accomplished;
(ii) Continuous
				oversight and supervision of the individual who performs the service;
(iii) The right to discharge the individual
				performing the service; and
(iv)
				The furnishing of tools and the furnishing of a place to work to the individual
				who performs the service.