Hawaii Administrative Rules › Title 18 - DEPARTMENT OF TAXATION › Chapter 237 - GENERAL EXCISE TAX LAW › Subchapter 2 - LICENSES; TAX; EXEMPTIONS › Section 18-237-13(6)-07 - Three parties required

Current through June, 2024
(a) In order for
				Service Provider to be eligible for the intermediary services rate, there must
				be at least three parties - Service Provider, Intermediary, and Customer (the
				ultimate recipient of the services).
Example 1:
Intermediary, an auto body and
				  fender shop, enters into an agreement with Customer to paint Customer's car.
				  Intermediary contracts with Service Provider, an auto paint shop, to paint
				  Customer's car. Service Provider bills Intermediary and Intermediary bills
				  Customer. Customer pays Intermediary and Intermediary pays Service
				  Provider.
In order for Service Provider to be eligible for the
				  intermediary services rate, there must be at least three parties. There are
				  three parties in this example: Service Provider, Intermediary, and
				  Customer.
(b) There are at least three
				parties when there is a direct flow of services from Service Provider through
				Intermediary (or Intermediaries) and then to Customer, the ultimate recipient
				of the benefits, regardless of the number of Intermediaries. Both Service
				Provider and each Intermediary, except for the Intermediary providing the final
				services to the Customer, may qualify for the one-half percent intermediary
				services rate.
Example 2:
Q, a provider of parking services,
				  contracts with Customer to provide those services at an event. Q contracts with
				  R to provide the parking services. R then contracts with S to provide the
				  parking services. S bills R, R bills Q, and Q bills Customer. Customer pays Q.
				  Q pays R and R pays S.
In order for a Service Provider to be eligible for the
				  intermediary services rate, there must be at least three parties. With respect
				  to R's eligibility for the intermediary services rate, there are three parties:
				  R (the Service Provider); Q (intermediary); and Customer.
With respect to S's eligibility for the intermediary
				  services rate, there are four parties: S (the Service Provider); R
				  (intermediary); Q (intermediary); and Customer.
(c) Service Provider is eligible for the
				intermediary services rate when Service Provider receives payment from a
				third-party payer, rather than Customer.
Example 3:
Intermediary, an auto body and
				  fender shop, enters into an agreement to paint Customer's car. Customer is
				  insured by Insurance Company. Intermediary contracts with Service Provider, an
				  auto paint shop, to paint Customer's car. Service Provider bills Intermediary
				  and Intermediary bills Insurance Company. Insurance Company pays Intermediary
				  and Intermediary pays Service Provider.
In order for Service Provider to be eligible for the
				  intermediary services rate, there must be at least three parties. Service
				  Provider is eligible for the intermediary services rate when Intermediary
				  receives payment from a third-party payer, rather than Customer. There are four
				  parties: Service Provider, Intermediary, Insurance Company (the third-party
				  payer who pays Intermediary for the services furnished to Customer), and
				  Customer.
(d) The intermediary
				services rate is not applicable when there are only two parties.
(1) There are two parties when Intermediary
				is an agent of Service Provider.
Example 4:
Intermediaries, which are various
				  hotels, provide laundry services to Customers, who are guests at the hotels.
				  Service Provider is engaged in the business of providing laundry services.
				  Intermediaries enter into agreements with Service Provider to provide those
				  services. The agreements expressly state that Intermediaries shall be agents of
				  Service Provider. Customers fill out laundry slips and turn over the slips
				  along with the laundry to Intermediaries which turn them over to Service
				  Provider. Service Provider does the laundry, returns it to Intermediaries, and
				  bills Intermediaries for its services. Intermediaries collect from Customers
				  and remit the amounts billed by Service Provider, retaining 35 percent of the
				  billing as commission. Other than for negligence of Intermediaries or its
				  employees, Intermediaries are neither liable nor responsible to Customers for
				  any loss or damage to Customers' laundry. All claims for losses or damages and
				  questions regarding charges are directed to Service Provider. All uncollectible
				  amounts are charged to Service Provider.
In order for Service Provider to be eligible for the
				  intermediary services rate, there must be at least three parties.
				  Intermediaries in this example are agents for Service Provider because they act
				  on behalf of and subject to the control of Service Provider. Therefore, there
				  are only two parties in this example (1) Service Provider and (2) Customers and
				  the intermediary services rate is not applicable to the payments Service
				  Provider receive from Intermediaries. Service Provider is subject to the
				  general excise tax at the rate of four percent on the total amounts billed by
				  Intermediaries to Customers.
(2) There are two parties when Service
				Provider is an agent of Intermediary.
Example 5:
Intermediary, through licensing
				  agreements, franchises fast-food restaurants in Hawaii to Customers. The
				  licensing agreements provide that Customers shall have the right, license, and
				  privilege to use Intermediary's system at restaurants and that Intermediary
				  shall provide management services. Intermediary and Service Provider, a
				  subsidiary company, enter into an agreement which specifies that Service
				  Provider will provide the management services to Customers. Intermediary,
				  however, is engaged in a licensing business rather than a service business.
				  Service Provider bills Intermediary and Intermediary bills Customers.
In order for Service Provider to be eligible for the
				  intermediary services rate, there must be at least three parties. Service
				  Provider in this example is an agent for Intermediary because Service Provider
				  acts on behalf of and subject to the control of Intermediary. Under the
				  contract Customers are looking to Intermediary only to provide the services.
				  Intermediary provides the services to Customers through Service Provider, a
				  subsidiary company of Intermediary. Intermediary would never entrust its
				  management system to an independent third party, especially in the highly
				  competitive fast-food industry. Therefore, there are only two parties in this
				  example:
(1) Intermediary; and
(2) Customers. The intermediary
				services rate is not applicable to the payment Service Provider receives from
				Intermediary. Service Provider is subject to the general excise tax at the rate
				of four percent on the amounts received from Intermediary.
(3) There are two parties when Service
				Provider is an employee of the "intermediary."
Example 6:
Intermediary, an insurance adjusting
				  company, adjusts claims for Customer, an insurance company. Intermediary enters
				  into a contract with Service Provider, an insurance adjuster, to adjust claims.
				  The contract provides that Service Provider is controlled or directed by
				  Intermediary as to the means and manner of performance, has fixed time
				  schedules, a fixed salary or rates, and is furnished an office and supplies.
				  Service Provider bills Intermediary, and Intermediary bills Customer. Customer
				  pays Intermediary and Intermediary pays Service Provider.
In order for Service Provider to be eligible for the
				  intermediary services rate, there must be at least three parties. Service
				  Provider in this example is an employee of Intermediary because Service
				  Provider acts on behalf of and subject to the control of Intermediary.
See
, Chapter 233, HRS, relating to Tax Classification
				  of Certain Business Relationships. Therefore, there are only two parties in
				  this example:
(1) Intermediary and
(2) Customer. The intermediary
				services rate is not applicable to the payments Service Provider receives from
				Intermediary. Service Provider's salaries and wages, however, are exempt from
				the general excise tax under section
				237-24(6),
				HRS. Intermediary is subject to the general excise tax at the rate of four
				percent on the total amounts received from
				Customer.