(a) Section 235-37,
HRS, provides for the inclusion in the numerator of the sales factor of gross
receipts from transactions other than sales of tangible personal property
(including transactions with the United States Government). Under this section,
gross receipts are attributed to this State if the income producing activity
which gave rise to the receipts is performed wholly within this State. Also,
gross receipts are attributed to this State if, with respect to a particular
item of income, the income producing activity is performed within and without
this State but the greater proportion of the income producing activity is
performed in this State, based on costs of performance.
(b) As used in this section:
"Costs of performance" means direct costs determined in a
manner consistent with generally accepted accounting principles and in
accordance with accepted conditions or practices in the trade or business of
the taxpayer.
"Income producing activity" applies to each separate item of
income and means the transactions and activity directly engaged in by the
taxpayer in the regular course of its trade or business for the ultimate
purpose of obtaining gains or profit. Income producing activity does not
include transactions and activities performed on behalf of a taxpayer, such as
those conducted on its behalf by an independent contractor. Accordingly, income
producing activity includes but is not limited to the following:
(1) The rendering of personal services by
employees or the utilization of tangible and intangible property by the
taxpayer in performing a service;
(2) The sale, rental, leasing, licensing, or
other use of real property;
(3) The
rental, leasing, licensing, or other use of tangible personal property;
and
(4) The sale, licensing, or
other use of intangible personal property.
The mere holding of intangible personal property is not, of
itself, an income producing activity.
(c) Receipts (other than from sales of
tangible personal property) in respect to a particular income producing
activity are in this State if:
(1) The income
producing activity is performed wholly within this State; or
(2) The income producing activity is
performed both in and outside this State and a greater proportion of the income
producing activity is performed in this State than in any other state, based on
costs of performance.
(d) The following are special rules for
determining when receipts from the income producing activities described below
are in this State:
(1) Gross receipts from the
sale, lease, rental, or licensing of real property are in this State if the
real property is located in this State.
(2) Gross receipts from the rental, lease, or
licensing of tangible personal property are in this State if the property is
located in this State. The rental, lease, licensing, or other use of tangible
personal property in this State is a separate income producing activity from
the rental, lease, licensing, or other use of the same property while located
in another state; consequently, if property is within and without this State
during the rental, lease, or licensing period, gross receipts attributable to
this State shall be measured by the ratio which the time the property was
physically present or was used in this State bears to the total time or use of
the property everywhere during that period.
Example: Taxpayer is the owner of ten rental
motor vehicles. During the year, the total of the days during which each motor
vehicle was present in this State was fifty days. The receipts attributable to
the use of each of the motor vehicles in this State are a separate item of
income and shall be determined as follows:
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(3) Gross
receipts for the performance of personal services are attributable to this
State to the extent that such services are performed in this State. If services
relating to a single item of income are performed partly within and partly
without this State, the gross receipts from the performance of such services
shall be attributable to this State only if the greater proportion of the
services were performed in this State, based on costs of performance. Usually,
where services are performed partly within and partly without this State, the
services performed in each state will constitute a separate income producing
activity; in such cases, the gross receipts from the performance of services
attributable to this State shall be measured by the ratio which the time spent
in performing the services in this State bears to the total time spent in
performing the services everywhere. Time spent in performing services includes
the amount of time expended in the performance of a contract or other
obligation which gives rise to those gross receipts. Personal service not
directly connected with the performance of the contract or other obligation, as
for example time expended in negotiating the contract, is excluded from the
computations.
Example 1: Taxpayer, a road show, gave
theatrical performances at various locations in State X and in this State
during the tax period. All gross receipts from performances given in this State
are attributed to this State.
Example 2: The taxpayer, a public opinion
survey corporation, conducted a poll by means of its employees in State X and
in this State for the sum of $9,000. The project required six hundred employee
hours to obtain the basic data and prepare the survey report. Two hundred of
the six hundred employee hours were expended in this State. The receipts
attributable to this State are $3,000:
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