(a) Section
237-20,
HRS, provides that the reimbursement of a cost or advance made for or on behalf
of one person by the taxpayer shall not constitute gross income to the
taxpayer, unless the taxpayer receiving such reimbursement also receives
additional monetary consideration for making such cost or advance.
(b) This provision was enacted by Act 297,
Session Laws of Hawaii 1967 (Act 297). The Legislature believed that Act 297
"would result in increased clarity of language with respect to the taxability
of reimbursements. It is the intent of this bill that payments made by one
person through another without monetary gain to the latter shall not create a
taxable incident under the general excise tax law". S. Stand. Com. Rep. No.
877, 1967 Reg. Sess., Haw. S.J. 1230-1231 (1967); H.R. Stand. Comm. Rep. No.
497, 1967 Reg. Sess., Haw. H.J. 658-659 (1967). Act 297, however, has not
resulted in "increased clarity". Since the passage of Act 297, the courts,
department of taxation (department), and practitioners, have tried to
distinguish between "reimbursements" that are not gross income under section
237-20,
HRS, and the receipt of other payments that are included in taxable gross
income.
(c) Prior to Act 297, the
law regarding reimbursements (old law), read as follows:
Even though a business has some of the aspects of agency it
shall not be so regarded unless it is a true agency. Without prejudice to the
generality of the foregoing, the reimbursement by one person of the amount of
costs incurred by another constitutes gross income to the latter, unless the
person making the reimbursement was himself, as principal liable in that amount
to the third party who furnished the property, services and the like for which
the costs were incurred.
The old law provided that the reimbursement exemption was
applicable to amounts repaid to an agent (taxpayer) by its principal that
reimburse the agent for costs that the principal was liable for. Under the
current statute, and these rules an agency relationship is not required to
qualify for the reimbursement exemption; although the reimbursement exemption
may apply where there is an agency relationship.
(d) The Department issued the first of two
administrative guidelines, Taxability of Reimbursement of Costs or Advances
under Section 117-17.1 of the General Excise Tax Law, Chapter 117, RLH 1955, as
amended by Act 297, L. 1967 on June 17, 1968 (Taxability of Reimbursement,
1968). There are no substantive differences between section 117-17.1 and the
current statute.
Some of the principles and examples in these rules are drawn
from Taxability of Reimbursement, 1968.
(e) General Excise Tax Memorandum No. 5 was
issued by the Department on December 23, 1986 as interim guidance to administer
the current statute. These rules expand and clarify the concepts discussed in
General Excise Tax Memorandum No. 5 and the Department withdraws General Excise
Tax Memorandum No. 5.
