Hawaii Enacts Economic Nexus Threshold for Income Tax and Other Significant Tax Legislation

Hawaii became the first state to enact a Wayfair economic nexus provision for income tax purposes, and this may be the beginning of a trend for more states to do the same.

By Betsy Tuck, SALT Manager

The 2019 Hawaii Legislative session has closed and there are several new tax laws that taxpayers should be aware of.[1]

Act 221 (SB495): Income Tax Economic Nexus – Last year, the legislature enacted economic nexus rules for its General Excise Tax that went into effect on July 1, 2018, and applied to taxpayers with sales in the state equal to or greater than $100,000 or for taxpayers engaging in 200 or more separate transactions with customers in the state.[2] Many states have imposed similar economic nexus standards for sales and use tax in response to the South Dakota v. Wayfair ruling. Just one year later, with the passage of Act 221, Hawaii became the first state that will now also impose economic nexus thresholds for income tax purposes on taxpayers that lack physical presence in the state. Under the Act, taxpayers are subject to the following income tax economic nexus thresholds for tax years beginning after Dec. 31, 2019:

• 200 or more business transactions with persons in the sate or
• At least $100,000 of gross income attributable to sources in Hawaii, or for multistate taxpayers, at least $100,000 of sales in the numerator of the person’s sales factor.

Taxpayers should continue to monitor whether other states will come out with bright line economic nexus thresholds for income taxes in the aftermath of Wayfair. A number of states have imposed bright line standards for income tax for many years now (typically at a much higher revenue threshold), and it will be interesting to see if any of those states revise their rules to be consistent with Hawaii.

Other notable Acts that business taxpayers should be aware of from the 2019 Legislative session include:

Act 2 (SB396): Marketplace Facilitators – This Act (Hawaii Senate Bill 396, S.D. 1) deems marketplace facilitators to be sellers, and the sellers on whose behalf the sale is made are deemed to be making wholesale sales (which are taxed at a rate of 0.5 percent).  A “marketplace facilitators” is defined as:

Any person who sells or assists in the sale of tangible personal property, intangible property, or services on behalf of another seller by:

1) Providing a forum, whether physical or electronic, in which sellers list or advertise tangible personal property, intangible property, or services for sale; and

2) Collecting payment from the purchaser, either directly or indirectly through an agreement with a third party.

Act 96 (SB394): Market Sourcing for Sales of Service and Intangibles – On trend with many other states, Hawaii will move to market-based sourcing for its sales factor for tax years beginning on or after Dec. 31, 2019.  Sales of services and intangibles will be sourced to Hawaii (i.e., included in the numerator of the sales factor) to the extent such intangible or service is used within the state.

Act 232 (SB1360): Withholding on Nonresident Partners and Beneficiaries This Act imposes withholding obligations on partnerships (except publicly-traded partnerships), estates, and trusts with nonresident partners/beneficiaries.  The withholding amount is equal to the highest marginal rate applicable to a nonresident taxpayer multiplied by such taxpayer’s share of Hawaii distributive income as reflected on the partnership’s, estate’s, or trust’s tax return. Although the Act applies to tax year beginning after Dec. 31, 2018, the Department of Taxation announced that it is still in the preparation phase for implementation and enforcement, and thus will not enforce withholding until tax years beginning after Dec. 31, 2019, at the earliest.[3] Taxpayers should be aware of the change and be on the lookout for forthcoming guidance from the state on how to withhold.

As with any change in the tax laws, businesses must analyze the impact of these new rules to determine if there will be an increase in liability, whether there are new compliance obligations and the steps required to satisfy them, including whether any structural, transactional, or operational changes are required to meet new requirements or could result in a more favorable outcome under the new rules.  Aprio’s SALT team is experienced with these types of issues and can assist with questions you have regarding these developments in Hawaii and their impact on your business.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Tuck, SALT manager, at betsy.tuck@aprio.com or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the August 2019 SALT Newsletter.

[1] See Department of Taxation Announcement No. 2019-09 for more information on these Acts and others.

[2] Haw. Rev. Stat. 237-2.5

[3] Hawaii Department of Taxation Announcement No. 2019-08, July 19, 2019.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.