Hawaii: Department of Taxation Addresses Public Law 86-272

The Hawaii Department of Taxation recently issued a Tax Information Release (TIR) addressing the application of P.L. 86-272 in light of Hawaii’s new income tax economic nexus threshold. Recall, effective for tax years beginning after December 31, 2019, a person with no physical presence in the state is “systematically and regularly engaging in business in Hawaii” if it has either $100,00 or more in gross income from Hawaii sales or 200 or more transactions in the state in the current or preceding calendar year.  At the outset of the TIR on P.L. 86-272, the Department notes that only activities associated with solicitation for orders of tangible personal property are protected under P.L. 86-272. Activities associated with leasing, renting, licensing, or other disposition of tangible personal property, or any transactions involving intangibles or services, are not protected under P.L. 86-272.

In the TIR, the Department lists activities that if performed by a taxpayer would cause the loss of P.L. 86-272 protection, as well as activities that would be protected. That list includes numerous activities that are similar to the Multistate Tax Commission’s list of protested and unprotected activities. Interestingly, the list of unprotected activities also includes making sales that equal or exceed $100,000 during the current or preceding calendar year and engaging in 200 or more business transactions with persons within Hawaii during the current or preceding calendar year.  In other words, the Department seems to be taking a position in the TIR that having substantial economic activity in the state eliminates the protection of P.L. 86-272. The Department also provides that for the de minimis activities exception to P.L. 86-272, whether an activity is de minimis will be determined based on both a qualitative and quantitative test. Thus, if any unprotected activities are de minimis under both tests, P.L. 86-272 protection will apply for Hawaii net income tax purposes. For more information on Tax Information Release No. 2020-05, please contact Reid Okimoto at 206-913-4682.