Just as it took the lead with the outcome of Wayfair1 and income tax nexus, Hawaii is the first state to promulgate a regulation dealing with its economic nexus threshold and the protections afforded by P.L. 86-272.2 On September 30, 2020, the Department of Taxation for the state of Hawaii issued Tax Information Release (TIR) No. 2020-05. The TIR is titled as “Application of Public Law 86-272 to Hawaii Net Income Tax.”
Hawaii Revised Statute § 235-4.2 provides nexus presumptions for persons lacking a physical presence in Hawaii. Under that law, for tax years beginning after December 31, 2020, persons with more than $100,000 of income from the state of Hawaii or who engage in more than 200 transactions with persons in Hawaii are subject to taxation of their income in Hawaii.
P.L. 86-272 is specifically designed to exempt from an income-based tax any entity who merely solicits sales in a state. The entity may also conduct activities ancillary to solicitation. The TIR ignores these protections in its list of unprotected activities. Item number 22 under unprotected activities, which states “[m]aking sales that equal or exceed $100,000 during the current or preceding calendar year,” and item number 23, which states “[e]ngaging in 200 or more business transactions with persons within Hawaii during the current or preceding calendar year,” are NOT activities protected under P.L. 86-272.
Hawaii is the first state to take this broad reaching imposition of its income tax. Not even the Multistate Tax Commission, in its deliberations to revamp its P.L. 86-272 guidelines, has suggested this broad of an override of the federal statute. It would certainly appear that a seller meeting all the other safe harbors of P.L. 86-272 should be exempt from Hawaii income taxation. Sellers of tangible personal property should carefully consider compliance with this TIR based on the protections afforded by federal law. Ryan’s Income Tax practice is here to help you evaluate and challenge tax liability assertions under this new TIR.
1 South Dakota v. Wayfair, Inc. - 138 S. Ct. 2080 (2018).
2 15 U.S. Code § 381.
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