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The telecommunications industry is changing rapidly, and can now offer many different services "bundled" together in one product package. The industry is moving away from billing solely on a per-call or per-usage basis. For example, unlimited usage of Internet access, long distance (interstate) phone, and intrastate (local) phone services may be bundled and sold to customers for a flat monthly rate. This new marketing model presents unique challenges in state taxation of these services. Telecommunications service providers need to decide how to allocate the income from these bundled packages so that the appropriate state tax can be levied on that income. Under Hawaii law, telecommunications services may be subject to the general excise tax (GET) or the public service company (PSC) tax. If the provider engages in other business activities, these taxes at different rates may apply.

Act 236 clarifies that a telecommunication service provider may segregate its income between HRS §237-13(6)(D) (interstate phone calls) and HRS §239-5 (intrastate phone calls) using a reasonable method. The income also may be segregated between different provisions of both HRS chapters 237 (GET) and 239 (PSC tax). The provider may rely on its books and records kept in the ordinary course of business to determine the amounts that should be allocated to each activity.

Act 236 does not alter:

1. The service provider’s basic responsibility to report and pay taxes as required by §237-13(6)(D), HRS, (which imposes the GET on interstate phone calls) and §239-5, HRS, (which imposes the PSC tax on intrastate phone calls), as well as other tax imposition sections that may apply to other activities engaged in by the provider; and
2. The Department’s power to audit the segregation method (e.g., as to whether the segregation is reasonable).

Act 236 applies to gross income, gross proceeds of sales, and value of products after July 1, 2002.

Current forms and other tax information are available at the Department’s website at: www.hawaii.gov/tax. On Oahu, forms may be ordered by calling the Department’s Forms Request Line at: 587-7572. Persons who are not calling from Oahu, may call: 1-800-222-7572 (toll-free) to receive forms by mail or by fax.