RE: Application of Act 143, Sessions Laws of Hawaii 1998 (Act 143), Relating to the Licensing of Direct SellersPursuant to Act 143, section 237-9, Hawaii Revised Statutes (HRS), has been amended to allow a company engaged in a network or multi-level marketing arrangement to obtain a single general excise tax license for all of its direct sellers doing business in the State. The company would then become a tax collection agent responsible for reporting, collecting, and remitting the general excise and use taxes due from the business activities of its direct sellers.
Act 143 models the following definition of "direct sellers" after the Internal Revenue Code's definition as set forth in section 3508(b)(2):
"Direct seller" means any person who is engaged in the trade or business
of selling (or soliciting the sale of) consumer products:
(1) To any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis, that the director prescribes by rule adopted pursuant to chapter 91, for resale other than in a permanent retail establishment;
(2) Other than in a permanent retail establishment; provided that:
(A) Substantially all the remuneration (whether or not paid in cash) for the sale of consumer products is directly related to sales or other output rather than to the number of hours worked; and
(B) The sales of consumer products by the person are performed pursuant to a written contract that provides that the person will not be treated as an employee with respect to those sales for federal or state tax purposes.
"Direct seller" includes individuals who realize remuneration dependent on the productivity of other individuals in the marketing arrangement.
In turn, these direct sellers would be exempt from the licensing and reporting requirements of the general excise law but only with respect to the business conducted directly through the marketing arrangement. Direct sellers who are also engaged in other lines of business (besides the network marketing arrangement) would still be required to obtain a general excise tax license and report the general excise and use taxes due on the other lines of business on their own tax returns.
If a network marketing company chooses to become a collection agent on behalf of its direct sellers, the company must first enter into a tax collection agreement with the Department of Taxation (Department). Act 143 also specifies that the company: (1) must notify all of its direct sellers making sales in the State of the agreement; (2) if required by the Director of Taxation, must furnish a list of all direct sellers and any other information deemed relevant to ensure proper payment of general excise and use taxes; and (3) will be personally liable for any tax which is collected but not remitted to the Department. The concept of personal liability for payment of the direct sellers' taxes is borrowed from Hawaii's tax withholding provisions which provide that any tax withheld and collected by an employer will be held in trust for the State.
Due to the significant number of direct sellers in Hawaii, Act 143 provides for greater ease in the administration of the tax law and enhanced compliance. Further, the Department expects to realize savings from the reduction in the amount of tax returns that need to be processed and from the reduction in the printing costs of forms.
If you have any questions regarding this Announcement, please call Administrative Rules Specialist Dana Viola at (808) 587-1564. Forms and other tax information may be obtained by mail or fax. Forms may be ordered by calling the Department's Forms Request Line at 808-587-7572 or 1-800-222-7575, or downloaded from the Department's website at http://www.state.hi.us/tax/tax.html.
/s/
RAY K. KAMIKAWA
Director of Taxation