Sales, Use and International Tax Activity Update - March 2010

Hawaii Allowed to Exercise Excise Exemptions for Government

A company's sales to the federal government of products along with manufacturer's repair or replacement warranties are exempt from Hawaii general excise tax.

Hawaii exempts sales of tangible personal property to the federal government and imposes tax on services sold to the federal government. The company's sales of products are considered sales of tangible personal property and the warranties are incidental to and inseparable from the sale of such property.

The warranties offer to repair, replace, or refund the purchase price of a defective product during the warranty period. When a warranty claim is made, no consideration is exchanged for the repair or replacement. Usually a defective product is replaced, but the company reserves the right to repair defective products. When the company repairs a defective product, the repair is a service. However, the service provided by the company free of charge is incidental to and inseparable from the purchase of the product. In order to be taxable, the service would have to be performed for a consideration.

The Letter Ruling can be viewed on the Hawaii Department of Taxation Web site.

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