Dear Taxpayer:

This responds to the letter from your legal representative regarding the application of the general excise tax to certain business activities engaged in by XYZ.

A. Facts

In your letter, you stated that XYZ is a Hawaii corporation registered with the State of Hawaii Department of Commerce & Consumer Affairs as a travel agent and activity desk operator. Besides selling tours as an activity desk operator, XYZ is in the business of arranging and coordinating meetings, conventions, and corporate incentive programs. This segment of the travel industry is well-recognized, with companies such as XYZ referred to as destination management companies.

Corporate incentive travel is used by national and international companies as a means of motivating and rewarding employees, especially sales staff. Corporations have found that creative and well-executed incentive travel programs are extremely motivational to their employees.

Clients engage XYZ to benefit from XYZ's specialized expertise in planning and coordinating events designed to meet the client's specific needs and desires. By using XYZ, these clients seek to avoid the practical burden of arranging and coordinating the myriad of component parts that make up a successful corporate incentive program.

As a destination management company, XYZ arranges and coordinates any and all ground services at a specifically chosen destination, such as Hawaii. XYZ packages tourism related services, such as lei greetings, transportation, meals extravaganzas, and other services rendered directly to participants of conventions or incentive travel programs. It sells these packages to conventions that are seeking to provide a higher level of service and a more entertaining program, thereby raising attendance; or to corporations providing incentive travel programs as rewards for attaining or exceeding their corporate goals.

To create these packages, XYZ subcontracts a wide range of services from over 600 service providers, most of which are Hawaii-based businesses. Given the large number of arrangements over the course of an average four-day program, clients require a consolidated price for the total package arranged by XYZ. Clients do not want a detailed cost breakdown of all the services arranged and provided for each event. Clients also are not willing to directly pay each service provider involved in an event due to the many bookkeeping and check writing requirements associated with a program. XYZ's invoices to its clients typically encompass a broad array of cost items, including lei greetings, transportation, food and beverage, activities, party favors, room gifts, and events.

XYZ is distinguishable from service providers in the tourism industry in several respects, including the following:

1. XYZ's Primary Business Activity. XYZ primarily acts as a packager of various tourism related services, rather than as the direct provider of such services. Unlike a service provider, XYZ is not engaged to perform some specified event or service which is fixed in design and format, such as a luau or a wedding ceremony. Rather, the service which XYZ provides to each of its clients is to create a unique package of services and events based on the client's particular needs and requirements. The vendors and subcontractors used by XYZ are the service providers which actually render tourism related services directly to the participants.

2. Nature and Extent of XYZ's Involvement in Rendering Tourism Related Services. XYZ also differs from service providers in terms of how actively involved it becomes in production logistics and in the actual rendering of the tourism related services that comprise the package arranged by XYZ. Almost by definition, a service provider is in full control of production, and performs an active and essential role in furnishing the tourism related services directly to the customer. Thus, a business which puts on a luau show or a wedding function has employees who are actively involved in the services being rendered.

On the other hand, the nature and extent of XYZ's involvement in actually rendering services directly to the customers varies from job to job. In each case, XYZ's role is determined by what the client wants and needs. In general, however, XYZ does not have full control over production logistics -- that is, all aspects of the production -- of the tourism related services that are rendered to its clients.

In some cases, XYZ's role consists almost entirely of contracting with the various service providers to create the package of tourism related services desired by the customer. With respect to each specific service, the service provider, rather than XYZ as the packager, controls the production. In addition, the clients themselves sometimes will make arrangements directly with the service provider for some of the tourism related services that comprise the package. In that case, XYZ has no involvement whatsoever with the rendering of the services, production or otherwise.

XYZ's services also are distinguishable from those of promoters. An XYZ event packaged by XYZ is open only to XYZ's client and the individual participants designated by that client. In contrast, events sponsored by promoters are open to the general public, and each attendee at the event or show is charged admission. Also, the promoter is not in the business of creating a unique package of tourism related services and events which varies based on the specifications of each customer. Unlike XYZ, the promoter instead makes available to all of its customers (i.e., the general public) a single event or show that has a fixed design and production and that might have repeat performances.

Finally, a promoter designs the event or show and controls all production logistics. As discussed above, the nature and extent of XYZ's active involvement in the specific tourism related services and events varies from job to job, but rarely if ever includes full control by XYZ over the production and rendering of the services or events.

3. Statute; Legislative History; and State Policy. Section 237-18(f) of the Hawaii Revised Statutes, as amended ("HRS"), provides that:

Where tourism related services are furnished through arrangements made by a travel agency or tour packager and the gross income is divided between the provider of the services and the travel agency or tour packager, the tax imposed by this chapter shall apply to each such person with respect to such person's respective portion of the proceeds, and no more.

As used in this subsection, "tourism related services" means catamaran cruises, canoe rides, dinner cruises, lei greetings, transportation included in a tour package, sightseeing tours not subject to chapter 239, admissions to luaus, dinner shows, extravaganzas, cultural and educational facilities, and other services rendered directly to the customer or tourist, but only if the providers of the services other than air transportation are subject to a four percent tax under [chapter 237] or chapter 239. (Emphasis added.)

HRS section 237-18(f) was amended in 1991 to expand the definition of "tourism related services." Specifically, the 1991 amendment broadened the definition to include catamaran cruises, canoe rides, dinner cruises, lei greetings, transportation included in a tour package, sightseeing tours not subject to chapter 239, admissions to luaus, dinner shows, extravaganzas, cultural and educational facilities, and other services rendered directly to the customer, but only if the service providers, other than air transportation providers, are subject to the 4% tax under HRS chapters 237 or 239.

By broadening the definition, the Legislature wanted to "allow more types of services to qualify under the tax payment arrangement provided by HRS section 237-18(f)." Stand. Com. Rep. 1470 on H.B. No. 675 (Ways and Means Committee), 1991 Senate Journal 1258. The legislative history indicates an intent to increase the number of parties exempted from paying the general excise tax on more than their portion of shared tourism-related income, and to expand the definition of 'tourism related services' to include "other incidental services included within tour packages." Stand. Com. Rep. 140 on H.B. No. 675 (Tourism Committee), 1991 House Journal. 891.

Clearly, the State's policy is to keep Hawaii competitive as a travel destination by allowing packagers of tourism related services to offer tour packages without being penalized by the pyramiding of the general excise tax. The Legislature has made clear on several occasions in the past that the Department should interpret HRS section 237-18(f) consistent with the Legislature's intent and in a manner that will serve the broad interests of the State in encouraging business activity in general and the tourism industry in particular.¹ In expanding the scope of this gross receipts splitting provision in 1991, the Legislature expressly provided for its application to other tourism-related services in addition to those specifically enumerated in the statute.

4. Rulings. Based on the facts and legal authority set forth above, we rule as follows:

a. XYZ is a tour packager, for purposes of HRS section 237-18(f), with respect to its business activities as a destination management company. In addition, any services provided by XYZ as a destination management company will not be considered services rendered as a promoter.

b. Since XYZ is considered to be a tour packager, amounts paid to XYZ's vendors for services rendered directly to, consumed by, or obtained for the benefit of the incentive travel participants qualify for the division of gross income under HRS section 237-18(f).

Specifically, the following items will be treated as tourism related services for purposes of HRS 237-18(f), as long as the gross income of the service provider is subject to the four percent general excise tax or public service company tax:
 

(1) Food and beverage and catering services, including floral arrangement and decorating services and charges for the temporary use of tables, chairs, props, silverware, china, glasses, and similar items typically furnished as part of food and beverage and catering services;
(2) Entertainment;
(3) Services rendered by sound technicians, lighting engineers, and staging companies;
(4) Charges for custom-made souvenirs, such as personalized coffee mugs, T-shirts, or tote bags, which are incidental to the packaged services arranged by XYZ; and
(5) Charges for temporary shelters for outdoor events, such as tents, that are comparable to banquet facilities typically included with food and beverage and catering services.
 

d. Amounts paid by XYZ to nonresident entertainers for performances at conventions and corporate incentive meetings in Hawaii are not subject to the withholding requirements under HRS section 237-44(d).

You may rely upon the rulings in this letter, subject to the limitations described below. If you wish, you may attach a copy of this letter to any annual tax return covering a taxable period affected by the rulings we have reached.

The rulings in this letter are based on our understanding of the facts you have represented. If it is later determined that our understanding of the facts is not correct, the facts are incomplete, or the facts later change in any material respect, the rulings in this letter shall be modified accordingly.