Rev. Rul. 63-8

Advice has been requested whether the `privilege' tax imposed in the State of Hawaii upon certain retailing and service business activities may be excluded in determining the amount upon which the Federal cabaret tax is imposed by section 4231(6) of the Internal Revenue Code of 1954.

Certain provisions relating to the privilege tax imposed in the State of Hawaii under section 117-14.6(b) of the amendment to Chapter 117 of the Revised Laws of Hawaii, 1955, added by section 3, subsection (u) of Act 1 of the Special Session of 1957, effective July 1, 1957, are set forth in Revenue Ruling 58-564, C.B. 1958-2, 79, which holds that, for purposes of computing taxable income, the privilege tax constitutes a `State or local' sales tax within the meaning of section 164(c)(2) of the Code. Revenue Ruling 63-7, page 188, this Bulletin, holds that the privilege tax is a state or local `retail sales tax' for purposes of computing the Federal retailers excise tax.

Section 117-14.6(a) of the Revised Laws of Hawaii, 1955, includes within the scope of the privilege tax on certain retailing `the rendering of services by one engaged in a service business or calling, as defined, to a person who is not purchasing the services for resale.' Under the provisions of section 15 of The Admission Act, Public Law 86-3, 73 Stat. 4, all territorial laws in force in the Territory of Hawaii at the time of its admission into the Union are continued in force in the State of Hawaii.

Section 101.13 of Regulations 43, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that where a State tax imposed upon the amount paid for admission, refreshment, service or merchandise, is passed on to the patrons, which may be shown by one of the three methods provided in that section, the State tax may be excluded in computing the Federal cabaret tax liability. That section further provides that if the State tax is not passed on to the patrons, the amount thereof shall not be excluded in computing the Federal cabaret tax.

In view of the foregoing, it is held that the `privilege' tax imposed in the State of Hawaii may be excluded in determining the amount upon which the Federal cabaret tax is to be computed, provided it is passed on to the patrons.