Hawaii General Excise Tax and the Unsuspecting Government Contractor

Hawaii
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Winning a contract in a new state can present many challenges, not least of which is ensuring that your company is compliant with the state’s tax code. The worst approach to state tax compliance is assuming that the taxes your company may be subject to and the tax treatment of your company’s activity will be the same as in other states. This is especially the case when it comes to Hawaii. It’s not surprising that many government contractors venturing into Hawaii overlook the General Excise Tax (GET), as it’s often assumed that the GET is essentially the same as most other states’ sales and use taxes. However, the unique nature of the GET can catch many businesses off guard, and the Department of Taxation’s penalties can be quite unforgiving.

The first thing every government contractor needs to know about the Hawaii GET is that it is NOT a sales tax. Certainly, the GET has some similarities to a typical sales and use tax. However, the GET has three critical distinctions from a typical sales tax, all of which affect government contractors. Those distinctions are:

  1. The GET is imposed on the seller, not the purchaser.
  2. The GET is imposed on most services; and
  3. There are very few exemptions for sales to the government.

Contractors hanging their hat on the “I am a government contractor, so I am exempt from tax” stance are in for a rude awakening when they receive a notice from Hawaii requesting GET returns for the past decade. Most government contractors providing services to the government are subject to the GET at a rate of either 4.0% or 4.5% of their gross receipts, so it does not take a particularly large contract to result in a material tax liability.

At its core, the GET is rather simple. The tax base for a service provider is generally gross revenue from services performed from within Hawaii. Given that the GET is a gross receipts tax, there are very few exemptions or deductions. However, the few that government contractors should be aware of are:

  • The exemption for sales of tangible personal property to the federal government;
  • The exemption for gross receipts from a contractor for the performance of “scientific work” for the Federal government. This exemption also excludes from tax receipts from the sale of tangible property to such a contractor when the property will be affixed to or become an integral part of a scientific facility, or which the contractor will consume during the performance of the contract; and
  • The deduction for payments made to subcontractors when a contractor is providing construction services.

Government contractors need to be proactive in recognizing that their receipts will likely be subject to the GET, so the additional costs should be factored into their bids. Contractors that are assessed years after a contract has ended will likely be unable to recoup those liabilities from their customers. Finally, the penalties assessed by Hawaii can be up to 60% of the tax liability, but there is a fair chance of getting those penalties waived, especially if you come into compliance before Hawaii issues you a notice.

If you have concerns about your company’s compliance with the Hawaii GET, please contact Aronson or Michael L. Colavito, Jr. at 301.231.6200.

About Michael Colavito, Jr.

Michael Colavito, Jr. has written 53 post in this blog.

Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.

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