If you are trying to understand how indirect/transaction taxes apply in Hawaii the first thing you need to know is that Hawaii does not have a sales tax, at least not in the traditional sense. Rather, the state imposes a General Excise Tax (GET) levied on the person conducting the business on the island and is based on the income the business receives from its customers. Unlike many US states, the rate applied to a transaction is determined by the type of business activity being conducted: retail, wholesale, manufacturing, and not generally by the type of good or service involved in a transaction.
If your company is making retail sales, gross income would generally be subject to a 4% GET. However, if you are conducting business in the City & County of Honolulu (Oahu), an additional 0.5% County Surcharge Tax (CST) is levied on the same gross income subject to the 4% GET.
Although the GET/CST are taxes imposed on a seller, it is important to understand that Hawaii allows vendors to “pass-on” the 4% GET expense to customers, up to a rate of 4.166% (or 4.712% when in the City & County of Honolulu on the island of Oahu). By way of shorthand, we frequently refer to this effect as “tax-on-tax.” For a more detailed explanation, please see Hawaii Department of Taxation, Tax Facts 37-1, dated March 2015, and found at: http://tax.hawaii.gov/legal/a2_b2_1taxfacts/. See also, Hawaii Department of Taxation, Announcement 2006-15, found at: http://tax.hawaii.gov/geninfo/a2_b2_7csurchg/, which was released at or around the time Hawaii implemented the additional county surcharge on transactions sourced to Oahu.
By way of a quick summary, the key impact of “passing-on” of the tax at an approved effective rate provides vendors with the option to recoup their GET/CST expense from their customer because, as noted, such tax is a tax on a vendor’s gross receipts. Sellers that choose not to pass on the GET/CST expense to their customers must pay out-of pocket the GET/CST due the state, effectively increasing cost of goods sold and, in turn, reducing profits. Nonetheless, the choice of whether or not to pass the GET/CST tax expense through to a customer or whether to do so at the flat standard rates, or factored up rates, is entirely up to you.
Every retail vendor has the option to take a different approach when dealing with Hawaii’s GET/CST, those options are:
- Don’t Calculate Tax – Vendors doing business in Hawaii can choose not to pass on their tax expense to their end consumers
- Calculate Tax at the Standard Rate – A vendor may choose to ONLY pass through the flat 4% GET (or 4.5% when in Honolulu/Oahu)
- Calculate Tax at the Approved Factored-Up Rates – A vendor may choose to pass through a factored up rate of 4.166% GET (or 4.712% for the GET/CST when in Honolulu) on an invoice, so as to recoup as close as possible the tax expense associated with a sale.
Please be aware that if a vendor collects any tax from their customer then the total gross amount collected, including tax, should be reported to the state and the tax due should be calculated by applying the standard flat rate of 4% (or 4.5% when in Honolulu). In other words, no matter which option you choose, as a vendor you are responsible for remitting every penny of tax due. However, if you choose to pass the tax on to your customer, the amount of “tax due” goes up a little bit. Please review the Hawaii Tax Fact 37-1 noted above for a more detailed discussion.
By way of a brief foray into invoicing requirements, vendors should understand that when collecting tax from a customer based on the factored up rate(s), Consumer Protection Laws may require that a customer see displayed on his/her invoice the factored up rate applied, e.g., the 4.166%, versus the standard 4% GET or the 4.712% for transactions subject to the GET as well as the Honolulu CST.
Hawaii’s taxation system is squarely a little different from the “sales tax” rules we generally see on the mainland, but once you understand how it works, you will be well equipped to choose the right approach for your particular business.
