What Is The Hawaii General Excise Tax

Hawaii's General Excise Tax (GET) is a unique aspect of the state's tax system, impacting businesses and consumers alike. Unlike a sales tax, which is charged only at the point of final sale to the consumer, the GET is a gross receipts tax, meaning it's applied to nearly all business activities, including sales, services, and rentals. This cascading effect makes understanding the GET crucial for anyone doing business in or with Hawaii, as well as for residents who ultimately bear the cost through increased prices.

Understanding the Basics of Hawaii's General Excise Tax (GET)

The GET is levied on the gross income of businesses operating in Hawaii, regardless of whether they are located in the state. This means that even businesses outside of Hawaii that sell goods or services to customers within the state are subject to the GET. The current GET rate is 4% for most activities, with a higher rate of 4.5% on the island of Oahu. Certain activities, such as insurance commissions, are taxed at a lower rate of 0.15%.

Who Pays the GET?

• Businesses: The primary responsibility for paying the GET falls on businesses operating in Hawaii. This includes corporations, partnerships, sole proprietorships, and non-profit organizations.
• Out-of-State Businesses: Businesses located outside of Hawaii but doing business within the state are also required to pay the GET. This can include businesses that sell goods online to Hawaii residents, provide services remotely to Hawaii-based clients, or lease property located in Hawaii.
• Individuals: While not directly levied on individuals, the GET is indirectly paid by consumers through higher prices on goods and services. Because the GET is applied at each stage of production and distribution, businesses pass the cost of the tax on to their customers.

What is Taxed Under the GET?

The GET applies to a wide range of business activities, including but not limited to:

• Sales of goods: This includes retail sales, wholesale sales, and sales of manufactured goods.
• Services: This includes professional services (e.g., legal, accounting, consulting), personal services (e.g., haircuts, massages), and repair services.
• Rentals: This includes rental of real property (e.g., apartments, houses, commercial space) and rental of personal property (e.g., cars, equipment).
• Royalties: This includes payments received for the use of intellectual property, such as patents, trademarks, and copyrights.
• Interest: This includes interest earned on loans and investments.

Exemptions from the GET

While the GET is broad in scope, there are some exemptions. Common exemptions include:

• Sales to the Federal Government: Sales of goods or services directly to the U.S. federal government are exempt from the GET.
• Sales for Resale: Businesses that purchase goods for resale can claim an exemption from the GET, provided they provide the seller with a resale certificate.
• Certain Healthcare Services: Certain healthcare services provided by licensed healthcare professionals may be exempt from the GET.
• Sales of Intangible Property: Sales of certain intangible property, such as stocks and bonds, may be exempt from the GET.
• Export Sales: Sales of goods that are exported from Hawaii are generally exempt from the GET.

It's crucial for businesses to understand these exemptions and properly document any exempt sales to avoid paying unnecessary taxes.

Calculating and Paying the GET

Calculating and paying the GET requires careful attention to detail and adherence to Hawaii's tax laws. Businesses must accurately track their gross income and apply the correct tax rate to determine their GET liability.

Determining Gross Income

Gross income is the total revenue a business receives from all sources, without any deductions for expenses. This includes cash, property, and services received in exchange for goods or services. Businesses must maintain accurate records of all transactions to properly determine their gross income.

Applying the GET Rate

Once gross income is determined, the appropriate GET rate is applied. For most businesses, this is 4%, but businesses on Oahu pay 4.5%. Businesses with income from activities taxed at different rates (e.g., insurance commissions) must calculate the tax separately for each activity.

Example:

A retail store on Maui has gross income of $100,000 in a month. The GET liability is calculated as follows:

Gross Income: $100,000

GET Rate: 4%

GET Liability: $100,000 x 0.04 = $4,000

Filing and Payment Options

The GET is typically filed and paid monthly or quarterly, depending on the business's annual gross income. Businesses with annual gross income of $4,000 or less can file annually.

• Online Filing: The Hawaii Department of Taxation offers an online filing system called Hawaii Tax Online (HTO) that allows businesses to file and pay the GET electronically.
• Paper Filing: Businesses can also file the GET using paper forms, which can be downloaded from the Department of Taxation's website. Payment can be made by check or money order.

Important deadlines:

• Monthly Filers: The GET is due on or before the 20th day of the following month.
• Quarterly Filers: The GET is due on or before the 20th day of the month following the end of the quarter.
• Annual Filers: The GET is due on or before the 20th day of the fourth month following the close of the taxable year (typically April 20th).

Penalties for Non-Compliance

Failure to comply with Hawaii's GET laws can result in penalties, including:

• Late Filing Penalty: A penalty of 5% per month (up to a maximum of 25%) is assessed for failing to file the GET return on time.
• Late Payment Penalty: A penalty of 0.5% per month (up to a maximum of 25%) is assessed for failing to pay the GET on time.
• Interest: Interest is charged on unpaid GET liabilities at a rate determined by law.
• Accuracy-Related Penalty: A penalty of 20% may be assessed for underpayment of the GET due to negligence or intentional disregard of the rules.

Businesses should take steps to ensure they are in compliance with the GET laws to avoid these penalties.

The GET vs. Sales Tax: Key Differences

It's important to distinguish the GET from a traditional sales tax, as they operate differently and have different implications for businesses and consumers.

The GET's cascading effect is a significant concern, as it can lead to higher prices for consumers and make it more difficult for businesses to compete. It also creates a situation where the total tax burden on a product or service can be much higher than the stated GET rate.

Impact of the GET on Businesses and Consumers

The GET has a wide-ranging impact on businesses and consumers in Hawaii. Understanding these impacts is crucial for making informed decisions and advocating for tax reform.

Impact on Businesses

• Increased Costs: The GET increases the cost of doing business in Hawaii, as businesses must pay the tax on their gross income. This can make it more difficult for businesses to compete with those in other states.
• Administrative Burden: Calculating and paying the GET can be complex, especially for businesses with multiple revenue streams or those claiming exemptions.
• Competitive Disadvantage: The GET can put Hawaii businesses at a competitive disadvantage compared to businesses in states with lower tax rates or no sales tax.
• Pricing Strategies: Businesses must carefully consider the GET when setting prices for their goods and services. They must balance the need to cover their costs with the desire to remain competitive.

Impact on Consumers

• Higher Prices: The GET leads to higher prices for goods and services, as businesses pass the cost of the tax on to their customers. This can make it more expensive to live in Hawaii.
• Regressive Impact: The GET is considered a regressive tax, meaning it disproportionately affects low-income individuals. This is because low-income individuals spend a larger portion of their income on goods and services subject to the GET.
• Reduced Purchasing Power: Higher prices due to the GET reduce consumers' purchasing power, making it more difficult to afford essential goods and services.
• Lack of Transparency: The GET is often hidden in the price of goods and services, making it difficult for consumers to understand how much they are paying in taxes.

Economic Implications

• Discourages Investment: The GET can discourage investment in Hawaii, as businesses may be hesitant to invest in a state with a high tax burden.
• Reduces Economic Growth: The GET can slow economic growth by increasing costs for businesses and reducing consumer spending.
• Distorts Economic Activity: The GET can distort economic activity by favoring certain types of businesses over others. For example, businesses that are able to claim exemptions from the GET may have a competitive advantage over those that cannot.
• Impact on Tourism: The GET can impact the tourism industry, as higher prices may make Hawaii a less attractive destination for visitors.

Arguments for and Against the GET

The GET has been a subject of debate in Hawaii for many years, with strong arguments on both sides.

Arguments in Favor of the GET

• Broad Base: The GET has a broad base, meaning it applies to a wide range of business activities. This makes it a stable source of revenue for the state government.
• Simplicity: The GET is relatively simple to administer, compared to more complex tax systems.
• Revenue Generation: The GET generates a significant amount of revenue for the state, which is used to fund essential government services.
• Out-of-State Revenue: The GET captures revenue from out-of-state businesses that do business in Hawaii, helping to support the state's economy.

Arguments Against the GET

• Cascading Effect: The cascading effect of the GET leads to higher prices for consumers and makes it more difficult for businesses to compete.
• Regressive Impact: The GET disproportionately affects low-income individuals, making it a regressive tax.
• Economic Distortion: The GET can distort economic activity by favoring certain types of businesses over others.
• Lack of Transparency: The GET is often hidden in the price of goods and services, making it difficult for consumers to understand how much they are paying in taxes.
• Competitive Disadvantage: The GET puts Hawaii businesses at a competitive disadvantage compared to businesses in other states.

Potential Reforms to the GET

Given the concerns about the GET, there have been numerous proposals for reform over the years.

• Exempting Business-to-Business Transactions: One proposal is to exempt business-to-business transactions from the GET, which would eliminate the cascading effect. This would reduce costs for businesses and make them more competitive.
• Implementing a Sales Tax: Another proposal is to replace the GET with a traditional sales tax, which would only be applied at the final point of sale to the consumer. This would eliminate the cascading effect and make the tax system more transparent.
• Increasing the Low-Income Tax Credit: To mitigate the regressive impact of the GET, some have proposed increasing the low-income tax credit. This would provide a tax break to low-income individuals, helping to offset the higher prices they pay due to the GET.
• Lowering the GET Rate: Another option is to simply lower the GET rate. This would reduce the tax burden on businesses and consumers, but it would also reduce the amount of revenue generated for the state.
• Broadening Exemptions: Expanding the list of exemptions from the GET could provide relief to certain industries or groups of people. However, this could also narrow the tax base and make the system more complex.

Each of these proposals has its own advantages and disadvantages, and the best approach to reforming the GET is a matter of ongoing debate.

Resources for Further Information

• Hawaii Department of Taxation: The Department of Taxation's website provides information on the GET, including forms, instructions, and publications.
• Tax Foundation of Hawaii: This non-profit organization provides research and analysis on tax issues in Hawaii.
• Hawaii Business Magazine: This magazine provides articles and information on business and economic issues in Hawaii, including the GET.
• Your Accountant or Tax Advisor: A qualified accountant or tax advisor can provide personalized advice on how the GET affects your business or personal finances.

Understanding the nuances of Hawaii's GET is essential for businesses operating in the state and for residents who feel its impact on their wallets. While the GET provides a stable source of revenue for the state, its cascading effect and regressive nature raise concerns about its fairness and economic impact. As Hawaii continues to grapple with its unique tax system, it's crucial for policymakers, businesses, and residents to engage in informed discussions about potential reforms that can create a more equitable and efficient tax system for the future.