Understanding Hawaii Sales and Use Taxes
Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in Hawaii.
Hawaii assesses a 4 percent sales tax on every type of business transaction, including retail sales of tangible personal property and the gross receipts generated from services provided. Manufacturers and wholesalers pay 0.5 percent, and insurance agents pay 0.15 percent.So, if your business buys, sells, or uses products or services in Hawaii, a sales or use tax liability will probably be incurred.
Hawaii Taxes All Services
In Hawaii, you will be required to pay sales tax on the gross receipts of all services you provide to your customers. The sales tax rate on intermediary sales of services is 0.5 percent.
All Leases Are Taxed in Hawaii
The gross income generated from the rental and leasing of personal and real property will be subject to the 4 percent sales tax. So, whether your business rents videos, DVDs or apartments, the business is going to incur a 4 percent sales tax on each rental.
Casual Sales Are Tax-Exempt
Casual sales are completely exempt from sales tax because the law specifically excluded them from the definitions of business and engaging in business. For purposes of this exclusion, a casual sale is defined as an occasional, isolated, irregular, infrequent, or incidental sale or transaction, involving tangible personal property that is not ordinarily sold in the usual course of the seller's business.
As a rule of thumb, a sale will be casual if the vendor engaged in a trade or business sells tangible personal property that is not usually carried in inventory and the vendor's sales show a pattern of selling only inventory merchandise.
Chow Hound Food Mart recently purchased new computers for their administrative offices. Management decides to sell the old computers to those employees who are interested in purchasing them. The sale of these computers will not cause sales tax to be accrued since they are not normally carried as inventory by the Chow Hound Food Mart.
Hawaii Does Not Fully Exempt Resale Transactions
Hawaii, unlike most states, does not provide a complete exemption from sales tax when tangible personal property is sold for resale. In fact there are very few cases in which no sales tax will be incurred when you make a purchase.
If you purchase goods or products and will resell them in your business, or include them as part of the service you provide, your purchase may qualify for a reduced sales tax rate. All sales made for resale are subject to a 0.5 percent rate of tax.
Resale exemption certificate. If your customers purchase goods or products for resale in their business, the state applies a reduced sales tax to this purchase (0.5 percent). The state provides three resale certificate forms that you may accept from your customers. There are two general resale certificates (Form G-17 and G-19). The third type of form is used by contractors or persons taxable as contractors purchasing materials and commodities (Form G-18).
Blanket resale certificate. A blanket resale certificate you present to the vendor will be valid until either you or the vendor revoke it. A blanket resale certificate is a resale certificate that you provide to a seller from whom you make numerous exempt resale purchases. The idea is that by providing a blanket resale certificate, both you and the seller can avoid the hassle of having to deal with a new certificate every time you make a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, you should present, in good faith, a blanket resale certificate to the seller that includes the same information as a regular resale certificate.
Physical Presence Triggers Taxation
Hawaii has a statute that specifically taxes out-of-state mail order and catalogue sellers. However, you will be responsible for paying this tax only if your business has physical presence within Hawaii. To determine if you have a physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse, or any office space in Hawaii? Maintaining retail or warehouse facilities means that your business has a physical presence within the state. Also, if you have an office for employees, even for business activities unrelated to mail order sales, your business will have a physical presence within the state.
- Do my employees or I enter Hawaii for purposes of taking and transmitting orders from customers in Hawaii? If your employee or independent contractor enters Hawaii for purposes of taking or transmitting orders, your business has a physical presence in Hawaii. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence within the state.
- Do my delivery vehicles frequently enter Hawaii for purposes of delivering property? Frequent deliveries in Hawaii by your trucks will give you physical presence in Hawaii. An occasional delivery, however, may not constitute a physical presence within the state.
Should You Absorb the Sales Tax
You will be responsible for paying Hawaii sales taxes, but the law allows you to pass it on to your customers. Hawaii also allows you to pay the tax yourself. You may be tempted to exercise this option in hopes of drumming up business. For example, you may decide to use your ability to absorb the tax as a negotiating point with selected purchasers. Or, you may go whole hog and hold an "I'll pay your sales tax" sale. However, is this really a good idea?
Well, in either case, you mustn't lose sight of the obvious fact that absorbing sales taxes will involve significant costs. Therefore, if you're already operating at a minimal profit margin, you'll want to analyze whether the increased costs will be offset by the additional revenues.
Sales Tax Is Based on Gross Receipts
You calculate sales taxes by taking the tax rate, which is 4 percent, and multiplying it by your gross receipts. Gross receipts are based on your total retail sales or tangible personal property transferred to your customers through the services you provided.
If you are making sales of products that will be resold by your customers, then you must remember to use the reduced sales tax rate (0.5 percent).
Hawaii does not provide for any small business deductions from sales or use taxes. However, the state allows you to take a credit against use tax if you have already paid sales or use tax to another state on the property purchased. This credit cannot exceed the amount of sales tax assessed in Hawaii.
You Can Claim a Refund for Overpaid Taxes
If you frequently audit your sales transaction reports, you may discover that through an error, sales or use tax was overpaid on a transaction. If you or your customer discover such an overpayment, the state allows you to file a claim for a credit or refund. You should submit the claim to the Hawaiian Department of Taxation. The State will normally issue a credit memorandum rather than give a refund to the person who made the erroneous payment.
Time limitations for filing a refund claim. If you're going to file a refund claim for overpayment of sales or use tax, you'll have to do it within three years from the date you paid the tax. If you file a refund claim after that time, the state will not approve it.
Hawaii Imposes Use Tax on Out-of-State Purchases
In order to avoid losing tax revenues on sales transactions taking place outside the state, Hawaii also imposes a use tax. The use tax is assessed against all persons who store, use, or otherwise consume tangible personal property in Hawaii that was purchased out-of-state. If the out-of-state seller you purchase property from is a registered retailer in Hawaii, you should pay the use tax to the retailer. If the retailer is not registered in Hawaii, you should pay the use tax directly to the state.