Hawaii Business Tax and Bookkeeping Basics for New Contractors

Hawaii taxes your gross receipts, not your customer

This is the single largest difference between running a contracting business in Hawaii and running one on the mainland, and it is the one new owners get wrong. The Department of Taxation states it flatly in Tax Facts 37-1: "No. Hawaii does not have a sales tax." What Hawaii has instead is the General Excise Tax, which the Department describes as "a privilege tax imposed on business activity in the State of Hawaii" imposed "on the gross income received by the person engaging in the business activity". Gross income here means "the total of all your business income before you deduct your business expenses".

The Department draws out two consequences. First, "the GET is a tax on the business for the privilege of doing business in Hawaii, whereas a sales tax is a tax on the customer that is collected by the business." Second, "the GET is a tax on income from almost all business activities. A sales tax is a tax on the retail sales of tangible goods." Construction contracting is named explicitly in the Department's list of activities taxed at the 4% state rate, alongside retail sales of goods and services and rental of real property.

Each county has adopted a 0.5% surcharge that applies to transactions subject to the 4% state rate, giving a combined 4.5%. The Department notes that the surcharge does not apply to transactions taxed at lower rates such as the 0.5% wholesaling rate, and that "a business located outside the State or on a neighbor island will be subject to the county surcharge."

You may pass the GET on to a customer, but you are not required to, and the way you do it is regulated. The Department says the visible pass on "is a matter of contract between you and your customer", that the customer must be told the exact dollar amount or percentage ahead of time and agree to it, and that any amount you add is itself included in your gross income subject to GET. That is why the maximum visible rate on a 4.5% activity is 4.712% rather than 4.5%: on a $100 sale the Department's own example is $4.71 of GET and a total price of $104.71. Charging more than the maximum is a consumer-protection violation, and a business that chooses not to pass the tax on still may not tell a customer there is "no tax" - section 237-49, HRS, carries a fine of up to $1,000 for that.

Official sources: Hawaii Department of Taxation: Tax Facts 37-1, General Excise Tax (PDF); Hawaii Department of Taxation: An Introduction to the General Excise Tax (PDF); Hawaii Department of Taxation: General Excise Tax

The one deduction that matters most to a contractor

Because GET is charged on gross income rather than profit, a general contractor who subcontracts most of a job would otherwise be taxed on money that passes straight through. Hawaii addresses that specifically. In its list of the more common GET deductions the Department names "payments made to a subcontractor doing contracting work as defined in section 237-6, HRS".

Two mechanics attach to it. Deductions are claimed on Schedule GE, filed with Forms G-45 and G-49, and the Department is blunt about what happens otherwise: "If you do not attach this form, then your exemptions will be disallowed." Make sure the revision year of the Schedule GE matches the return.

The Department also warns that most ordinary business expenses do not work this way. "Most business expenses, such as the cost of goods sold or depreciation allowed as deductions on your income tax return, are not deductible on your GET return." Materials you buy and install are not a GET deduction; the subcontractor you pay to install them, doing contracting work as defined in the statute, is. Your chart of accounts should separate subcontract cost from materials cost from the first invoice, because reconstructing it in April is how the deduction gets lost.

One more line to keep straight in the books: the GET you visibly pass on to a customer is itself part of your gross income. The Department states that your gross income "includes any cost passed on to your customers such as the GET". That is the arithmetic behind the 4.712% maximum. It also means the pass-on line on an invoice is revenue in your books, not a liability account you sweep out untouched.

Official sources: Hawaii Department of Taxation: An Introduction to the General Excise Tax (PDF)

Getting licensed for GET, and keeping the licence

You register on Form BB-1, the State of Hawaii Basic Business Application, selecting "General Excise/Use Tax". Registering for GET automatically registers you for use tax as well. The registration fee is $20.00, and the Department states that an application submitted through Hawaii Tax Online produces a Hawaii Tax Identification Number "in five to seven business days", or the same day if you apply in person at a district tax office.

One application covers the whole taxpayer, not each activity: "It is the taxpayer, not the specific business activity, that is being registered. List all of your business activities on one application." But locations and names do multiply. The licence must be displayed at your place of business, and you need an additional branch licence for each further location. Branch licences are applied for on Form G-50, there is no charge for them, and they are required if you have multiple business locations or "more than one business name (such as a trade name or doing business as (DBA) name)".

The penalty for skipping registration is a civil citation. The Department states the fine is "$500 for most businesses, but is $2,000 for cash-based businesses", and that a further fine of $500, or $1,000 for a cash-based business, applies if you hold a licence but fail to produce it when a Special Enforcement Section investigator asks. A GET licence is also not transferable: it "is issued to a specific person or entity and may not be transferred to a different person or entity". Buying someone's contracting business does not buy their GET licence.

If work stops, do not simply go quiet. The Department offers two alternatives to cancelling: keep the licence open and keep filing periodic and annual returns even with no gross income, or file Form L-9 to place the licence on inactive status for up to two years, during which annual returns are still required but periodic returns are not. A licence may be cancelled if no returns are filed for five years and the Department cannot make contact, and once cancelled it "cannot be reactivated" - you apply again and pay the $20 fee again.

Official sources: Hawaii Department of Taxation: An Introduction to the General Excise Tax (PDF)

Filing: which return, how often, and the electronic thresholds

Two forms carry the GET. Form G-45 is the periodic return and Form G-49 is the annual return, and the annual return is not optional just because the periodic ones were right. The Department describes G-49 as "a summary of your activity for the entire year" and notes that filing it is what starts the three-year statute of limitations: "If you do not file your annual tax return, the Department can make adjustments to the return at any time." A missed annual return can also cost you benefits outright - fail to file it within 12 months of its due date and "you could lose the right to claim any GET benefits (such as exemptions or lower tax rates)". For a contractor claiming the subcontractor deduction, that is not a small sentence.

Frequency follows expected liability, including the county surcharge: semiannual at $2,000 or less per year, quarterly at $4,000 or less, monthly above $4,000. Filing more often than required is allowed, but the Department will then move you permanently to monthly. If your total annual liability does not exceed $100, periodic returns are not required at all for tax years beginning after December 31, 2022, though Form G-49 still is.

Three electronic thresholds carry a 2% penalty each. Monthly filers must file electronically at Hawaii Tax Online unless a waiver is obtained on Form L-110. A GET liability exceeding $4,000 annually requires Form G-49 to be filed electronically. Total annual general excise, use and county surcharge taxes exceeding $100,000 must be paid by electronic funds transfer. And if you did business in more than one taxation district, Form G-75 must be attached to the G-45 and G-49, with failure carrying a failure-to-file penalty plus a penalty of ten percent on the tax and surcharge due.

There is no extension of time to file a periodic return. An extension for the annual return is requested on Form GEW-TA-RV-6, may be granted three months at a time up to six months in total, is not automatic, and is "not an extension of time to pay the tax".

Official sources: Hawaii Department of Taxation: An Introduction to the General Excise Tax (PDF)

Bookkeeping habits that Hawaii specifically rewards

The tax clearance requirement makes your GET compliance a licensing issue rather than only a tax issue. The Contractors License Board requires a current Hawaii State Tax Clearance with an original DOTAX stamp, issued not more than six months ago, with the application, and at renewal it requires an active entity or sole proprietor to have "current and valid tax clearance with DOTAX" with the DOTAX name matching the PVL licence name exactly. A name mismatch between your DCCA registration and your DOTAX record is a renewal-blocking problem that takes weeks to fix, so reconcile the two names on day one.

Keep the GET calendar and the DCCA calendar in the same place. GET periodic returns land on the 20th, the GET annual return on April 20 for a calendar-year filer, the DCCA annual report in the quarter matching your registration date, and the contractor licence renewal on September 30 of every even-numbered year. Those four run on four different clocks, and only one of them will mail you a reminder.

Finally, remember that GET is a business expense rather than a credit. The Department states that "the GET that you pay may not be taken as a credit against your income tax liability. However, you may claim the GET as a business expense deduction." Post it as an expense account, not as a tax-payable contra account, and your income tax return and your job costing will agree with each other.

Official sources: Contractors License Board: Requirements for License, Sole Proprietor (PDF, rev. 10/25); Hawaii DCCA Contractors License Board; Hawaii Department of Taxation: An Introduction to the General Excise Tax (PDF); Business Registration Division: quarterly annual business report notice

Check the current rule before you file

Two of the documents this guide relies on carry old dates on their own faces. The Contractors License Board's Contractor FAQ is footer-dated 7/9/18, and the Description of Contractor License Classifications is dated June 20, 2014 and tells you so itself: it describes its contents as "selected excerpts" and directs you to "the most current language in Hawaii Revised Statutes ('HRS') chapter 444 and Hawaii Administrative Rules ('HAR') chapter 16-77" for the official version. Both are still the documents the Board links from its own pages today, which is why they are used here, but treat a figure in them as a starting point and confirm it with the Board before you write a check.

One conflict is already visible on the Board's own material. The Board's live page lists an on-time renewal fee of $338.00 for a contractor entity or sole proprietor in active status, $208.00 for an RME and $160.00 for any contractor in inactive status. The Contractor FAQ says $353.00 for entity and sole proprietor, and $208.00 for RMEs. The RME number matches; the entity number does not. We are not picking a winner - call the Board.

The other conflict is about timing, and it can cost you a month. The Board's applications and publications page says the application, fee and supporting documents "MUST be received in the Board's office on or before the first Tuesday of the month TWO MONTHS prior to the scheduled meeting date". The Contractor FAQ and the current sole-proprietor application packet, revised 10/25, both say the first Tuesday of the month prior to the scheduled meeting date. Work to the earlier of the two and confirm the date against the Board's published meeting schedule.

Official sources: Contractors License Board: Contractor Frequently Asked Questions (PDF); Contractors License Board: Description of Contractor License Classifications (PDF); Hawaii DCCA Contractors License Board; Contractors License Board: applications and publications; Contractors License Board: Requirements for License, Sole Proprietor (PDF, rev. 10/25)