Hawaii GE tax for services sold out of state

[Paul der Krake]

Hi fellow tax nerds, I'm looking for someone to confirm or disprove my reading of some funky state law.

I'm looking to start two small businesses in Hawaii, where my wife and I are full-time residents. Straight-forward self-employment, her company, my company, no employees in either.

Business #1 is administrative services. My wife will perform various clerical tasks for a company based in Washington state. That company provides advisory services to clients based mostly in Washington, but some of them are in other states. At least a couple of those clients are based in Hawaii. She will likely do some work in relation with those Hawaii clients, but as far as I can tell the services are rendered to the WA company, not the end clients themselves.

Business #2 revolves around the design and delivery of computer code. I will likely only perform work for out-of-state customers, because there are basically no customers in-state. My customers will be companies with end customers everywhere, including Hawaii.


Now for the funky part. Hawaii imposes a general excise tax on any business activity in the state.

Yes, you read that right. However, I found the following:

§237-29.53 Exemption for contracting or services exported out of State.

(a) There shall be exempted from, and excluded from the measure of, taxes imposed by this chapter, all of the value or gross income derived from contracting (as defined under section 237-6) or services performed by a person engaged in a service business or calling in the State for use outside the State where:
(1) The contracting or services are for resale, consumption, or use outside the State; and
(2) The value or gross income derived from the contracting or services performed would otherwise be subject to the tax imposed under this chapter on contracting or services at the highest rate.

For the purposes of this subsection, the seller or person rendering the contracting or services exported and resold, consumed, or used outside the State shall take from the customer, a certificate or an equivalent, in a form the department prescribes, certifying that the contracting or service purchased is to be otherwise resold, consumed, or used outside the State. Any customer who furnishes this certificate or an equivalent shall be obligated to pay the seller or person rendering the contracting or services, upon demand, if the contracting or service purchased is not resold or otherwise consumed or used outside the State, the amount of the additional tax which by reason thereof is imposed upon the seller or person rendering the contracting or service.

Source: http://files.hawaii.gov/tax/legal/hrs/hrs_237.pdf

Paul, internet lawyer and internet CPA: both businesses are exempt (but still need to file) because while the services are produced in Hawaii, they are consumed out of state.

Am I reading this right?

[Michael in ABQ]

New Mexico has a similar Gross Receipts Tax (GRT). In my previous career I was a commercial real estate appraiser and most of my clients were out-of-state. However, if we had an in-state client we had to pay (and try to collect) ~7.5% gross receipts tax. I was working for a large national company and my understanding is they got hit with a pretty significant amount of back taxes ($50k+) for the first several years that department had been operating and paying no GRT at all.

So based on that I would say you are correct. As long as the work is for out-of-state clients you should not have to collect or remit general excise tax. However, this is obviously a case where you will want to get confirmation from a CPA or tax attorney. This is probably a fairly common question for them. They could probably advise you on the recordkeeping requirements as well. I.e. will every new client require some form or is there a blanket exemption and you just have to file periodically with the state saying you owe $0.

[Paul der Krake]

Interesting! Didn't know other states had something quite like this.

I did a mock filing of the GE tax form and there is indeed a way to say "nope I don't owe squat". If you expect to owe less than $2,000 of GE tax per year, that form can be filed as little as twice a year, and it's quite straigthforward.

So I went ahead and filed the paperwork for both businesses.