Sales Tax Obligations of a Seller in Hawaii

April 13, 2006

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As a seller, you have the obligation to pay sales taxes to the state. There are a few issues that you may need to consider when determining your tax liability. For instance, you will want to determine whether it would be more advantageous to pass the tax onto your customers. Furthermore, if you're an out-of-state catalogue seller generating sales in Hawaii, you're going to have to consider whether Hawaii's excise tax applies to you. For this reason, we recommend that you review the following discussions in order to avoid underpayment penalties and interest.

Procedure for accepting a resale 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).

Procedure for accepting blanket resale certificates. Hawaii allows you to accept blanket resale certificates from your customers. A blanket resale certificate is a resale certificate provided to you by those customers who make numerous exempt resale purchases from you. The idea is that by maintaining a blanket resale certificate, both you and your customer can avoid the hassle of having to present a certificate every time your customer makes a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, you should require that the purchaser present, in good faith, a blanket resale certificate that contains the same information as the regular resale exemption certificate.

Sales and use tax liability for out-of-state mail order and catalogue retailers. 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.

Passing on the sales tax to your customers. You will be responsible for paying Hawaii sales taxes, but the law allows you to pass it on to your customers.

Using a "no sales tax" advertising strategy to drum up business. Consumers will generally go to great lengths to avoid or reduce the sales taxes they pay. As proof of this phenomena, you need only go to a shopping mall parking lot in a state that's adjacent to a state with higher sales taxes. Based on the number out-of-state license plates, it's clear that people will take a longer drive to reduce their shopping bill. Since Hawaiian sellers can elect to pay the sales tax themselves, 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.

Calculating sales taxes. 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).

Claiming a refund of overpayment for sales and use 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.