Tax on tax on tax? Understanding the Hawaii GE tax calculation
Starting a new business in Hawaii is a journey! Whether you’re finally launching your pop-up restaurant or opening a floral design boutique, there is plenty to celebrate (and plenty to do). But as you settle into your new role as a business owner, you might hear a term that feels a little daunting: General Excise Tax.
Tax talk can feel heavy, but our goal is to help you move from overwhelmed to empowered. So, let’s break down Hawaii’s General Excise Tax (GET) and talk about what it means for your new business.
What exactly is GE tax?
The most important thing to know is that Hawaii does not have a "sales tax." Instead, we have the General Excise Tax.
While a traditional sales tax is a tax on the customer that the business simply collects and sends to the state, the GET is a tax on the business for the *privilege* of doing business in Hawaii. It is a tax on your gross income, not your profit.
This means if you sell a service for $100, the State of Hawaii taxes you on that full $100, no matter what your costs might be.
What counts as GE taxable income?
One of the reasons the GET feels different is that it applies to almost every business activity. Unlike many states that only tax physical goods (like a t-shirt or a book), Hawaii also taxes services.
Taxable income for GET purposes generally includes:
Service income: Handyman(or woman) services, coaching, hair styling, and auto detailing are examples of service income.
Retail sales: Selling physical products to a customer.
Rental income: Rent received for a residential or commercial space.
Commissions: Income earned as a real estate agent or travel planner.
Interest: Interest earned on business bank accounts is taxable.
The Hawaii Department of Taxation explains that your gross income is the total of all your business receipts before any deductions.
The "tax on tax" calculation
Here is where many new business owners get a bit confused. Because the GET is a tax on your total receipts, the state considers any tax you collect from your customers to be included in your taxable gross income.
For example, if you charge $100 for a service and add $4.50 for the tax (4.5%), you collect a total of $104.50. When you go to file your return, the state taxes you on the full $104.50, not just the original $100. This effectively means you are paying tax on the tax you collected!
Understanding the maximum pass-on rate
To account for the "tax on tax" effect mentioned above, the state allows businesses to charge a slightly higher amount to their customers. This ensures that after you pay the tax on your total receipts, you are left with exactly your intended price.
The standard rate: 4.5% (State + County Surcharge)
The maximum pass-on rate: 4.712%
If you charge the maximum 4.712%, the math works out perfectly. On a $100 sale, you would collect $104.71. When you pay 4.5% tax on the total received ($104.71), the tax amount is $4.71, leaving you with your original $100. Phew!
How to get started
If you’re doing business in Hawaii, your first step is to register for a GE tax license. You can do this easily through the Hawaii Tax Online website. Along with your tax license number, you will be assigned a filing frequency (monthly, quarterly, or semi-annually) based on how much tax you expect to pay.
For more detailed forms and official guides, you can always visit the Hawaii Department of Taxation forms page. This Tax Facts page also has a lot of good info for new businesses. Reach out for more help!
