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Hawaii enacts economic nexus standards for general excise tax

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On June 12, 2018, Hawaii enacted legislation that subjects an out-of-state person who is engaged in business to the state’s general excise tax (GET) if the person has a specified amount of sales or number of transactions within the state.1 The sales thresholds for economic nexus mimic the thresholds of the South Dakota legislation that recently was considered by the U.S. Supreme Court in South Dakota v. Wayfair, Inc.2 The legislation is effective July 1, 2018, and applies to taxable years beginning after Dec. 31, 2017. However, the Hawaii Department of Taxation has issued an announcement explaining that it will not enforce the GET on out-of-state taxpayers prior to July 1, 2018.3 This announcement includes a detailed explanation of initial filing deadlines after taxpayers meet either of the thresholds. For certain taxpayers filing on a monthly basis, the first filing deadline is Aug. 20, 2018.

Background As explained by the Department, the GET is a privilege tax that is imposed on all business and other activities “in the State.”4 A person engaging in business who has a physical presence in Hawaii is subject to GET because the person clearly satisfies the statutory “in the State” requirement, but it was not clear under which circumstances a person without a physical presence in the state would meet the “in the State” requirement. As a result, legislation was enacted to establish bright-line nexus standards for the GET.

Economic nexus thresholds For purposes of the GET, a person is engaging in business in Hawaii, whether or not the person has a physical presence in the state, if in the current or immediately preceding calendar year: (i) the person’s gross income or gross proceeds from the delivery of tangible personal property delivered in the state, services used or consumed in the state, or intangible property used in the state is $100,000 or more; or (ii) the person sold tangible personal property delivered in the state, services used or consumed in the state, or intangible property used in the state in 200 or more separate transactions.5

Implementation The Department issued guidance to explain the implementation of the GET bright-line nexus standard.6 As noted by the Department, the U.S. Supreme Court recently held in Wayfair that a South Dakota statute with the same nexus thresholds as the Hawaii legislation satisfied the substantial nexus requirement under the Commerce Clause of the U.S. Constitution. In Wayfair, the Court concluded that several factors of the South Dakota law prevented burdens on interstate commerce, including no retroactive application of the law.7 To avoid any constitutional concerns, the Department explained that it will not retroactively administer the Hawaii economic nexus statute and will not impose the GET on out-of-state taxpayers prior to July 1, 2018.8

Deadline for filing first return

Periodic GET returns are due on the 20th day following the close of a taxpayer’s filing period. Taxpayers must file on a monthly basis if more than $4,000 in GET will be paid for the year.9 In addition, annual returns are due on the 20th day of the fourth month following the close of the tax year.10

According to the Department’s guidance, a person engaged in business who lacked a physical presence in Hawaii prior to July 1, 2018, but met either of the economic nexus thresholds in 2017 or 2018, is not required to remit GET for the period from Jan. 1, 2018, to June 30, 2018. However, these taxpayers are subject to GET beginning July 1, 2018, and must file their first periodic return by the applicable deadline. Fiscal year taxpayers are subject to GET beginning on the later of July 1, 2018 or the first day of the tax year beginning after Dec. 31, 2017. For calendar year taxpayers filing on a monthly basis that first met either of the economic nexus thresholds between Jan. 1, 2017, and June 30, 2018, the first filing deadline is Aug. 20, 2018.

Taxpayers without a physical presence that meet either of the economic nexus thresholds between July 1, 2018 and Dec. 31, 2018, are subject to GET beginning July 1, 2018.11 The taxpayer will be given a grace period of one period for filing the first periodic return. Thus, the taxpayer must file its first periodic return by the deadline for the return following the period during which the taxpayer meets either of the thresholds.12 Taxpayers that meet the threshold during the last period of the tax year are not required to file a periodic return for that period. In this situation, the taxpayer’s first return will be the annual return for the tax year.13 The grace period also applies to years after 2018 for out-of-state taxpayers that did not meet either of the thresholds during the preceding calendar year.

Catchup income

Because taxpayers meeting one of the economic nexus thresholds after July 1, 2018, are given a grace period to file their first return, they are required to report and pay GET on what the Department characterizes as “catchup income.” The Department defines “catchup income” as income recognized prior to and during the period in which the taxpayer meets the threshold.14 Taxpayers may report and pay GET on all catchup income in full on the first periodic return or by spreading the GET liability equally over the remaining periods in the current tax year. However, taxpayers meeting one of the thresholds during the last period of the tax year must report and pay GET on all catchup income in full on the annual return. The catchup income provisions also apply to years beginning after 2018.

Commentary The Hawaii economic nexus legislation was enacted while Wayfair was pending before the U.S. Supreme Court. In fact, the Hawaii economic nexus thresholds for the GET are virtually the same as the thresholds contained in the South Dakota statute at issue, and ultimately endorsed in Wayfair. The statute is very brief and similar to the statutes enacted by other states, but the implementation of the statute differs from other states because the GET is a privilege tax rather than a sales tax. Unlike a sales tax, the GET is imposed on the gross income received by the person engaging in the business activity.

While the statute became effective July 1, 2018, concerns were raised by the statutory intent to apply the new economic nexus policy to taxable years beginning after Dec. 31, 2017. The Department initially indicated that it was going to enforce the statute retroactively, but quickly changed its position to conform to language in Wayfair endorsing South Dakota’s efforts in this area in part because its statute was not going to be imposed on a retroactive basis. Accordingly, out-of-state sellers are not required to pay GET for the period from January 1, 2018 through June 30, 2018. However, from the perspective of administrative burden, a level of retroactivity arguably remains in the application of the statute. Taxpayers that met either of the thresholds in 2017 or the first half of 2018 are automatically subject to the registration and compliance responsibilities of the GET beginning July 1, 2018, regardless of whether the thresholds are met or exceeded on July 1, 2018 or thereafter. At its extreme, a remote seller that met the economic nexus threshold based on one large transaction completed in January 2017 technically would have a filing responsibility under the GET in 2018 even if it had no further contact with Hawaii purchasers since the completion of the January 2017 transaction.

Taxpayers that meet either of the thresholds during the second half of 2018 are allowed one grace period to initially file their report. However, these taxpayers are required to pay GET on catchup income back to July 1, 2018. This catchup income concept also applies to years beginning after 2018. Again, while Hawaii’s intent is not to apply the thresholds on a retroactive basis, an argument can be made that there is a retroactive aspect to taxing income earned prior to the date that a taxpayer meets the thresholds (albeit for a short period of time) through the catchup income concept. Because this catchup concept is unique to Hawaii, taxpayers should carefully consider whether they may owe tax on this income. This may substantially increase a taxpayer’s GET obligation, but taxpayers meeting the threshold prior to the last period of the tax year are allowed to spread the liability equally over the remaining periods in the current tax year.


 
1 Act 41 (S.B. 2514), Laws 2018.
2 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
3 Announcement No. 2018-10, Hawaii Department of Taxation, revised July 10, 2018.
4 See HAW. REV. STAT. § 237-13. The GET is imposed on the gross income received by the person engaging in the business activity. The Department has explained that there are two main differences between the GET and a sales tax. First, the GET is a tax on the person for the privilege of doing business in Hawaii, while 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, but a sales tax traditionally is a tax on the retail sale of tangible goods. An Introduction to the General Excise Tax, Hawaii Department of Taxation, revised April 2018.
5 S.B. 2514, § 1 (new provision, HAW. REV. STAT. ch. 237).
6 Announcement No. 2018-10, Hawaii Department of Taxation, revised July 10, 2018. Note that the announcement includes a list of FAQs that cover (i) engaging in business in the state and (ii) filing and payment deadlines.
7 According to the Court, the conclusion that the South Dakota statute satisfied the Commerce Clause also was supported by factors such as (i) a safe harbor for limited sales and (ii) South Dakota’s adherence to the Streamlined Sales and Use Tax Agreement.
8 Note that the Department initially issued guidance on June 27, 2018, indicating that it would retroactively enforce the legislation. This guidance was amended and superseded on July 10, 2018.
9 See HAW. REV. STAT. § 237-30. Quarterly returns are required if more than $2,000, but less than $4,000 of GET will be paid for the year, and semiannual returns are required if $2,000 or less in GET will be paid for the year. Id.
10 See HAW. REV. STAT. § 237-33.
11 Similar to above, fiscal year taxpayers are subject to GET beginning on the later of July 1, 2018, or the first day of the tax year beginning after Dec. 31, 2017.
12 As a result, taxpayers meeting the threshold during July 2018 will have a first filing deadline of Sept. 20, 2018.
13 Therefore, taxpayers meeting the threshold during December 2018 will have a first filing deadline of April 22, 2019, (the annual return due date).
14 As noted above, taxpayers meeting either of the thresholds between July 1, 2018 and December 31, 2018 are subject to GET beginning July 1, 2018, and would have catchup income from July 1, 2018, to the end of the month in which the thresholds are met.




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