Hawaii has a special tax, called the General Excise Tax (“GE” or “GET”) that applies to gross receipts from most (virtually all) business transactions. While I am not a tax return preparer or accountant, as a tax attorney with more than two decades of experience in helping people work their way out of difficult tax problems, I have observed several common GE filing mistakes.
Here’s the GE half-dozen:
The first three mistakes relate to timing, the second three relate to the substance of the returns.
(As with anything you read on the internet,) this list is not intended as legal advice or addressed to your particular situation. Also, it is based on generalizations.
In general, ignorance of the law is not a defense and certainly is not a strong excuse to most penalty assessments under Hawaii law.
General excise return filings should be taken (at least) as seriously as income tax returns. Getting to it later can become never.
Intentional failure to file is a misdemeanor crime pursuant to Hawaii law. On a civil basis, not filing returns most likely simply delays the ultimate reckoning, accrues penalty and interest, and does not start the statute of limitations on audit or collection, among other negative ramifications.
2. Not Filing G-49 (Annual Reconciliation) Returns
A sub-species of not filing at all is filing the periodic (G-45) returns, but never filing the annual returns. This is #2 because frequently the periodic returns are accompanied by payments, thereby greatly reducing penalty and interest when the annual reconciliation (G-49) returns are filed.
The problem is the G-49 reconciliation is the operative return that legally starts the statute of limitations on assessment and collection. Failing to file the G-49 can also deprive filers of a potential refund should they have overpaid with their G-45s.
While there is typically a certain comfort to knowing that payments were made with periodic returns, this comfort can quickly evaporate under the pressure of an audit into all years for which a G-49 was not filed.
3. Filing Late
Late filing typically results in a 25% penalty on any outstanding balances, increases audit exposure, and delays starting the audit and collection statute of limitations. The 25% is a cumulative amount imposed at 5% per month until 25% is reached.
Hawaii imposes interest on unpaid tax and accrued penalty at the rate of 8% per year.
Now, turning to the substantive mistakes:
4. Returns Filed Are Based On Net, Not Gross, Receipts
In general, the General Excise Tax is a gross receipts tax. There are extremely limited exceptions to a general concept that gross receipts should appear in Column a of the general excise tax return, shown in part below:
In this mistake, the return preparer initially puts a “net” number into Column a.
There are then two variations, in my experience. In one variation, the exemptions that should be entered in Column b are deducted and the result is in Column a. In another variation, the Column a figure is an “income tax” style net profit figure, meaning, a figure after all expenses.
Both variations can potentially be identified by data sorting techniques and selected for audit. Depending on the size of the omitted or understated “Column a” gross income, the statute of limitations for examination may be extended or simply not apply.
5. Exemptions Incorrectly Claimed
There are exemptions from the general excise tax. The vast majority of business activities and transactions in Hawaii, however, are not exempt from the general excise tax.
Overwhelmingly, exemptions require specialized documentation to establish the exemption. Simplistically stated, the documentation is an agreement between two or more parties on how a transaction will be treated for GE purposes. Because the specialized documentation is not required to be routinely submitted to the Department of Taxation, some (or many) taxpayers “never bother” to obtain the appropriate documentation. Frequently, when an exemption could have been claimed if appropriately documented, the exemption is lost because it depends upon the conduct of a third party.
If an audit occurs, it may not be possible to obtain the documentation or, in the process of attempting to obtain the documentation, it becomes evident that the exemption is no longer available because of the conduct or status of a third party.
6. Incorrect Filing Category
At first glance, all 4% categories would appear to produce the same tax result as the tax rate is the same.
Unfortunately, the categories can have significant ramifications especially if not consistent with income tax reporting. The major ramification will be a potential contact from the Department of Taxation and a possible audit.
A common mistake involves rentals. There are two lines for rentals: “Transient Accommodations Rentals” and “Other Rentals.” Transient Accommodations are lodging rentals subject to Hawaii’s special Transient Accommodations (“TA”) Tax, which is akin to a hotel tax and applies, in general, to lodging rentals of less than 180 consecutive days. “Other Rentals” are all non-TA rentals and also include equipment rentals. Filing on the TA Rentals line is likely to eventually trigger an inquiry into the potential non-filing of a corresponding TA return.
Another common mistake I have observed involves “contracting.” On the general excise tax returns, “contracting” refers primarily to the building trades. It does not apply to “independent contractors” that are not working in the building or construction trades. Software engineers, freelance artists, persons doing gig work, etc., while referred to as “independent contractors” for withholding tax (and other) purposes, are not engaged in “contracting” for GE purposes.
So, if you’ve made some of these mistakes, what should you do?
The short answer is consult with someone familiar with Hawaii’s laws as soon as possible. Many of these errors can be fixed without calling attention to yourself and triggering a time-consuming audit.