Hawaii’s General Excise Tax Puts Local Small Business at a Disadvantage
By Marina DeWit – Region 9 Advocate
The first things that come to mind when thinking about Hawaii are tropical weather, beautiful beaches, and family vacations. Tourism is Hawaii’s top industry, with more than 8 million visitors each year. However, it is expensive compared to the rest of the United States. Besides having the country’s highest prices for lodging, car rental, and merchandise, Hawaii has a general excise tax (GET) which is the state’s largest source of public revenue. Unlike sales tax, which is paid by consumers, the GET is levied on businesses’ gross income from wholesale goods, services, and rents. Any business, whether it’s a small business, self-employed, independent contractor, or freelancer, must obtain a general excise license and pay the tax. Businesses headquartered in another state but with a physical presence in Hawaii also have to pay the GET.
The current base rate for the GET is 4 percent of gross sales. However, O’ahu adds an extra 0.5 percent to help pay for the mass-transit rail project. Many business owners add the GET onto their customers’ bill, and customers see the tax only when they pay. With the intermediate taxes charged on goods as they change hands, the GET tax rate that vendors add to bills on O’ahu is 4.712 percent. Additionally, products brought to Hawaii from the mainland are priced much higher by the final seller due to the amounts of the GET paid along the way. As the product passes through the stream of commerce, Hawaii’s GET is calculated with each transaction. By the time a product reaches its point of sale, the GET may have been added to the cost two or three times since its arrival in the state.
With several military bases in the state, military personnel make up almost 4 percent of Hawaii’s population, and defense spending is a large part of Hawaii’s economy. Federal government functions provide significant potential opportunities for local companies. However, local small business struggle to successfully compete with those registered outside of Hawaii because of the GET. When bidding on a federal contract, mainland companies end up having lower bids for same product or service since they don’t have to incorporate the GET in their cost. As a result, Hawaiian companies are often outbid, the state of Hawaii loses a potential source of the GET revenue, and eventually, small businesses that are responsive to the unique requirements of the area decline.
Small businesses stakeholders have put forward numerous solutions to level the playing field for Hawaiian small businesses and enhance their success rate. First, companies performing federal contracts could be exempt from GET. Second, all companies bidding for work in Hawaii could be required to comply with local tax requirements and procedures. Third, state taxes could be excluded during supplier cost evaluations. Finally, the federal government could strive to use local Hawaiian companies to perform work in Hawaii. Improving the climate to breed more successful businesses in Hawaii is a challenge that requires regulatory and tax policy solutions.
Marina DeWit serves as the Region 9 Advocate for the SBA Office of Advocacy, representing small businesses in Arizona, California, Nevada, Hawaii, and the Pacific Islands of Guam, American Samoa, Commonwealth of the Northern Mariana Islands, and Trust Territories. DeWit works with small business owners, state and local governments, and small business associations to bring the voice of Region 9 to Washington DC. She can be reached at Marina.DeWit@sba.gov.