Hawaii

Understanding SaaS Taxability in Hawaii

Is SaaS Taxable in Hawaii?

Yes, Software-as-a-Service (SaaS) is taxable in Hawaii. Additionally, SaaS is subject to the state’s General Excise Tax (GET), which functions similarly to a sales tax but is levied on businesses for the privilege of conducting business in the state.

The state classifies prewritten software, whether sold outright or licensed, as tangible personal property, making it subject to the GET at the retail rate of 4%. This classification applies regardless of whether the software is delivered physically or electronically.

Distinction for B2B vs. B2C

Hawaii does not differentiate the tax rate based on the end-user. Both business-to-business (B2B) and business-to-consumer (B2C) SaaS transactions are subject to the same 4% GET rate.

Determining SaaS Taxability

To determine if your SaaS product is taxable in Hawaii, consider the following:

Assess the Nature of the Service: Determine if your service qualifies as prewritten software, which is taxable, or as custom software, which may be considered a service and subject to different tax implications.
Evaluate the Delivery Method: Confirm that the service is delivered electronically without any accompanying tangible personal property, as this affects taxability.
Review Recent Legislation: Stay informed about any legislative updates impacting SaaS taxability in Hawaii. For instance, the Tax Information Release No. 2021-06 issued by the Hawaii Department of Taxation provides guidance on the taxability of prewritten software and custom software.

Nexus Thresholds for Hawaii

Establishing a tax obligation, or “nexus,” in Hawaii depends on certain criteria:

Physical Nexus: Having a physical presence in Hawaii, such as an office, employees, or inventory, establishes a nexus.
Economic Nexus: Hawaii enforces economic nexus, requiring out-of-state sellers to collect GET if they meet specific thresholds, such as $100,000 in gross sales or 200 separate retail sales within the state.

Sales Tax Compliance Checklist

To ensure compliance with Hawaii’s tax regulations, follow these general steps:

Register for a GET License: Businesses with nexus in Hawaii must register with the Hawaii Department of Taxation to obtain a GET license.
Collect and Remit GET: Once registered, collect the appropriate GET on all taxable transactions and remit the collected taxes to the state.
File Regular Tax Returns: Depending on your sales volume, you may be required to file monthly, quarterly, or annual GET returns. Timely filing is crucial to avoid penalties.

Examples of Taxable SaaS in Hawaii

Taxable:
- B2B Transactions: A business subscribes to a cloud-based accounting software for its internal operations. This transaction is taxed at 4%.
- B2C Transactions: An individual purchases a subscription to an online photo editing tool for personal use. This transaction is taxed at 4%.
- Custom software developed exclusively for a client and delivered electronically without any tangible personal property is also subject to GET.

Local Tax Considerations in Hawaii

Hawaii imposes a county surcharge on the GET, which varies by county. For example, the City and County of Honolulu has a 0.5% surcharge, making the total GET rate 4.5% in that county. It’s important to apply the correct rate based on the location of the sale.

Penalties for Non-Compliance in Hawaii

Non-compliance with Hawaii’s tax laws can result in:

Financial Penalties: Fines and interest on unpaid or late taxes.
Legal Consequences: Potential audits and legal actions by the Hawaii Department of Taxation.
Reputational Damage: Negative impact on your business’s credibility and customer trust.