Yes. SaaS (software as a service) is taxable in Hawaii; the state applies its general excise tax, or GET for short, to most SaaS products.
Prewritten software, whether sold outright or licensed, is treated as tangible personal property and taxed at the statewide rate of 4%. Custom software, however, is classified as a service, which is also subject to GET, but it can have different tax implications depending on how it is used.
Understanding the concept of nexus is essential for maintaining compliance with the state’s tax regulations. Physical nexus is a physical presence in Hawaii, such as an office, employees, or inventory. Economic nexus is established if your sales in Hawaii exceed $100,000 in a year or involve 200 or more total transactions.
The taxability of SaaS in Hawaii is a matter not only of understanding but also of compliance, as noncompliance can lead to potential penalties and missed obligations. Therefore, it's crucial for businesses to understand and adhere to these tax regulations.
What does taxability mean for SaaS?
SaaS is software that is accessed online rather than purchased and then downloaded on a customer’s device.
You typically subscribe to SaaS, accessing features and updates through the cloud. Its hybrid nature — it is both a product and a service — means that states have to decide how to classify it. Some view SaaS as a service; others, as a product. This creates varying tax rules across the U.S.
In Hawaii, most SaaS offerings are taxable under the state’s GET. The state classifies prewritten software as tangible personal property, even if it’s delivered electronically, and applies its 4% GET. (Custom software is treated as a service but is still taxable at the same rate.)
Hawaii’s tax system is unique in that the GET is both a sales tax and an excise tax, covering services and goods alike. This broad scope creates unique obligations for SaaS businesses.
So a thorough understanding of Hawaii's tax system is essential for SaaS business owners and financial professionals operating in or considering business in Hawaii. Properly understanding how Hawaii’s taxation system works allows you to assess how it might impact your business operations.
SaaS taxation rules in Hawaii
Hawaii applies its GET to SaaS transactions, treating them differently based on the type of software being sold. Prewritten software, whether sold outright or licensed, is considered tangible personal property and taxed at the 4% retail GET rate.
If prewritten software is sold to a licensed reseller, the wholesale rate of 0.5% may apply to the transaction. Custom software, on the other hand, is classified as a service but is still taxable under the same GET framework.
Hawaii clarified its current SaaS taxation rules in its Tax Information Release 2021-06, issued in August 2021, which established that both prewritten and licensed software is taxable as tangible personal property, while custom software is treated as a service. This is in line with Hawaii’s broad interpretation of taxable goods and services.
Nexus in Hawaii
The establishment of nexus, whether physical or economical, determines when a business must collect and remit sales taxes in the Aloha State.
- Physical nexus: Businesses with a physical presence, such as an office, warehouse, or employees in Hawaii, have established physical nexus in the state, which creates a tax obligation.
- Economic nexus: Businesses without a physical presence must collect GET if their total sales in Hawaii exceed $100,000 in a calendar year or reach 200 or more total transactions, which instead triggers an economic nexus.
Exceptions and exemptions
Certain sales and transactions may qualify for exemptions to Hawaii’s GET. For instance, sales to nonprofits or educational institutions might not be taxable depending on how they use the software.
What about digital goods?
Hawaii taxes other digital goods, such as e-books, streamed content, and downloadable files, under similar rules; these goods are treated as tangible personal property when sold to consumers, falling under the same GET rates.
Having a solid understanding of these classifications will help you navigate Hawaii’s tax environment; however, it is often wise to consult with a tax professional if you have questions or concerns.
Navigating compliance for SaaS companies
Complying with Hawaii's tax laws will help you avoid penalties and maintain smooth business operations. The state’s GET applies to most SaaS transactions, making accurate tax collection and remittance a necessary part of doing business.
Steps for compliance in Hawaii
- Registering for GET: Start by registering with the Hawaii Department of Taxation to obtain a GET license, which licenses your company to do business in Hawaii and allows it to legally collect and remit taxes on taxable sales. The complete registration process is straightforward and can be completed online through Hawaii’s official DOTAX website.
- Collecting Tax: When selling SaaS in Hawaii, calculate tax on the total gross receipts, including any sales tax collected from customers. This means you may need to adjust your pricing to account for Hawaii’s GET, which is generally 4% but can be slightly higher if passed on to the customer (for example, 4.167%).
- Filing Taxes: Filing your GET returns involves reporting your gross receipts and the tax collected during the filing period. Hawaii requires businesses to file monthly, quarterly, or annually, depending on their total revenue, which is why accurate recordkeeping is essential here to avoid errors and penalties. You can use the Hawaii Department of Taxation’s DOTAX online system to submit your returns easily and effortlessly.
- Remitting Taxes: After filing your returns within the state, you must remit the taxes that are collected and owed to the state. Payments can be made electronically through the Department’s HITAX portal. It’s important to pay on time, as late payments may result in penalties or interest. Setting reminders for due dates or using automation tools can help you stay on track and on top of your current obligations.
If you owe back taxes, consider pursuing a Voluntary Disclosure Agreement, or VDA, through the Hawaii Department of Taxation, as a VDA can reduce penalties and interest, helping you resolve outstanding liabilities. For businesses no longer operating in Hawaii, deregistering your GET license, using Form GEW-TA-RV-1, is necessary to avoid any unnecessary future fillings or fees.
Tax compliance can get complicated, especially for SaaS companies managing sales across multiple states. Thankfully, tools like Numeral simplify the process by tracking nexus, calculating taxes, and managing filings. This allows you to stay focused on your business while handling Hawaii’s complex tax rules with confidence.
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Additional resources for staying compliant
Navigating Hawaii’s tax rules for SaaS can feel overwhelming, but there’s a wealth of reliable resources that can guide you through the process and make it much simpler.
The Hawaii Department of Taxation’s website is your primary source for official tax updates and general information. Here, you can access tax rates, filing deadlines, and essential forms, such as GET registration and resale certificates. If you have any specific questions, contact the Hawaii Department of Taxation directly at 1-(808)-587-4242 or use their email support for quick responses.
- General Excise Tax (GET) Information
- State of Hawaii Department of Taxation
- TAX INFORMATION RELEASE NO. 2021-06
For additional guidance, you can check out third-party guides specifically focused on SaaS taxation. Many industry organizations, including our blog, offer free or low-cost resources to help businesses stay on top of compliance requirements.
Your guide to staying compliant with Hawaii’s GET
Understanding SaaS taxability in Hawaii is a critical part of operating a business in the state. Hawaii’s general excise tax applies broadly to most software transactions, whether it’s prewritten software taxed as tangible personal property or custom software that’s treated as a service instead.
Knowing your business’s nexus, whether physical or economic, helps you determine when and how to collect and remit taxes in the state. Registering for GET, filing returns, and keeping accurate records will help you avoid penalties, and staying informed about Hawaii’s tax policies will help you stay ahead of any changes that could affect your business.
Consider using tools like Numeral to simplify tax compliance, especially if you’re navigating multi-state obligations. Numeral can track your nexus, automate tax calculations, and handle filings so you can focus on growing your business.
For more personalized help, look into getting a free tax analysis or schedule a demo to see how Numeral can streamline compliance for your organization.
