In 2011, Act 105 became law and disallowed the exemption of Hawaii’s General Excise Tax (GET) on subcontractor work by the general contractor. This law is scheduled to be discontinued this summer.
Act 105 causes the GET to be charged multiple times on the same GET already paid. This practice is called tax pyramiding. Since the inception of Hawaii’s GET, pyramiding was cautiously avoided by exempting services that triggers tax on tax situations.
In Hawaii, the number of subcontractor licenses continues to grow with every new product or new way of work, due to a current state law. We have two types of general contractor licenses: “A” for general engineering contractors; and “B” for general building contractors, and more than 168 subcontractor licenses.
Each type of license identifies work dedicated to a specific jurisdiction. For example there are different licenses for fencing depending on the type of fence: wood, vinyl, stone, glass and more. There are different licenses for roofing depending on the type of roof: wood shake, asphalt shingles, hot tar, metal, tile and more. Each type of license can be subject to multiple taxing of the GET depending on if a subcontractor uses other subcontractors.
Here’s an example: When a cabinet maker sells to a cabinet installer (first tax), and the installer sells the same cabinet with installation to a general contractor (second), and the general contractor sells the total job with cabinets and the installation to you, the consumer (third), the state Tax Collector gets the 4.5 percent GET three times on the same cabinet, which is ultimately passed on to the buyer.
By allowing Act 105 to sunset June 30, contractors will be allowed to pay the 4.5 percent GET at the first level, just once, and not continuously add the tax at each level. Contractors identify the amount the previous subcontractor has paid and deducts that from the amount due on the total sale. This practice lowers the cost of construction to you, the buyer.
The state tax collector favors allowing this law to sunset. Rep. Sharon Har introduced HB 1194, which allows for the sunset of the subcontractor exemption. The Committee on Consumer Protection & Commerce had scheduled this bill for hearing earlier this week at the State Capitol.
Rep. Sylvia Luke has introduced HB 1360, which would make permanent the suspension of the subcontractor exemption. It has a single-referral to the Finance Committee, of which she is chairwoman, and no hearing has yet been scheduled.
Please write to your state representative to tell them to allow this law to sunset so construction costs can remain affordable in Hawaii.
Karen Nakamura is executive vice president/CEO of the Building Industry Association of Hawaii.