How is software taxed in Hawaii?

Most business activities in Hawaii are subject to general excise tax (GET), including sales of custom software, canned or prewritten software, and the license to use canned software. However, not all transactions are taxed at the same rate.

While the standard 4% GET rate applies to most retail sales of tangible personal property (TPP) and services in Hawaii, a reduced rate of 0.5% applies to wholesale transactions of TPP and services. Where applicable, local tax (aka, a county surcharge) applies to transactions taxed at the standard rate but not to transactions taxed at the reduced 0.5% rate.

Custom software is considered a service, but canned or prewritten software is considered TPP. Depending on the nature of the transaction, both custom and canned software can be taxed at either the standard 4% GET rate (plus applicable local tax) or the reduced 0.5% GET rate. 

The standard 4% GET rate plus applicable local tax applies to most retail sales of canned or prewritten software, whether the consumer receives it electronically or in physical form (e.g., a disc). The standard rate also applies to most retail sales of the license to use canned or prewritten software.

Likewise, retail sales of custom software are generally taxed at 4%, plus applicable local tax.

The 0.5% GET rate generally applies when custom or canned software is sold or licensed to a licensed seller for subsequent resale or licensing. Hawaii Revised Statutes section 237-4 provides more information about resales.

To validate use of the reduced rate, the seller should obtain a resale certificate from consumers who intend to resell the software.

Sales made through a marketplace typically involve both wholesale and retail sales.

Canned or prewritten software sold by a marketplace facilitator to an end consumer is generally considered a retail sale, so the 4% GET rate generally applies. Yet canned or prewritten software sold by a marketplace seller to a marketplace facilitor is generally considered to be a wholesale transaction and taxed at 0.5%. Hawaii Department of Taxation TIR 21-06 further clarifies treatment of software sales in Hawaii.

Retailers, marketplace sellers, or marketplace facilitators with a physical presence in the Aloha State are required to obtain a GET license.

Retailers, marketplace sellers, or marketplace facilitators with no physical presence in Hawaii are required to register only if they meet or exceed Hawaii’s economic nexus threshold: at least $100,000 in gross income sourced to Hawaii or 200 transactions in the state in the current or previous calendar year.

When calculating the sales/transaction threshold, a marketplace facilitator should count both direct and third-party sales into the state. Determining the threshold is less straightforward for marketplace sellers.

If selling through a marketplace facilitator that’s engaged in business in the state (i.e., registered and collecting sales tax), a marketplace seller should count the following transactions when calculating the threshold:

• Direct sales (sales not made through a marketplace) of tangible personal property
• Sales of tangible personal property made through any marketplace facilitator if the marketplace seller sends the property into Hawaii, either directly to the purchaser or to a marketplace facilitator for resale
• Sales of intangible property and services that were made into Hawaii, regardless of whether the sale was made through a marketplace facilitator, if the intangible property or services are ultimately used or consumed in Hawaii

When selling through a marketplace facilitator that isn’t engaged in business in the state, a marketplace seller should count all sales made into Hawaii when calculating the threshold. TIR  2019-03 further explains how GET applies to marketplace transactions.                                  

Our Software Executive’s Guide to Sales Tax explores more issues related to software and tax compliance, while our free sales tax risk assessment can help you determine whether you have an obligation to register and collect GET in Hawaii.