Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 237 - GENERAL EXCISE TAX LAW
Subchapter 2 - LICENSES; TAX; EXEMPTIONS
Section 18-237-13-03 - Tax upon contractors

Universal Citation: HI Admin Rules 18-237-13-03

Current through November, 2023

(a) For the purposes of this section:

"Contractor" includes every person engaging in the business of contracting to erect, construct, repair, or improve buildings or structures, of any kind or description, including any portion thereof, or to make any installation therein, or to make, construct, repair, or improve any highway, road, street, sidewalk, ditch, excavation, fill, bridge, shaft, well, culvert, sewer, water system, drainage system, dredging or harbor improvement project, electric or steam rail, lighting or power system, transmission line, tower, dock, wharf, or other improvements; every person engaging in the practice of architecture, professional engineering, land surveying, and landscape architecture, as defined in section 464-1, HRS; and every person engaged in the practice of pest control or fumigation as a pest control operator as defined in section 460J-1, HRS.

"Licensed specialty contractor" means the same as the term is defined in section 444-7, HRS, in chapter 16-77 and in Exhibit A entitled, Specialty Contractors Classifications, located at the end, and made a part, of this chapter, and who is licensed under chapter 444, HRS.

"Owner-contractor" means an owner or lessee of property who builds or improves residential, farm, industrial, or commercial buildings or structures on such property for the owner-contractor's own use, or for use by the owner-contractor's grandparents, parents, siblings, or children and does not offer such building or structure for sale or lease, as distinguished from the business of contracting which is taxed under section 237-13(3)(D), HRS. The sale or lease, or offering for sale or lease, of such structure within one year after completion is prima facie evidence that the construction or improvement of such structure was undertaken for the purpose of sale or lease; provided that this shall not apply to residential properties sold or leased to employees of the owner or lessee; provided further that the owner or lessee registers for an exemption from the contractors licensing law, under section 444-9.1, HRS.

"Person" means the same as the term is defined in section 237-1, HRS.

"Prime contractor" means a person who:

(1) contracts directly with the owner, lessor, lessee, developer, mortgagor, mortgagee, or any other person, including another contractor or licensed specialty contractor, to engage in the activities listed in the definition of a contractor in chapter 237, HRS; or

(2) performs the activities listed in the definition of a contractor in chapter 237, HRS, except that this does not include an owner-contractor.

"Subcontractor" means a person who contracts with the prime contractor to engage in the activities listed in the definition of a contractor in chapter 237, HRS, and this rule.

(b) Subcontract deduction. Section 237-16, HRS, imposes the general excise tax at the rate of four percent upon the gross income received or derived from the business of a contractor. That section, however, does not apply to gross income received from contracting with the state, county, or federal government, those persons exempted under section 237-23, HRS, and those persons licensed under chapter 237, HRS.

The gross income of a contractor which is not subject to taxation under section 237-16, HRS, however, shall be subject to taxation under section 237-13(3), HRS. Section 237-13(3)(A), HRS, imposes the general excise tax at the rate of four percent on the gross income of the contracting business. A prime contractor is allowed a deduction from gross income for payments made to a subcontractor or licensed specialty contractor; provided the requirements of section 237-13(3)(B), HRS, and this section are satisfied.

These requirements are as follows:

(1) The prime contractor is licensed under chapter 237, HRS;

(2) The subcontractor or specialty contractor is licensed under chapter 237, HRS;

(3) The subcontractor is a contractor as defined in section 237-6, HRS, or the subcontractor is a specialty contractor licensed by the department of commerce and consumer affairs, pursuant to chapter 444, HRS, except that where a prime contractor and subcontractor or specialty contractor perform work exclusively on federal property the specialty contractor must be licensed under chapter 237, HRS, but need not be licensed pursuant to chapter 444, HRS;

(4) The general excise taxes due on the amount claimed as a deduction by the prime contractor must be paid by the subcontractor or the licensed specialty contractor or by the prime contractor on behalf of the subcontractor or the licensed specialty contractor.

The prime contractor may attempt to secure the payment of the excise tax by the subcontractor or licensed specialty contractor by issuing a check payable jointly to the subcontractor or licensed specialty contractor and the department of taxation for the amount of the general excise tax due for the work done by the subcontractor or licensed specialty contractor. Subsequently, the subcontractor or licensed specialty contractor may sign the check and deposit it with the department of taxation. If the subcontractor or licensed specialty contractor fails to deposit the check with the department of taxation, however, the prime contractor shall not be entitled to the subcontract deduction.

Rather than relying upon the subcontractor or licensed specialty contractor to pay the tax to the department of taxation, the prime contractor may withhold the general excise tax from the gross income paid to the subcontractor or licensed specialty contractor and remit those taxes to the department of taxation together with a separate general excise tax return with the name and general excise number of the subcontractor or licensed specialty contractor. There must exist, however, some indicia that the subcontractor or licensed specialty contractor has authorized the prime contractor to withhold the tax due and remit the tax to the department of taxation. The prime contractor shall provide the subcontractor with a copy of the general excise tax return filed by the prime contractor on behalf of the subcontractor or licensed specialty contractor. A copy of the general excise tax return may serve as the receipt required by section 231-13(3)(B), HRS. The department of taxation may audit the prime contractor and disallow the prime contractor's subcontract deduction if the tax is not paid by the subcontractor or licensed specialty contractor or by the prime contractor on behalf of the subcontractor or licensed specialty contractor. If the subcontract deduction is disallowed, the prime contractor shall pay to the department of taxation the amount of the additional tax due, including any applicable interest from the date of the filing of the return in which the prime contractor claimed the subcontract deduction. The statute of limitations for collecting the tax and interest from the prime contractor shall run from the date of the filing of the return in which the prime contractor claimed the subcontract deduction. If the department of taxation collects the tax and interest relating to a disallowed subcontract deduction from the prime contractor, the department will not subsequently attempt to collect a tax which is attributable to the disallowed subcontract deduction from the subcontractor or licensed specialty contractor who initially failed to pay the tax; and

(5) The prime contractor shall provide the department of taxation with the name and general excise number of each subcontractor or licensed specialty contractor for which the deduction is claimed and the total amount of gross proceeds paid to each subcontractor or licensed specialty contractor. The prime contractor shall report this information on either the back side of the prime contractor's general excise tax monthly, quarterly, or semi-annual return and summarized on the annual return or on a separate schedule attached to the respective returns. A prime contractor may claim the subcontract deduction only when the prime contractor correctly reports its gross income as contracting income on the prime contractor's general excise tax returns. Thus, a taxpayer who reports gross income as professional services, rather than as contractor income, is erroneously reporting the income and will be questioned by the department of taxation about the subcontract deduction.

(c) Whether a prime contractor qualifies for the subcontract deduction shall be determined on the basis of all the facts of each particular case. The application of this deduction is illustrated in the following examples:

Example 1: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the construction of a commercial building for $100,000. ABC then subcontracts various aspects of the job to architect W for $10,000, engineer X for $10,000, land surveyor Y for $10,000, and landscape architect Z for $10,000, all of whom are licensed pursuant to chapters 237 and 444, HRS, and are included in the definition of a contractor in section 237-6, HRS. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. Accordingly, ABC, the prime contractor, is subject to the general excise tax at the rate of four percent on $60,000, which is the $100,000 contract less the $10,000 taxable to each of the four subcontractors, W, X, Y, and Z. W, X, Y, and Z are subject to the general excise tax at the rate of four percent on the payments received from ABC.

Example 2: Assume the same facts as in Example 1, except that W fails to pay the general excise tax due on the payment that W receives from ABC and ABC claims the subcontract deduction for the payment to W. ABC shall pay to the director, upon demand, $400, which is the amount of the additional tax due on the amount W received.

Example 3: X, an engineer, contracts for $100,000 to perform engineering work on a building. X is acting as a prime contractor and subcontracts $10,000 of the engineering work to Y, another engineer who specializes in designing fire sprinkler systems. X reports the gross income for the contract as professional services and deducts $10,000 from gross income for the subcontract for Y. This deduction will be questioned because X incorrectly reported the gross income received as professional services. Providers of professional services are not allowed to take subcontract deductions. If X had correctly reported the gross income as contracting income, the subcontract deduction would not be questioned.

Example 4: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the renovation of a residential building for $50,000. While renovating the building, ABC discovers termites and subcontracts with DEF Pest Control Operator, a pest control operator licensed pursuant to chapters 237 and 460J, HRS, to fumigate the building for $5,000. Additionally, ABC subcontracts a portion of the job for $5,000 to GHI Acoustical and Installation Contractor, a specialty contractor licensed pursuant to chapters 237 and 444, HRS. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. Accordingly, ABC, the prime contractor, is subject to the general excise tax at the rate of four percent on $40,000, which is the $50,000 contract less the $5,000 taxable to DEF, the subcontractor, and the $5,000 taxable to GHI, the licensed specialty contractor. DEF and GHI are subject to the general excise tax at the rate of four percent on the payments received from ABC.

Example 5: ABC Land Planning Company works with architects and engineers to plan construction projects by providing financial and market analysis and feasibility studies. ABC contracts with X Landscape Surveyor and Y Landscape Architect, who are both licensed under chapter 237, HRS, and are included in the definition of a contractor in section 237-6, HRS, to do various aspects of the projects. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. ABC is not a prime contractor since it is not engaged in the business of contracting. See, section 237-6, HRS. Accordingly, ABC is not entitled to a deduction for the payments to X and Y.

Example 6: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the construction of a residential building. ABC purchases cabinets manufactured by D Supply House from D and ABC installs the cabinets. ABC also rents equipment from E Rental Company and subcontracts with F Solar Energy Systems Contractor, a specialty contractor licensed under chapters 237 and 444, HRS, to assemble and install a solar hot water system. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to contractors and licensed specialty contractors. Neither D nor E are subcontractors or licensed specialty contractors. F, however, is a licensed specialty contractor. Accordingly, ABC, the prime contractor, is entitled to a deduction for the payment to F but is not entitled to a deduction for the payments to D and E. F is subject to the general excise tax at the rate of four percent on the payment received from ABC.

Example 7: ABC Supply House sells customized cabinets to its customers, including DEF Construction Company. DEF installs the cabinets for its customers. Additionally, ABC, which has a specialty contractor's license, sells and installs cabinets for GHI Construction Company. GHI is entitled to a subcontract deduction for the payment to ABC. DEF, however, is not entitled to a deduction for the payment to ABC as ABC is not engaged in the contracting business, as such, when ABC sells the cabinets to DEF.

Example 8: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor in the construction of a residential building. ABC contracts with Edifice Wrecks, a licensed specialty contractor, to demolish the existing structure and remove the debris. ABC purchases lumber from E Supply House to be used in the construction of the building. ABC subsequently contracts with F Hauling Company, who is licensed by the Public Utilities Commission as a carrier of general commodities and household goods, to haul the lumber to the job site. F is subject to chapter 239, HRS, and is not licensed under chapter 237, HRS. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to contractors and licensed specialty contractors. ABC is entitled to a deduction for the payments to Edifice Wrecks, a licensed specialty contractor. ABC, however, is not entitled to a deduction for the payments to E and F.

Example 9: ABC Construction Company, DEF Construction Company, and XYZ Bank form a joint venture to develop a shopping center. The joint venture will sell or otherwise dispose of the shopping center within one year of the completion. The joint venture contracts with G Landscape Surveyor and H Landscape Architect, who are both licensed under chapter 237, HRS, and are included in the definition of a contractor in section 237-6, HRS, to do various aspects of the project. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. The definition of a person under section 237-1, HRS, includes a joint venture. Accordingly, the joint venture is a prime contractor and taxable as a contractor on the disposition of the property. The joint venture, however, is entitled to a deduction for the payments to G and H. G and H are subject to the general excise tax at the rate of four percent on the payments received from the joint venture.

Example 10: Individual A, who is not engaged in the construction business, purchases land and decides to build a residence. A, an owner-contractor under sections 444-2 and 444-9.1, HRS, and this section, contracts with Contractor X, who is licensed under chapter 237, HRS, and is included in the definition of a contractor in section 237-6, HRS, to do various aspects of the job. The definition of a prime contractor does not include an owner-contractor, such as A. Thus, A is not entitled to a subcontract deduction for the payments to X, and X is subject to the general excise tax at the rate of four percent on the payments received from A. If, however, X fails to pay the general excise tax due on the payment that X receives from A, A is not liable for the nonpayment of the tax.

Example 11: Assume the same facts as Example 10, except that X contracts with Contractors Y and Z, who are both licensed under chapter 237, HRS, and are included in the definition of a contractor in section 237-6, HRS, to do various aspects of the project. X is entitled to a deduction for the payments to Y and Z. Y and Z are subject to the general excise tax at the rate of four percent on the payments received from X.

Example 12: ABC Construction Company, a contractor licensed under chapter 237, HRS, is the prime contractor for the construction of a commercial building. ABC then subcontracts with DEF Company, a specialty contractor licensed under chapter 237, HRS, but not licensed under chapter 444, HRS, to do part of the job. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and specialty contractors licensed under chapter 444, HRS. DEF, however, is an unlicensed specialty contractor. Accordingly, ABC is not entitled to a deduction for the payments to DEF.

Example 13: Assume the same facts as in Example 12 above, except that the renovation will be done on a commercial building which is exclusively on federal property. The specialty contractor, DEF, is not required to be licensed under chapter 444, HRS, because its contracting activities on the federal property are not within the regulatory jurisdiction of the State. Accordingly, ABC is entitled to a deduction for the payments to DEF if DEF pays the general excise tax at the rate of four percent on the payments received from ABC. DEF is required to be licensed as a taxpayer under chapter 237, HRS.

Example 14: ABC Construction Company, a contractor licensed under chapter 237, HRS, but unlicensed under chapter 444, HRS, is the prime contractor for the renovation of a commercial building. ABC then contracts with DEF Acoustical and Installation Construction Company, a specialty contractor licensed under chapters 237 and 444, HRS, to do part of the job. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. There is no requirement that the prime contractor be licensed under chapter 444, HRS. Accordingly, ABC is entitled to a deduction for the payments to DEF. DEF is subject to the general excise tax at the rate of four percent on the payments received from ABC.

Example 15: Customer X purchases tile from ABC Retailer, a company licensed under chapter 237, HRS, but unlicensed under chapter 444, HRS. ABC then contracts with DEF Tile Contractor, a specialty contractor licensed under chapters 237 and 444, HRS, to prepare the base and install the tile. Section 237-13(3)(B), HRS, allows a prime contractor a deduction for payments to subcontractors and licensed specialty contractors. ABC, however, is not a contractor under section 237-6, HRS. Accordingly, ABC is not entitled to a deduction for the payments to DEF. DEF is subject to the general excise tax at the rate of four percent on the payments received from ABC.

(d) Exemption from the general excise tax of all rents and proceeds received from housing projects, including all gross proceeds received by contractors for the construction of housing projects developed pursuant to chapters 201E and 356, HRS.

(1) Scope. This subsection sets forth the general excise tax exemption provisions of section 201E-205, HRS.

(2) Definitions. For the purposes of this subsection:

"Corporation" means the housing finance and development corporation established under chapter 201E, HRS.

"Housing" or "housing project" means dwelling units developed and constructed pursuant to contracts or partnership agreements executed between the corporation and eligible bidders (as defined in section 201E-213, HRS).

(3) Application of exemption from the general excise tax.
(A) Qualifying process. The following are exempted from the general excise tax under chapter 237, HRS:
(i) All rents received on account of the lease or rental of dwelling units developed and constructed pursuant to sections 201E-211 and 201E-213, HRS, and

(ii) All gross proceeds received by a contractor for the development and construction of dwelling units pursuant to sections 201E-211 and 201E-213, HRS.

(B) Non-qualifying proceeds. Gross proceeds shall not be exempt from the general excise tax where they are received by any person who furnishes tangible personal property or renders service to:
(i) Another person who receives rental payments which are exempted from the general excise tax under this section; or

(ii) A contractor for the development and construction of housing or housing projects pursuant to sections 201E-211 and 201E-213, HRS.

(4) Filing of claim; time and place. An exemption claim (FORM G-37) shall be prepared by the claimant and submitted to the corporation for certification after final execution of the partnership agreement or contract or both between such claimant and the corporation. The original copy of the certified exemption claim shall be filed with the tax assessor for the taxation district in which the claimant files the claimant's general excise tax return (FORM G-HW-1).

(5) Failure to file claim. The exemption shall not be allowed unless the original copy of the certified exemption claim is filed with the tax assessor.

(6) Records. A claimant shall keep at the claimant's principal place of business such records as will enable the director to verify the accuracy of the amount of exemption claimed.

[Eff 2/16/82; am 12/1/88; am 2/1/89; am 7/1/90; am and ren § 18-237-13-03 12/27/90] (Auth: HRS §§ 231-3(9), 237-8) (Imp: HRS § 237-13)

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