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How Software is Taxed in Hawaii

by TaxJar September 15, 2021

The Hawaii Department of Revenue recently stated their position on the taxability of software. With this news Hawaii becomes the latest state to clarify how they require retailers to tax both software purchased in a tangible medium (such as on a DVD) and software downloaded digitally.

How is software taxed in Hawaii?

Issued in August, Hawaii Tax Information Release 2021-06 states that prewritten, canned software is considered tangible personal property whether sold in tangible form, such as on a flash drive, or sold as a digital download.

The notice goes on to further clarify that both prewritten software sold outright and licensed prewritten software are considered tangible personal property and subject to Hawaii’s 4% general excise tax (GET).

The bulletin also addressed custom software. (Prewritten software means software like Microsoft Office, which is prewritten and sold in the same form to many customers. Custom software means a custom application created for one customer.) Hawaii considers developing custom software a service rather than tangible personal property. This is no matter if the custom software is sold outright or licensed to the consumer. 

In Hawaii, tangible personal property and services are both subject to the state’s General Excise Tax (GET).

Long story short: the state has had the final word and most software is taxable in Hawaii. 

Retail vs. Wholesale Tax and Software in Hawaii

In some cases, software is sold to a wholesaler who will turn around and resell or license the software to end users. In this case, selling software wholesale is subject to Hawaii’s .5% wholesale GET rate rather than the 4% rate for sales of tangible personal property to end users. 

Read more about retail vs. wholesale sales tax (and GET) here, and read what the Hawaiian General Excise Tax code has to say about wholesales in Hawaii in section 237-4 here.

How does Hawaii’s General Excise Tax (GET) differ from sales tax?

GET in Hawaii is similar to sales tax in other US states in that consumers generally see it as a percentage tacked on to the price of items (and generally services) they purchase in Hawaii. 

But unlike sales tax, which is paid by the buyer, GET is a tax for “the privilege of doing business” in the state of Hawaii and levied on the seller. According to the Hawaii Department of Taxation, “Activities subject to GET include wholesaling, retailing, farming, services, construction contracting, rental of personal or real property, business interest income, and royalties.”

You can read more about the difference between Hawaii’s General Excise Tax (GET) and Sales & Use Tax (SUT) here.

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