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For many years, owners, developers, contractors and other construction professionals have contracted for the development of real property in Hawaii with a clear and reliable understanding of how projects would be taxed under Hawaii's General Excise Tax ("GET") law. That tax scheme changed dramatically this year with the passge of Act 105 (S.B. 754), a revenue-generating measure which suspended certain standard exemptions contractors and owners/developers relied upon in determining and assessing project costs. In particular, Act 105 suspended the standard gross income deductions taken by contractors for GET calculation purposes on work performed by subcontractors and/or specialty contractors. The effect of this new law was a shock to the system that is only now starting to be understood and felt.
The Act 105 suspensions became effective on July 1, 2011 and last for two years. Contractors executing construction contracts after June 30, 2011 must pay four percent (4.0%) GET on all income received under their contract, including income "passed through" to subcontractors or specialty contractors for work performed by them. Like any tax law, the details of the application and effect of these suspensions is complex, but here are FIVE THINGS EVERY CONTRACTOR SHOULD KNOW:
1. Certain pre-Act 105 construction contracts may be exempt from the Act 105 suspensions. Contracts are exempt from Act 105 if they: a) are in writing; b) are fully executed and binding prior to July 1, 2011; and c) do not permit any increase in GET to be passed on to the project owner (or above-tier contractor). It is too late to change any existing contract to comply with this exemption, but many construction contracts, including most fixed price contracts, meet these requirements. Check your contracts carefully and if there is a question consult an attorney who understands the Act 105 exemption.
2. Change orders to qualified existing contracts (contracts that qualify for the exemption from Act 105) are also exempt from the Act 105 suspensions. If you have a qualified contract and can build in additional work through a change order, you can avoid the additional GET caused by Act 105 that would necessarily result if you entered into a new contract for the work.
3. Bids submitted or accepted bid awards granted on government projects prior to July 1, 2011 are exempt from the Act 105 suspensions. Provided the bid or award ultimately results in a fully executed written contract, a bid submitted prior to July 1, 2011 in response to a local, state or federal government bid invitation is considered a binding written contract for the purposes of the exemption discussed in Item #1 above.
4. Act 105 only applies to GET and does not affect a contractor’s exemption from paying the Oahu Surcharge of (0.5%) on work performed by others. While after June 30, 2011 contractors have to pay GET on work performed by subcontractors and others, they do not have to pay the Oahu Surcharge on income that was exempt prior to the Act 105 suspensions. Don’t miss this and pay the Oahu Surcharge on work you didn’t perform.
5. In additional to the "work performed by subcontractors and specialty contractors", Act 105 suspends numerous other GET exemptions previously available to contractors. You should discuss the potential applicability of all of the Act suspensions carefully with your tax professional or an attorney who understands the ins and outs of Act 105. The money you save may be your own.
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