The Department of Taxation (Department) announces its position that the general excise tax (GET) subcontract deduction is allowed for amounts paid to a specialty contractor who is not licensed by the Hawaii Department of Commerce and Consumer Affairs (DCCA) under chapter 444, Hawaii Revised Statutes (HRS), provided that the specialty contractor is a "contractor" as defined in section 237-6, HRS. This has been the Department's position notwithstanding language in the rules to the contrary, i.e., that a specialty contractor must be licensed by the DCCA in addition to being a "contractor" as defined in section 237-6, HRS, to qualify for the subcontract deduction.

Most taxpayers are subject to the GET on their entire gross income without allowance for income splitting or deductions. Section 237-13(3)(B), HRS, however, allows a contractor a deduction for payments made to another contractor or specialty contractor if certain conditions are satisfied. The purpose of this provision, which is commonly called the subcontract deduction, is to reduce the cost of construction projects.

Payments by a contractor (prime contractor) to another contractor or specialty contractor qualify for the subcontract deduction if the following conditions are satisfied:
 

1. The prime contractor and subcontractor or specialty contractor are licensed under the GET law;
2. The name and general excise number of the subcontractor or specialty contractor and the amounts paid are listed on the prime contractor's GET return ¹; and
3. The amounts are paid to a subcontractor or specialty contractor who is:

a. A contractor, as defined in section 237-6, HRS ²;
b. A specialty contractor, duly licensed by the DCCA pursuant to section 444-9, HRS; or (emphasis added)
c. A specialty contractor who is not licensed by the DCCA pursuant to section 444-9, HRS, but who performs contracting activities on federal military installations and nowhere else in the State.

Thus, amounts paid by a prime contractor to a specialty contractor who is not licensed by the DCCA would qualify for the subcontract deduction if the specialty contractor is a "contractor" as defined in section 237-6, HRS. ³
 

Example: Prime contractor subcontracts the installation of garage doors to A. A is not licensed by the department of commerce and consumer affairs as a specialty contractor. The amounts paid to A, however, will qualify for the subcontract deduction because A is a "contractor" as defined in section 237-6, HRS. A is "engaged in the business of contracting to erect, construct, repair, or improve buildings or structures, of any kind or description."

Forms and other tax information may be downloaded from the Department's website at http://www.state.hi.us/tax/tax.html. On Oahu, forms may be ordered by calling the Department's Forms Request Line at: 587-7572. Persons who are not calling from Oahu, may call: 1-800-222-7572 to receive forms by mail or 808-678-0522 from a fax machine to receive forms by fax.

/s/
RAY K. KAMIKAWA
Director of Taxation

2  Section 237-6, HRS, defines "contracting" to include:  (1) Every person engaged 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; (2) Every person engaged in the practice of architecture, professional engineering, land surveying, and landscape architecture, as defined in HRS section 464-1; and (3) Every person engaged in the practice of pest control or fumigation as a pest control operator as defined in HRS section 460J-1.

3  The Department will amend Example 12 in Hawaii Administrative Rules section 18-237-13-03 which concludes that amounts paid to a specialty contractor not licensed by the Department of Commerce and Consumer Affairs will not qualify for the subcontract deduction.  That example is contrary to the plain language of the statute.