Hawaii Sales Tax Audit Readiness Checklist
Introduction
If you operate a business in Hawaii or have been notified by the Hawaii Department of Taxation that your General Excise Tax account is under review, understanding what this means and how to prepare is essential.
Hawaii does not have a sales tax. Instead, the state imposes a General Excise Tax (GET) on
businesses for the privilege of doing business in Hawaii. A GET audit examines whether you have correctly reported and paid GET on gross receipts from business activities. The Hawaii
Department of Taxation conducts these audits to ensure compliance with state tax law and to verify that tax obligations are being met accurately.
Failing to respond to audit notices or ignoring them can result in estimated assessments, penalties, interest charges, and potential collection actions that significantly escalate the situation.
What This Issue Means
A General Excise Tax audit is a formal review by the Hawaii Department of Taxation of your business records, gross receipts, and tax filings for a specific time period. The state examines whether you have correctly reported business income, applied the correct GET rate, and paid the appropriate amount of tax.
An audit notice is the official communication that initiates this review and typically specifies the tax period being examined, the type of records needed, and the deadline for providing information. The GET differs from a sales tax because GET is a tax on businesses, not on consumers, and applies to gross receipts from virtually all business activities.
Why the State Issued This or Requires This
The Hawaii Department of Taxation conducts General Excise Tax audits for several common reasons. These include random compliance checks, discrepancies discovered during initial filing review, complaints or referrals, changes in business operations or ownership, or prior audit findings that suggest ongoing compliance issues.
In some cases, the state may initiate an audit based on industry-wide compliance patterns or when a business's reported gross receipts appear inconsistent with those of comparable
businesses. An audit is designed to verify that tax laws are being followed and that the correct amount of tax revenue is being collected and accounted for.
What Happens If This Is Ignored
If you do not respond to an audit notice or do not provide the requested records within the specified timeframe, the Department of Taxation typically proceeds with the audit using alternative methods. In many cases, the state may assess GET based on estimates, prior years' returns, or industry standards rather than your actual records.
These estimated assessments often result in higher tax liabilities than would occur if you provided accurate documentation and cooperated. The state may also impose penalties for failure to cooperate and interest charges on any unpaid tax amounts. If the situation remains unresolved, the matter may escalate to collection actions, liens, or seizure of business assets.
What This Does NOT Mean
A General Excise Tax audit does not mean you are being accused of criminal activity or that criminal charges are being filed against you. An audit is a civil administrative review, not a criminal investigation.
The audit does not automatically result in a large bill or a finding of wrongdoing; the outcome depends on what the records show and whether corrections are needed. Receiving an audit notice does not necessarily mean the state has already concluded that you owe additional tax; the audit is a process used to determine what, if anything, is owed.
Checklist: Hawaii General Excise Tax Audit Readiness
Step 1: Locate and review the audit notice. Review the official notice from the Hawaii
Department of Taxation to identify the tax period, key issues, record submission deadline, and auditor's contact information.
Step 2: Gather your business records. Organize all records documenting gross receipts for the
audit period, including sales invoices, receipts, cash register tapes, point-of-sale system records, bank deposit records, business income journals or ledgers, and payment processing statements.
Step 3: Understand the GET application for your business. Review how General Excise Tax
applies to your business activities, noting that GET applies to gross receipts from almost all business operations at rates ranging from 0.15% for insurance commissions to 0.5% for manufacturing or producing to 4% for most other business activities.
Step 4: Organize records chronologically. Arrange your documentation in chronological order or
by category, as maintained in your everyday business operations, and create a simple index that describes the contents.
Step 5: Gather supporting documentation. Locate and organize purchase orders and invoices
from suppliers, documentation of any exemptions you claimed, records of GET returns previously filed with the state, and documentation explaining business operations during the audit period.
Step 6: Prepare Audit Period Operations Summary. Write a brief description of your business,
including the type of business activities you conduct, how gross receipts are recorded, any changes in operations during the audit period, any ownership or management changes, and whether you operate at multiple locations.
Step 7: Review your GET returns. Gather copies of all General Excise Tax returns filed for the
audit period using Forms G-45 or G-49, and verify the reported gross receipts amounts, the reported taxable receipts, the reported GET collected, and any credits or adjustments claimed.
Step 8: Compile and organize all materials. Create separate folders for the audit notice,
business records organized chronologically, supporting documentation, GET returns, your business operations summary, and any correspondence with the Department of Taxation.
Step 9: Prepare responses to specific questions. Prepare written responses to specific
questions from the audit notice, clearly explaining the problem and providing supporting documents, exemption justifications, and relevant facts.
Step 10: Address any incomplete records. If you do not have complete records for part of the
audit period, note this clearly and explain why records are not available, such as system failure or records destroyed by circumstances beyond your control.
Step 11: Submit your records to the auditor. Examine the audit notice for the correct delivery
method and prepare documents according to the auditor's instructions. Use certified mail with a return receipt and request filing for email confirmation.
Step 12: Request an extension if needed. If you cannot gather and organize records by the
deadline, contact the auditor in writing before the deadline, provide a specific reason for the delay, and propose a new date for submission.
Step 13: Maintain communication with the auditor. Respond promptly to any follow-up requests
or questions from the auditor, and keep copies of all correspondence.
- Missing deadlines for records allows the state to issue an estimated assessment, which
- Providing incomplete or disorganized records can delay review and raise tax compliance
- Altering or destroying records may result in severe penalties. Ignoring follow-up requests
- State enforcement notices and responses
- Sales tax audits, assessments, and collections
- Payroll & trust fund tax enforcement issues
- Penalty and interest reduction options
- Payment plans and state tax relief eligibility
- Representation before state tax agencies
Step 14: Consider professional representation. Decide whether you want to represent yourself
or have a tax professional, accountant, or attorney represent you, and notify the auditor in writing if you choose representation.
What Happens After This Is Completed
After you submit your records to the auditor, the state reviews them against your GET returns, use tax reporting, and applicable Hawaii Tax Rules. This review may take several weeks or months, depending on the frequency of filings and the volume of records for your Small
Business.
Once complete, the Department of Taxation issues an audit report or assessment letter that explains the findings, notes any issues with sales tax exemptions, tax deduction adjustments, or errors, and states whether additional tax, penalties, interest at the federal interest rate, or a tax refund applies.
Common Mistakes to Avoid requires additional assessments, increasing their ability to dispute your results. concerns related to sales tax permits, income tax returns, or federal income tax returns. or failing to document business practices, income brackets, or gross receipts can weaken your position in a tax dispute and undermine effective financial planning or a small business strategy.
Facing State Tax Enforcement Action?
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