Although many people call it and think of it as the retail sales tax they pay in mainland stores, Hawaii’s general excise tax is unique. It is not to be found anywhere else in the nation!
Can that be true? Yes, the Hawaii general excise tax IS NOT the same as the retail sales tax in a variety of ways. The most obvious difference is the fact that it is imposed on all transactions. The retail sales tax is usually imposed only on the sale of goods. In Hawaii where nearly 60% of the economic activity results from the provision of services, the 4% tax is imposed on those services. As a result, there is a broader base for the general excise tax than for the retail sales tax that is found on the mainland. This allows the tax rate to be relatively low by comparison to retail sales tax rates. For example, the retail sale tax rate in San Francisco is 8.75%.
The other glaring difference is that the general excise tax is the liability of the business whereas the retail sales tax is a tax on the consumer. This is a point of confusion for many shoppers who see the general excise tax added on to their register receipts. While the law is silent on the visible “passing on” of the tax, businesses have done so since the mid-1950’s when the visible pass-on of the tax allowed Hawaii residents to claim the “sales tax” deduction under the federal income tax law. No doubt, this practice gave rise to the belief that the general excise tax is the same as a retail sales tax.
The third major difference between the general excise tax and the retail sales tax is that it is imposed on sales of goods and services that may not be for final consumption. As the term implies, the retail sales tax is imposed only on those sales of goods where the purchaser is the consumer of the goods purchased.
The general excise tax, on the other hand, is imposed whether or not the transaction results in the final consumption. Again, remembering that it is imposed on goods and services, the tax is added to the subsequent selling price of those goods or services which in turn increases the “shelf price” of the goods or services.
While goods sold for resale suffer from price increases less than services as sales of goods for resale are hit with a 0.5% tax rate; services, on the other hand, are always considered for final consumption and are therefore hit with the full retail rate of 4%. Given the fact stated above that nearly 60% of the economic activity in Hawaii is due to services, it is not difficult to understand why the general excise tax imposes such a heavy burden on the cost of living and doing business in Hawaii.
Recently, some administration officials have erroneously indicated that if Hawaii switched to a sales tax, the tax rate would only have to be 5% in order to generate the same amount of money for the state treasury. It appears that this belief is based on a 1986 study done for the Tax Review Commission which found that the “effective tax rate” of the general excise tax is 5.6%, that is the net effect of the general excise tax is to increase the cost of all goods and services by 5.6%. The study did no address what the tax rate should be if the structure was changed to a retail sales tax that taxes only goods, is imposed only on the final sale for consumption, and is a tax on the customer.
By contrast, a study by Professor William Fox of the University of Tennessee – a national authority on state sales taxes – indicates that if Hawaii adopted a retail sales tax structure, the rate might have to be as high as 16% in order to generate the same amount of money as the general excise tax now produces. Indeed, that rate seems more realistic when one realizes how much the base would shrink in moving from the comprehensive general excise tax to a retail sales tax.
What is scary is that state administration officials believe that we taxpayers are paying only the equivalency of a 5% or 6% sales tax. Perhaps that’s why public officials don’t believe taxes are so high. That’s really scary. No doubt, public officials need to spend more time examining just how the general excise tax is hurting everyone in Hawaii – businesses, consumers, families, and workers!