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Keeping the Playing Field Level

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By Lowell L. Kalapa


Unless you are in the business of importing goods or products into the state or have purchased an automobile on the mainland, you are probably not familiar with the state’sUse tax.
 

 

 

Last year’s session of the legislature added an interesting twist that placed local businesses at a competitive disadvantage…

       The use tax is a complementary tax to the state’s general excise tax and is imposed only on goods imported into the state either for resale or for consumption by the importer. Depending on whether goods are for consumption or they are to be resold, the tax rate will be either 4% or 0.5%. Like the general excise tax, the full 4% rate applies to goods imported for consumption by the importer whereas the 0.5% rate is applied when the goods are imported for resale.

The major reason for the use tax is to level the playing field for Hawaii businesses so that there is no distinct tax advantage to purchasing goods from a seller outside the state as opposed to purchasing the same goods from a seller in the state who is subject to the general excise tax. Thus, while there may be differences in the cost of the product between an in-state business and an out-of-state business, the cost of the tax will be the same.

Since there is no way to keep track of the out-of-state seller nor would the state of Hawaii have any jurisdiction over the out-of-state seller, the tax is collected from the person who imports the goods. Thus, the business which imports the goods pays the use tax upon receiving the goods in Hawaii or the person who brings in that car from the mainland pays the use tax upon delivery.

The use tax is also excellent proof that Hawaii’s general excise tax had its genesis as a retail sales tax in that the use tax is imposed only on goods. Perhaps it was a matter of the times that the drafters could not conceive of a service being imported into the state by an out-of-state provider. However, as technology has developed, it is possible to perform a service and deliver the results of that service to a customer in the state without the person ever entering the state. As a result, to some degree, local service providers are put at a disadvantage as they must add the 4% general excise to their bill while an identical out-of-state service provider does not.

However, for those out-of-state service providers who actually do come into the state, technically they should be paying the state’s general excise tax as they gain nexus or presence in the state. Since the service provider locates in the state, he or she then becomes subject to the general excise tax even though that service provider may return to his home outside the state.

Generally the taxpayers who import goods for resale comply with the use tax as the law provides that refund of the tax is made to the importer if the goods are in fact subsequently resold and subject to a general excise tax of 0.5%. Compliance on the part of consumers is a little bit more hit and miss because tracking the import of smaller goods like purchases from catalogues is far more difficult. In the case of major ticket items, such as cars or in some cases building materials for a house, they can be identified because in most cases the consumer will have to register the car or in the case of construction, secure a building permit. It is at this point that the tax department intercepts such imported goods and sends a notice to the taxpayer to pay the use tax.

 

 

 

…local businesses who may be selling the identical supplies will lose the sale because the cost of the local supplies will be 4% higher [than what the mainland supplier can charge] as a result of the general excise tax.

       While the provisions of the use tax law generally follow the application of the general excise tax, last year’s session of the legislature added an interesting twist that placed local businesses at a competitive disadvantage and therefore made the playing field uneven. This case involved the effort to exempt aircraft maintenance activities from the general excise tax. As part of that exemption, the legislature was asked to also exempt the importation of goods used in the aircraft maintenance activity from the use tax.

While the use tax exemption was aimed primarily at costly aircraft engines, the way the exemption was drafted included anything associated with the maintenance activity. Thus, this included everything from bolts to hold parts together to the tools that are needed to service the aircraft. This year it was pointed out that the use tax exemption encourages the aircraft maintenance companies to buy everything from outside the state as they avoid the additional 4% cost of the general excise tax. As a result, local businesses who may be selling the identical supplies will lose the sale because the cost of the local supplies will be 4% higher as a result of the general excise tax.

Administration officials argued that limiting the exemption only to the use tax would minimize monitoring of the exemption as they would only have to keep track of the purchaser. On the other hand, the general excise exemption would require keeping track a plethora of local businesses selling to the aircraft maintenance company.

Thus, rather than leveling the playing field for local businesses, lawmakers and administration officials appeared to be concerned only with how difficult it would be to monitor the exemption. So much for leveling the playing field for local businesses.

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