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De-Pyramiding Legislation Raises Many Other Questions

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By Lowell L. Kalapa

While taxpayers may still be confused about what qualifies for the new provisions relating to purchase of services for resale, lawmakers must grapple with some legislation that will resolve conflicts between the depyramiding legislation and the new law regarding the exemption of exported services and the taxation of imported services.

Since both Act 70 and Act 71 passed independent of each other because negotiations in conference committees broke down at the end of session, lawmakers did not have an opportunity to synchronize the provisions of the two acts. For example, the depyramiding bill focused on the reduction of the general excise tax rate on services purchased for resale; however, while contracting is usually thought of as being a “service” it has its own distinct provisions in the law and thus is not including in the term services. Thus, remedial legislation is being submitted to extend the depyramiding tax relief to “contractors.”

Another problem with last year’s legislation is that the provisions imposing the use tax on services imported into the state did not recognize the possibility of purchasing services from outside the state that would in turn be resold to customers either in the state or outside the state. Thus, the remedial bill will address the situation where services are being purchased from an unlicensed provider outside the state for resale to customers in the state or for that matter outside the state where the service would then be exempt as the service would be exported from the state.

Similar to the problem with contractors, last year’s depyramiding legislation overlooked another specialized group of services call amusements. Thus, while observers used examples of how a hotel may hire a magic show or other type of entertainment show for a group that will be in house for a convention, technically, the entertainment show is classified as an amusement and under last year’s law was not included in the depyramiding provisions.

These are but a few of the technical errors and omissions which occurred in the depyramiding and export service exemption which the legislature adopted last year. Obviously, while many tried in earnest to pass a “clean” bill, hindsight is always much clearer than foresight. This observation also applies to businesses attempting to file their general excise tax forms for the first time this year.

Since the depyramiding provisions took effect with the first of the year, businesses have not yet gotten accustomed to the changes and certainly more education and information by the department of taxation could help taxpayers understand the law. While the department has issued some guidelines, even the department is “feeling” its way through these new provisions. In some cases, the department reversed itself in the process of talking with taxpayers during the period between the time the measure became law and the first date of its application. In the meantime, taxpayers should ask a few simple questions that might save them some money.

If you provide a service and sell that service to another business, ask yourself and your customers if that service is being used by the business or if that service is being resold to a customer of the business to whom you are selling your service. Similarly, if you sell a product to another business which provides services to its customers, ask whether your product is being resold to the customers of that business as part of the service that business provides.

If you provide services to customers outside the state, it is just possible that you will not have to pay the general excise tax on your services. Here the question to ask is: “Where is my customer located?” For example, the customer calls you on the phone and asks you to prepare an assessment of weather conditions in Japan for growing a type of fruit. The customer never comes to Hawaii, but you are the one and only expert on weather in Japan. You write up a report on the weather in Japan and send it off to the customer on the mainland. Under the new law, that is a service exported from the state and no general excise tax is due.

On the other side, if you decide to have your accounting done by an accountant on the mainland and you send your records to him or her by fax. The accountant never comes to the state but bills you from the mainland for his or her services. Under the law, you are responsible for paying the 4% use tax on that bill.

While it may all seem confusing for the time being, practice does make perfect. In the long run both laws will save taxpayers money.

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