De-Pyramiding of Excise Tax Causes Much Confusion

Perhaps the reason is that the department of taxation has utilized the “show and tell” method of providing examples of how the tax provisions work rather than sharing the philosophy or rationale behind the provisions so that each taxpayer can apply that rationale or philosophy in their unique situation.

First, taxpayers should just think about how goods purchased or sold for resale have been treated under the general excise tax law for the last thirty some odd years and then apply that same thought process to services. In the case of goods, if a customer comes with a “resale” certificate that certifies that the goods he or she is about to purchase will be resold to someone else, then the business will apply the lesser 0.5% rate to the purchase by the customer because that will be considered a “wholesale sale” where the goods will be resold. If, on the other hand, the customer comes into the store and purchases good that he or she will use in their business, like paper clips or copying paper or pencils, then the business will charge that customer the full 4% retail rate as the goods are to be “consumed” by the purchaser.

While it may be a bit more difficult when it comes to services, it is probably because it is a new way of thinking about how services are being used. Let’s say the couple down the street will be celebrating their 25th anniversary and wants to have a few hundred friends over for dinner. So they hire a caterer to come in and provide the meal. However, not wanting to be bothered with the details, they ask the caterer to provide the tables and chairs, tents, the floral decorations and linens as well as the clean up after the party. Well, the caterer is indignant, after all she is an artist of food and not someone who decorates or makes floral arrangements.

So, in order to secure the contract, the caterer hires a florist to make the floral arrangements and contracts with Omar the tent person to do the tents and set up the tables and chairs as well as arrange for the linens and the favors. Omar who can do the tent and provide the tables and chairs, turns around and calls the local laundry which rents linens for one-time occasions. Omar also contacts a janitorial service to provide the clean up after the big event.

At the end of the party, the linen company sends a bill to Omar as does the janitorial service. Since these are services that were for the benefit of the couple and not for Omar, they pay the lesser rate of 3.5% on the amount they charge Omar. Omar, in turn, includes the cost of the linen service and the janitorial service in the bill he submits to the caterer and includes a general excise tax equal to 3.5% of the bill since these services are not being consumed by the caterer but by the couple celebrating their anniversary.

The caterer, who has also gotten a bill from the florist with the lesser 3.5% rate tacked on to that bill includes all of these bills into her bill for the food and applies a 4% rate on top of the bill she now presents to the couple. Because all of these other “services” like the tent, the flowers, and the linens are being sold to a business who will in turn sell those “services” to the ultimate consumer, the general excise tax is the lower 3.5% when sold to the subsequent business customer who then must pay the 4% rate when the goods are resold to the final consumer.

In order for the initial service provider to be able to apply or use the lesser rate on his or her sale of services, the purchasing business must provide the seller with a resale certificate verifying that the service about to be purchased is not for the purchaser’s use but for further sale to a customer of the purchaser. The whole idea behind allowing the lesser rate is that ultimately when the provisions are fully phased-in six years, the lesser rate will be 0.5%.

While many businesses seem to think that the lesser rate of 3.5% “ain’t no big deal” at the moment, they should get into the practice of deciphering when their services are going to be resold by their customer. By reducing the tax rate on services purchased for resale, the cost of all goods and services should be reduced. However, only time and regular practice of applying the lesser rate will make the difference in the cost of doing business and the cost that the general excise tax imposes on all consumers in Hawaii.