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Opportunity for Tax Savings Being Missed

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By Lowell L. Kalapa

One of the most important pieces of tax legislation in the history of the state was approved by the legislature almost two years ago and yet, it is reported that many taxpayers still are not taking advantage of this money saving change.

This critical change that will save taxpayers money is the resolution of the pyramiding of the general excise tax when the tax is applied to services. Pyramiding relief on the sale of goods has been in place for years by allowing the lesser 0.5% rate to apply to any sale of goods where the goods are to be resold by the purchaser.

However, because services are “intangible,” that is you can’t see or touch them, the idea of reselling services didn’t seem to take hold in lawmakers’ minds. However, as Hawaii’s economy evolved over the years from an agrarian to a service-based economy, the fact that services could be resold became more and more apparent. With that realization also came the fact that the general excise tax took a big bite out of the cost of providing those services, adding substantially to the cost of those services at the point of final consumption.

As a result, for nearly thirty years private industry complained that the tax exacerbated the cost of providing services in Hawaii and contributed to the higher cost of living in Hawaii. Finally, pressured to do something to improve the prospects for the economy, the legislature adopted Act 71 during the 1999 session which phases in a lower tax rate for the services which are to be resold by the purchaser (the rate for the 2001 calendar year will be 3%). A lesser rate will also apply to goods which are purchased by service providers which are incorporated into the services provided by the purchaser.

So what are some of the services that would qualify for the reduced rate? If taxpayers will remember that if the service is NOT to be consumed by the purchaser but resold to the purchaser’s customer, the service will qualify for the reduced rate. For example, a child care provider who is contracted by a hotel to provide child care for its guests is a service that would qualify since the service is not being consumed by the hotel but is being resold to the hotel guest who needs those services. This is an example of the sale of services to a service provider which in this case is the hotel.

An example of goods sold to a service provider would be flowers or perhaps table favors sold to a caterer who is providing the food for a banquet. Since the caterer is in the business of cooking food but has a request from a customer to also set the tables with decorations and flowers, the caterer contracts with a florist to provide the flowers for the table and a craft store to create and set the favors for the banquet. In this case, tangible personal property or goods are being sold to the service provider, the caterer, who will in turn bill the customer for these items.

As long as the goods are identifiable as part of the service provided, the sale of those goods should qualify for the reduced rate. For example, fabric that is purchased by an uphosterer to recover a customer’s sof would qualify as will paint that an auto body shop purchases to repaint a customer’s car. Even those little bottles of shampoo one finds in a hotel room would qualify for the lesser rate because the shampoo is basically being resold to the guest by the hotel.

With Hawaii’s visitor industry providing all kinds of services to travelers from all over the wold, the potential benefit of this change in the general excise tax law can mean substantial savings — if taxpayers will take advantage of its provisions.

Further, as a result of improvements made by this year’s legislature, the types of activities that qualify are even more comprehensive. For example, amusements and contracting services were added to the list of qualified services that are recognized as being resold. So, a group of entertainers or perhaps a hula halau which is contracted by a hotel or luau caterer would also qualify to pay the lesser rate when those amusement activities are being resold to the customers or guests of the hotel or luau provider.

Perhaps some taxpayers didn’t think that the phased-in rate of 3.5% for this year was much to sneeze about but as the rate is reduced each year, the savings will begin to make big bucks out of what seems to be a small cut in the tax rate. Taxpayers who may qualify should check with their accountants or call the tax office.

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