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Vexing Use Tax a Conundrum to Mainland Sellers

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By Lowell L. Kalapa

Because Hawaii’s general excise tax is NOT a sales tax in that it is a liability of the business which sells the product or service, understanding its compliment, the use tax, can be just as confusing.
Unlike the retail sales tax scheme found on the mainland, Hawaii’s general excise tax on gross income is the responsibility of the business and not of the consumer. In the truest sense of the law, the general excise tax is imposed “for the privilege of doing business” in the state. Thus, all businesses wanting to do business in the state must have a general excise tax license and pay either the 4% or 0.5% tax on their gross income.
Now the difference in the tax rates also poses a challenge to those novices of the tax. The 4% rate is imposed whenever the sale is to a customer who will be consuming or using the product or service for his own benefit. The lesser 0.5% rate is due when the sale of the goods are purchased for resale (the rate for services purchased for resale will eventually reach this rate in the year 2006). While the seller may have no control over what the purchaser does with the goods (or services), the law provides that the seller can take a certificate from the purchaser which in effect gives a promise that the goods (or services) are for resale and not for consumption by the customer.
It gets a little more tricky when it comes to the use tax. The use tax is imposed to so call “level the playing field” for in-state vendors of goods or services which might be purchased from a vendor located outside the state. Since that vendor is not doing business in the state, it is said that the vendor is “unlicensed.” So sales from an unlicensed business to a customer located in the state will be subject to the use tax rather than the general excise tax. Thus, to avoid a constitutional problem of imposing the state tax on someone who is not located in the state, the use tax is imposed on the purchaser or importer of the goods or service since that person is located in the state.
Thus, if a person purchases something from a vendor who is located outside the state and has no presence in the state of Hawaii, the purchaser or customer has to pay the use tax upon receipt of the goods (or service) at the rate that is applicable depending upon the use of the goods (or services), with the 4% rate if it is for the purchaser’s use or at the 0.5% rate if the goods (or services) are to be resold.
Because the payment of the use tax is dependent on voluntary compliance, a lot of people pooh-pooh the fact that 4% or 0.5% is due on the purchase. More so if the goods are purchased for one’s own use and not for resale. And truly, it is hard for the department of taxation to keep track of all those catalog purchases. However, there are some things which the department can monitor and insure that the use tax is paid on those purchases.
For example, under an agreement with the counties, the local departments of motor vehicles are to turn over all records of vehicles brought in from out of state when presented for licensing in the state. Where it is clearly indicative that the purchase of a motor vehicle was made outside of the state for use in the state, the department sends a notice to the car owner notifying that the use tax is due.
Similarly, prefabricated houses or house building kits shipped into the state have come under close scrutiny and shippers have notified the tax department of those arrivals in the state to insure that the use tax is paid on those imports. Of course, where goods are imported by businesses for resale, the business would have to report those sales as the subsequent resale of the goods will be subject to the 4% general excise tax.
Some taxpayers have questioned the application of the use tax and wondered whether or not it is appropriate. However, when one views the use tax as a complement of the general excise tax to insure that the general excise tax doesn’t act as an incentive to purchase from out-of-state vendors, it begins to make sense.
For example, if the use tax was not in place and one could purchase a new automobile for several hundred, if not thousands of dollars, less from a dealer in Oregon, then there would be no reason to purchase that particular product locally because not only would the cost of the car be less, but it would also not be subject to the 4% tax either as the general excise tax or the use tax.
Whether or not the use tax can be collected on all of those out-of-state purchases or from catalog purchases is just one of the challenges of the tax department to assure compliance with the state tax laws.

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