General Excise Tax Depyramiding Continues

Not every thing the legislature does is necessarily a failure; there are pluses for the taxpayer albeit timid in approach.
One of those successes was achieved by the 1999 session of the legislature when after years of being told – make that 30 years – that the general excise tax adds to the cost of living, lawmakers passed a measure that begins to address the phenomenon called pyramiding. Pyramiding occurs where the 4% tax is imposed on the sale of the same service time and time again. Note well that we said service, as goods have long enjoyed a reduction of the tax when the same goods are sold over and over again.
In fact, it was a study done in the mid-1960’s that pointed out how the tax tends to pyramid, adding to the cost of goods and services in the Islands. The phenomenon became more pronounced when the general excise tax rate was hiked in 1965 from 3.5% to 4% as lawmakers looked for more resources to meet the expanding needs of the young state.
Lawmakers were advised that when goods are purchased for resale, the full rate of 4% was imposed on each transaction even though the goods and services were not being purchased for consumption by the buyer. The result was that the amount of the tax was then imbedded in the shelf price of the goods or services and when resold, the next transaction was again taxed at the full 4% rate.
Well, lawmakers could see this happening with goods or things but not with services, after all, once someone cleans your windows, it is hard to imagine that those clean windows could be sold to another person. So lawmakers reduced the rate imposed on goods or things when they are purchased for resale and not for consumption. This rate was set at one-half of one percent (0.5%). Only when the goods are purchased for use or consumption by the buyer is the full retail rate of 4% imposed.
But services were never extended the same lower rate as apparently lawmakers could not conceive of a service being resold. Well, after thirty years and the evolution of Hawaii’s economy where more than 60% of the transactions are the purchase of services, lawmakers either finally understood that services could be resold or more than likely were pressured into doing something to help the state’s economy. So in 1999 lawmakers adopted a reduced rate for the purchase of services where the services are to be resold.
However, because the state has been strapped for cash, lawmakers could not reduce the rate immediately to the 0.5% rate enjoyed by goods when purchased for resale. Instead, lawmakers phased the reduction of the rate in over a period of seven years reaching the 0.5% rate in the year 2006. And therein lies the problem.
It seems there are a lot of taxpayers who paid very little attention to the reduction in the tax rate on services purchased for resale as the rate only changed by half a percentage point in the first few years. But take note everyone, this is now the third year of the rate reduction where the rate is now 2.5%. Now we are talking real money!
The other problem is that taxpayers also have a difficult time grasping the concept of the resale of services. Note well that the change in the law also recognizes when goods are purchased and are resold as part of a service. What kinds of transactions would qualify for the reduced rate?
Let’s take catering. A caterer could cook a meal for your dinner party tonight and that sale would be subject to the 4% rate because you and your guests will consume the food. But the same caterer is engaged by a company that sells a snorkeling adventure or a hiking activity to the guests of a hotel. The snorkeling or hiking company includes a box lunch as part of the package and purchases the box lunch from the catering service. The lunch is not for the consumption of the tour company, but for its customers. So in a sense the lunch provided by the catering service is being resold to the visitor on the tour. In this case the sale of the box lunches would be taxed at the lower rate of 2.5% rather than at 4%. The cost of the lunch is included in the charge for the entire tour package and will therefore be taxed again at the 4% rate when sold to the visitor.
While it will take a few more years for the 0.5% rate to be achieved, taxpayers should begin to look at their own operations and ask if some of the services being purchased are really for resale to customers and therefore should be taxed at the lesser rate.