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Insights Into the General Excise Tax

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By Lowell L. Kalapa

The general excise tax is probably the most simplistic of all the taxes imposed in Hawaii, but at the same time, it is probably the most misunderstood of all Hawaii’s taxes.
Everyone knows that the 4% general excise tax is imposed and paid every time we purchase something in the store or when services are provided in our homes or businesses. Some refer to it as the state’s sales tax. And indeed, it looks just like the sales taxes paid in other states. Some people believe that like those sales taxes, the tax is a burden on the customer or purchaser of the goods or services and therefore the legal responsibility falls on the customer to pay the tax.
That’s where the similarity stops. The general excise tax is, in fact, imposed on all those who wish to do business in Hawaii. Thus, the responsibility for paying the tax falls on the business. If the tax is not paid, the business is the person the tax office goes after to collect the tax. In the case of the sales taxes found throughout the mainland, the onus of responsibility for paying the tax falls on the consumer. If the customer walks out of a store on the mainland refusing to pay the sales tax, technically the department of revenue can go after the customer to collect the sales tax.
So when people talk about taking the general excise tax off of food or medical services, they are proposing exempting grocers or doctors, the businesses who sell groceries or provide medical services. To exempt those types of transactions is to exempt those types of businesses. At this point, the question of equity arises. Is it equitable and fair to exempt grocers and doctors and not businesses which sell clothes or fix clogged drains? To treat all businesses the same regardless of the goods or services they sell is called horizontal equity.
Thus, when one type of business is singled out as being exempt, the message to all other businesses is that they must pay the tax while the favored few don’t have to pay the tax. If the same amount of revenue is needed by lawmakers, then an exemption of certain businesses will mean the rate of the tax on those who don’t fall into the favored categories of exempt businesses will have to go up.
So when elected officials try to pander the politically popular issues such as exempting food or medical services, what they are really saying is that they want to raise taxes on all other businesses from retailers in clothes or other items to real estate agents to plumbers and electricians.
Another misunderstood aspect of the general excise tax is that it is a tax on the gross income of the business. Unlike the retail sales tax found on the mainland which is a tax on the shelf price of the goods sold, the general excise tax is a tax on all the gross proceeds of a business in Hawaii, including the amount collected as the 4% general excise tax. Thus, when as business collects a dollar plus the 4% general excise tax or 4 cents on that dollar sale, the 4% tax is imposed on every cent collected by the business from the customer including the amount collected as the 4% tax from the customer.
While it doesn’t seem like much on the sale of a dollar tube of toothpaste, just imagine what it would mean on a million dollars of sales. If a business passed on the 4% on a million dollars of sales, it would collect an additional $40,000 in general excise taxes. However, because the $40,000 is a part of the gross income of the business, the business must pay 4% on that $40,000. The 4% tax on $40,000 amounts to another $1,600 which must come out of the million in sales. As a result, many businesses have begun to collect the additional 0.16% from customers. The result is that customers see the 4.16% on their receipts.
This reduces the amount the business has to pay out of its million dollars in sales from $1,600 to $64. So is this fair and is this legal? The law does not specify what a business can or cannot do other than the fact that a business cannot say that it is not charging the 4% general excise tax. All the department of taxation cares about is that it gets its 4% of the gross income of the business.
So while many may think that the Hawaii general excise tax is the same thing as the retail sales tax found in many states on the mainland, it is not. Rather, it is a truly unique tax. It taxes not only goods but services, something that does not happen with the retail sales tax.
Care should be exercised before making radical changes to this tax.

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