By Lowell L. Kalapa
Last week it was noted that the general excise is a tax on businesses “for the privilege of doing business in Hawaii” whereas a sales tax is a tax on the consumer or customer. That said, not all businesses in Hawaii pay the general excise tax.
What? We just said that the general excise tax is imposed on all businesses in Hawaii for the privilege of doing business in Hawaii. Well that is true, except there are some businesses where all the money they take is not theirs or where the income they receive does not reflect all benefits received.
As a result, these businesses pay taxes in place of or “in lieu” of the 4% general excise tax and usually at rates higher than 4%. For example, public utilities like the electric, gas and telephone companies pay the public service company tax at a rate that begins at 5.335%. This tax is paid “in lieu” of not only the general excise tax but also the real property tax as taxation of utility property tends to be administratively costly and difficult. And because the receipts of the real property tax accrue to the counties, a portion of the public service company tax collections is shared with the counties in recognition that this tax is in lieu of the real property tax.
Until 2001 the public service company tax applied to all industries regulated by the public utilities commission. This included taxpayers like the trucking industry and commercial motor carriers like those tour buses. However, because the public service company tax is based on income earned in the prior year but paid on a current basis, many of these industries found themselves severely affected after the 9/11 tragedy and did not have the cash flow to pay taxes based on what had been a good year in 2000. Thus, the legislature moved these transportation providers from the public service company tax, where the rate had been 4% on prior year income, over to the general excise tax where the rate is still 4% but is imposed on current income.
Another business that does not pay the general excise tax is the insurance industry as the money they take in the form of insurance premiums is really money that will be invested on behalf of their clients or holders of insurance policies or in some cases annuities. While most of the premium amount does not directly benefit the insurance company, a portion does, yet the entire amount, if taxed under the general excise and net income tax laws, would be considered gross income subject to the 4% tax and corporate income tax rates. The rates vary depending on the type of insurance for which the premium is paid. Thus, the insurance premiums tax is paid in lieu of the general excise tax and the net income tax.
Another industry which is not subject to the general excise tax law is the banking or financial institutions industry. And quite obviously not all the money they take in belongs to the bank such as savings, checking deposits, and repayments of loans. Any and all banking unique income is subject to the bank franchise or financial institutions tax which is taxed at the rate of 7.92%. Again, this tax is paid in lieu of the general excise and net income taxes. Income received by a bank that is not bank unique, like fees for the rental of a safe deposit box, is subject to the 4% general excise tax and income tax.
The foregoing are imposed on businesses for doing business in Hawaii. What about purchases made by residents in the state from businesses or vendors located outside the state? If that vendor or business has no presence in the state, then the business is not obligated to pay the general excise tax. However, the purchaser in the state has to pay a complementary tax called the use tax when the goods or services are delivered to the purchaser in the state. This is to insure that the playing field is kept level, that is there is no advantage, at least tax-wise, to making the purchase from an in-state business as opposed to an out-of-state business. The rates of this complementary tax vary depending on whether the purchase is for final consumption (4%) or for resale (0.5%).
And let’s not forget the unique transaction tax on hotel or lodging rentals. Because many other states with a retail sales tax do not tax services, as noted earlier, they impose a special tax on lodgings called a hotel room tax. That is not the case in Hawaii where the general excise tax is already imposed on hotel rentals. Thus to compare Hawaii’s TAT or hotel tax to those found on the mainland is not fair. The comparable rate must include both the 7.25% TAT rate with the 4.16% general excise rate for an 11.41% rate on hotel rentals.