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Tax at 4% or 4.166%?

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By Lowell L. Kalapa

Every year people inquire whether or not retailers are overcharging them for Hawaii general excise tax when they see on their receipts a tax rate of 4.166% instead of the flat 4% rate that the law tells us is the rate for this tax.
Unlike the sales tax found on the mainland, the general excise tax is actually a tax on the business “for the privilege of doing business in Hawaii” whereas a sales tax is a tax on the consumer or customer. In the case of the sales tax, the business merely acts as the tax collector, turning over what is collected from the customer to the revenue department.
The general excise tax, on the other hand, is a tax on all the money that the business puts into the cash register for the day, week or month. That includes the amount collected from the customer as the “pass-on” of the general excise tax. And while the 4% tax on four cents may seem insignificant, start talking about millions of dollars of gross sales and now you are talking big money.
For example, on a million dollars of sales the tax passed on is $40,000. However, when it comes time to pay the tax collector, the business must pay not only the $40,000 collected as the general excise tax, but 4% of the $40,000 or $1,600. That $1,600 has to come out of the million dollars of sales so the business tries to pass on more of the tax by charging 4.166%. The result of the latter application is that the business has to take only $6.40 out of the million dollars of sales to be paid as the tax to tax department.
Wait a minute, isn’t the rate of the tax 4%? Why are businesses charging the customer 4.166%? Is that illegal? No, the law says the rate is 4% on the taxpayer which in this case is the business. As long as the tax department gets its 4% of everything that went into the cash register, they are not interested in what businesses say they are charging as the tax. However, that might be a concern of the office of consumer protection. In fact, it might be interesting to note that prior to 1957, many, if not all, businesses did not show the tax separately on a customer’s receipt. It was only because business and community leaders wanted the tax to be perceived as a “sales” tax so that it could be deductible for federal income tax purposes that the tax was shown out separately.
But a sales tax the general excise tax is not. Some of the other ways the general excise tax differs from a sales tax is that it is imposed on nearly every transaction that takes place here in Hawaii. That means that sales of both goods and services are subject to the 4% tax. Sales taxes are generally limited only to the sale of goods. And as the more formal title for the sales tax connotes, the retail sales tax is usually imposed on the retail sale of goods which means the goods are being purchased for final consumption. That is not the case with the general excise tax which is imposed on both wholesale and retail transactions not to mention when goods are sold by manufacturers and producers.
Not only that, but the tax is imposed on rental income for housing and commercial space at the full retail rate of 4%. Again another reason why the cost of living is so much higher here in Hawaii than in states where there is a retail sales tax. It is one of the reasons why the “big box” stores can discount their prices or a store like Macy’s can survive sales week after week as they have little, if no, warehousing costs. Smaller “mom and pop” stores rely on distributors who have to warehouse products which incur the general excise tax on the rental of that facility or the land underlying that warehouse.
If it is any indication of the uniqueness of the general excise tax as opposed to the retail sales tax being imposed on services, it would be well to note that federal law specifically exempts the sales of goods to the federal government from taxation but falls silent on the issue of services sold to the federal government. Thus, the general excise tax is collected from service providers for federal projects.
Similarly, federal credit unions are treated like federal agencies so the federal law exempts the sales of goods to federal credit unions from any sales tax which in the case of Hawaii is the general excise tax. However, because the federal law is silent on sales of services which appears to be a result of retail sales taxes being imposed only on goods, sales of services to federal credit unions are subject to Hawaii’s general excise tax. Again, another example of how common misunderstandings are of this unique tax.
Next week we will look at businesses who pay taxes instead of the general excise tax.

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