By Lowell L. Kalapa
This year’s session has spawned more proposals dealing with the state’s use tax than ever in the recent past. The use tax is imposed when purchases are made from unlicensed sellers outside the state where the goods or services are brought into the state for use.
The state’s use tax looks more like the retail sales tax found on the mainland in that it is paid by the purchaser of the goods or services. The general excise tax that we are all used to paying is actually paid by the seller even though we see it passed on to us on the receipts we get for our purchases.
However, like the general excise tax, the rate imposed under the use tax depends on how the goods or services are to be used in the state. In the case where the person is importing the goods or services for resale, the use tax rate is 0.5%.
Now depending on what kind of resale that is, the use tax does a funny thing. If the goods or services will be sold by the importer for further resale or will be incorporated into another product where the goods are still perceptible to the senses, once the importer pays the 0.5% general excise tax, a refund of the 0.5% use tax is made by the department back to the importer. This is because the goods or services were sold for further resale and not for consumption by the importer’s customer.
If, on the other hand, the importer sells the goods or services to a customer who will actually consume the goods, then the importer pays the general excise tax at the full retail rate of 4% on the sale to the consumer and gets no refund of the 0.5% use tax.
Finally, if the importer brings the goods or services into the state for consumption by the importer, then the use tax rate is the full retail rate of 4%. This is the situation that most taxpayers unknowingly avoid when they purchase goods from catalogues or over the Internet. And admittedly, while the tax is owed, few pay it as it is usually a case of ignorance. On the other hand, when big ticket items are brought into the state, it is a little more difficult to avoid paying the use tax on such things as new automobiles or ready to assemble homes.
For example, when someone buys a car in a place like Oregon where there is no sales tax and brings the car back to Hawaii and registers it at the division of motor vehicles, the division notifies the tax department, especially if the car is last year’s model, this year’s model or next year’s model. The tax department then sends the car owner a notice that the use tax is due on the automobile.
Why is there a use tax on goods and services imported into the state? Because the general excise tax is imposed on all businesses doing business in the state at either the 0.5% or 4% rate and to allow purchases from vendors outside the state to go untaxed would put local businesses at a cost disadvantage at either the 4% or 0.5% rate. Thus, the use tax exists to level the playing field so that consumers do not find it more advantageous to purchase from someone outside the state versus someone doing business in the state.
Since the state cannot reach across state lines and tax the unlicensed vendor, the use tax focuses on the person over whom the state has jurisdiction – the importer of the goods or services. Thus, the use tax is imposed on the importer who is located in the state and attempts to collect the tax from that person.
In recent years, there has been confusion over when a person becomes subject to the general excise tax and when the use tax is due. The department’s interpretation has always been strictly construed to infer that whenever a business enters the state, be it sending a sales representative or participating in a trade show to show off a product or service to potential customers in the state, that business gains presence in the state and therefore should be licensed as a general excise taxpayer. However, the out-of-state vendor may not be aware of this.
So in many cases, because the purchaser happened to make a purchase from that out-of-state vendor while he or she may have been in the state at a trade show, the purchaser might have been under the impression that he owed the 4% use tax because he was buying from an out-of-state seller.
The result is that depending on who is audited first, the purchaser may have paid the use tax but the department later finds that the vendor should have been licensed and assesses the vendor the 4% general excise tax. The upshot of it all is that the tax may have been paid twice because of the confusion.
Next week we will look at some specific examples of this confusion and misunderstanding of the use tax.