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Creating the Level Playing Field

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By Lowell L. Kalapa

Last week’s commentary was a basic primer in the state’s use tax which, as we learned, is the complement to the state’s general excise tax. However, instead of being levied on the business, the use tax is paid by the purchaser.
But what happens if there is no “purchase?” That was the problem that the Supreme Court was faced with a few years ago when the company that had the contract to provides books to the state’s libraries inquired about whether they were responsible for paying the state’s general excise tax if they transferred title to the property outside the state as opposed to transferring title within the state.
The department of taxation advised the company that not only were they responsible for the general excise tax, but also the state’s use tax as importers of the books. The book company subsequently changed its contract so that the title to the books passed to the state on the mainland. But when the tax department notified the book company that they were still responsible for both the general excise and use tax, the book company filed an appeal.
Although the book company argued that the terms of the sale should be consistent with the uniform commercial code that determining where title to the property passes should define whether or not a sale occurred in or outside a state, the department countered that the general excise tax applies regardless of where the title to the property passes. This opinion was based on the fact that because the book company had mailed catalogues to the state, sent employees to the state to meet with potential customers, attended trade shows in the state, and assisted customers, the book company had a presence in the state and therefore was “doing business in the state,” the privilege of which required the payment of the general excise tax.
While the Court agreed with the imposition of the general excise tax on the book company, it made an interesting interpretation of the use tax law. The Court found that the use tax was imposed on the use of tangible personal property that was imported or purchased from an unlicensed seller for use in the state. To the Court, the language of the law was “plain and unambiguous” in determining that the sale of the books was directly from the book company to the state library. It determined that the book company did not import books from an unlicensed seller and that the book company did not purchase the books from an unlicensed seller and resell the books to the state library.
And what the Court was interpreting was true in a sense, the book company owned the books outside the state, but upon finding that the book company had acquired presence in the state and therefore is subject to being licensed under the general excise tax law, there was no purchase from an “unlicensed” seller.
As a result, the department issued rules several years ago clarifying that goods imported into the state, regardless of whether they were purchased from an unlicensed seller outside the state, are still subject to the state’s use tax. And this year the department has thrown in a measure to basically codify the intent of those rules. The measure under consideration will clarify that regardless of how the goods or services are owned or acquired, the importation of those goods or services is subject to the state’s use tax at the 0.5% rate if imported for resale at retail or refunded when the goods are sold for subsequent resale.
While the rules that the department adopted several years ago give guidance to these situations, putting the provisions that clarify the use tax into the state laws insures that there will be a foundation for any challenges of this interpretation. With numerous multi-state vendors entering the Hawaii market, it is quite possible that the challenges could be initiated based on the findings in the case of the book company.
And why is this important to Hawaii taxpayers? Not only does the use tax level the playing field for local businesses, but it also contributes a significant amount of money. Between the use tax imposed at the 0.5% rate and the 4% rate, the state treasury realizes about $52 million from the tax. While small by comparison to the grand total of $1.8 billion in general excise and use tax collections annually, it is by no means money the state can do without.
However, because vendors should not have a competitive edge solely because of either the use or general excise tax, it is important that the integrity of the tax be preserved.

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