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General Excise Tax is Not a Sales Tax

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By Lowell L. Kalapa

Once again the question has come up as to why Hawaii imposes its general excise tax – which many a malihini refers to as a “sales tax” – when many other states which have sales taxes exempt food and drugs.
Perhaps the most obvious misconception is that the general excise tax, like the sales tax, is a tax on the consumer. After all, it shows up on all of our receipts as a charge that is calculated as 4% of the cost of the goods or services we just purchased. Nothing could be farther from the truth. The general excise tax is a liability of the business selling the goods or services. The law does not require the businesses to show the amount of the general excise tax out separately.
The practice of showing out the tax separately came about years ago when the federal income tax law allowed income taxpayers to deduct amounts paid in state sales taxes. Local merchants reached an agreement with the Internal Revenue Service back before Hawaii became a state that if the tax was shown out separately, the Service would allow those amounts to be deductible for income tax purposes.
Even with the disappearance of the provision which allows sales taxes to be deducted on income tax returns, businesses in Hawaii continue to show out the tax separately because it allows the business to show the customer how much of the tab is because of the general excise tax.
The other frequent question raised is what is the legal rate that businesses can charge as the general excise tax as more and more businesses show the rate as 4.166%. Because the tax is on the business and the rate is 4% of whatever the business collects from customers and puts into the register, the state is only interested in getting 4% of everything that goes into the cash drawer of the businesses. The 0.166% comes about because the business must pay 4% of every penny it collects from customers as general excise tax to the state. Thus, even the amount passed on to customers as the 4% tax is subject to the 4% tax. Thus, 4% of the amount passed on as the tax is equal to 0.166% which then allows the business to recover as much as possible of the tax that is paid over to the state tax department.
For example, if a business sells $1 million in goods and charges the statutory 4% rate for an additional cost to customers of $40,000, when it comes time to pay the tax department the amount owed is $41,600, with the additional $1,600 representing 4% of $40,000 or the amount passed on to customers. On the other hand, if the business collects the tax at the 4.166% rate for a tab of $41,660, that business will turn over $41,666.40 to the tax department with only $6.40 coming out of the business’ shelf price.
Now as to the exemption of food and drugs. If readers will remember from earlier in this column, the tax is on the business and not on the customer. Thus, the competition is between businesses. Exempting food or nonprescription drugs places those businesses at a competitive advantage over those who don’t sell food or nonprescription drugs. To exempt these types of products says that these businesses should receive a break while businesses that sell, for example, clothes, should not.
The same can be said for services. The repeated cry to exempt medical services misses the point that the tax is on a profession and not on the consumer of those services. The exemption of medical services would exempt medical personnel, like doctors, while the mechanic who works on the medical professional’s Porsche would not be exempt.
Finally, readers should recognize that the general excise tax is all encompassing with relatively few broad based exemptions. The tax is imposed on both goods, as well as on services, whereas the retail sales tax on the mainland is largely imposed only on goods, and then only goods for final consumption. For example, under a sales tax scheme, goods and services sold to another business are usually not subject to the retail sales tax.
While the broad base means that everything is taxed but the crow of the chicken, the broad base allows the rate to remain relatively low by comparison to other states which have a retail sales tax.
While the rate is relatively low by comparison to sales tax states, the tax is pervasive and becomes a part of the cost of everything consumed and produced in Hawaii. The tax is imbedded as part of the overhead costs such as the rent of an office or warehouse and the machinery and equipment used to produce goods and services.
Thus, if elected officials want to do something about the high cost of living and doing business in Hawaii, they might want to start by lowering the rate of the general excise tax.

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