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Important Note to Be Made for All Sellers of Beverages

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By Lowell L. Kalapa

Several weeks ago, we talked about the infamous “bottle bill” that will take effect this coming November when all consumers will be required to pay a nickel deposit on every beverage container purchased.
It was noted in that column that legislation was approved in 2002 which established the bottle bill and legislation was approved this past session which provided technical “fixes” to the previous legislation. The original legislation provided for an exemption from the general excise tax for the “deposit beverage container deposit” while the most recent legislation provided an exemption for amounts collected as the “deposit beverage container deposit.”
This column noted that there are actually two charges imposed under the “bottle bill” legislation, one is known as the “deposit beverage container fee” which is currently imposed at a rate of 1 cent per beverage container. Then there is the refundable “deposit beverage container deposit” which is the nickel collected at the point of sale of the beverage. This column noted that under the terminology of the legislation, it appeared that lawmakers had exempted the nickel charge from the general excise tax and income tax.
However, one reader pointed out that the department of taxation had issued a tax announcement back in 2002 after the original legislation was approved which had a couple of examples which basically indicated that the 1 cent “deposit beverage container fee” was exempt from the general excise tax. Ah mea culpa! It would seem that indeed the 1-cent charge was exempt. However, on closer examination of this tax department information release, there was no discussion of the nickel being exempt from the general excise tax.
Apparently the department believed only the “deposit beverage container fee” was exempt at the time as the refundable nickel charge was years away from implementation. If that was the case, then it is curious that no legislation was introduced this past session to clarify that the nickel charge was to be exempt. The exemption provided by the remedial legislation mirrors the general excise tax exemption from the original legislation. Thus the question arises, is the exemption applicable to both the 1-cent charge and the refundable nickel?
After a few businesses called the department of taxation for clarification, it appears that the department now interprets the exemption to apply to both the 1 cent “deposit beverage container fee” and the nickel “deposit beverage container deposit.” While the nickel charge will go into effect on November 1st of this year, the penny per beverage container fee has been in effect since October 1, 2002.
Thus, distributors who are responsible for paying the fee pass the cost on to the vendors, be it wholesalers or retailers. That penny is in the cost of every single beverage container sold and it is estimated that there are 800 million beverage containers sold in Hawaii every year. That amounts to $8 million of gross income at the retail level not to mention the same amount at the distributor’s level or at the wholesale level where the general excise tax is one-half of one percent instead of 4%.
The point of the matter is that for businesses who sold beverages during the past two years, at the distributor, wholesale, and retail levels, that amount of one cent per container should have been exempt from the general excise tax. If a business which sold beverages in the past two years did not take the exemption of one-cent for each container but paid the half percent or 4% general excise tax on the full amount of their gross income, then a refund claim for the amount of the general excise tax paid on that penny should be filed.
Of a more interesting note is the exemption from the net income tax for these charges. Since the legislation approved this year which grants the net income tax exemption became effective upon approval, does that mean that the net income tax was due on the penny charge collected in 2002 and 2003, but not for fees collected in 2004? And unlike the refundable nickel deposit charge which may be shown out separately, the penny charge will be folded into the price of the beverage and therefore questionable whether it is gross income accruing to the seller.
And what do businesses do when it comes to the federal net income tax? Since there is no similar exemption at the federal level for the penny charge, will businesses be taxed on this amount as part of their gross income? This piece of bad legislation gets worse the more one looks at the details. That is certainly where the devil is.

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