By Lowell L. Kalapa
With the onslaught of the new year, taxpayers may not be aware that one more step has been taken to mitigate the impact of the general excise tax as the rate on the sale of services for resale has dropped to an effective 1 percent.
While most readers probably will not appreciate this change in tax rate because they are probably not in a position to purchase services for resale, it will have a subtle effect on the goods and services purchased for consumption.
This is because the general excise is imposed on all transactions regardless of whether the purchase is for consumption or for resale. The drop in the wholesale rate on the purchase of services came about six years ago when after years of preaching to lawmakers and administration officials they admitted that services sold at wholesale should enjoy the same rate as goods sold at wholesale.
As a result of Act 71 of the 1999 legislative session, the rate on the sale of services for resale was phased down from 4 percent to 0.5 percent which will be reached next year. The rationale for the lesser rate is that the purchase is not for consumption by the buyer but for resale to someone else. The resale could be another purchase for resale or it could be made for consumption at which point the general excise tax rate is 4 percent.
While the sale of goods for resale enjoyed the lesser rate of 0.5 percent, services were always taxed at the full retail rate as if they were to be consumed by the purchaser. This is probably because lawmakers in the “old” days just could not imagine a service being resold.
If a window was washed, it was probably for the owner of the window. Today it is not hard to imagine that windows can be washed under a contract to a management company which then resells the service to the owner of the building.
Note well that Hawaii is the only state that levies a “sales” tax on transactions that include all services sold in the state. While there are states that impose their sales tax on some services, none is as all encompassing as Hawaii. As a result, the nominal 4 percent rate of the general excise tax generates the largest per capita collections in the sales tax category. It is also fascinating to note that approximately 60 percent of the general excise tax base is services which means the residual 40 percent of the base is the sale of goods or things.
Thus, if Hawaii was to change its tax on transactions to the more traditional type of sales tax which is imposed only on goods, the tax rate would have to be at least 10 percent to make up for the loss of the 4 percent tax on 60 percent of the tax base.
And because the tax is on the business making the sale, there are relatively few exemptions for consumers as the tax is on the business and not on the consumer. This is a stark difference from the retail sales taxes found on the mainland where because the tax is on the customer, there tends to be numerous exemptions because of the customer=s characteristics. For example, in some states purchases made by churches and other nonprofits are exempt from the retail sales tax.
And the often-pursued exemption for purchases of food and drugs again puts down a clear line of difference between the retail sales tax and the general excise. Because the general excise tax is a tax on the business, exempting grocers while not exempting clothiers, would be discriminatory. On the other hand, because the tax is on the customer in a retail sales tax scheme, the customer is being accorded the exemption and not the business.
But what is important to remember is the comprehensiveness of the general excise tax in that it is imposed on nearly all transactions that take place in the state and applies to all purchases of goods and services from outside the state that will eventually be consumed in the state. It is a multi-rate tax applied at the retail or consumption level at a rate of 4 percent and at the wholesale level at a rate of 0.5 percent for goods and 1 percent for services this year. Therefore, it is a multistage tax, applied at every level the goods or services are traded until it reaches the final consumer.
It is for this reason that the ever so slightest change — either up or down — will have a substantial impact on taxpayers. Thus, as lawmakers open another round of policy making, care and respect should be accorded the general excise tax, a tax that should not be taken so lightly.