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Not a Sales Tax So Don’t Treat It Like One

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By Lowell L. Kalapa

Oh boy, you should have seen the feathers fly when one of the Honolulu dailies reported that the Tax Foundation estimated that the proposed 1% rate increase in the general excise tax would cost the statistical family of four another $900 a year.
The back of the envelope critics were quick to note that when the $3,580 in general excise tax burden assigned the family of four was divided by 4%, it produced a number greater that the family’s adjusted gross income. And that criticism might have been valid if indeed Hawaii had a retail sales tax like those found on the mainland, but what that criticism highlights is the fact that few understand the intensity and breadth of the general excise tax.
Those unfamiliar with the general excise tax think of it as a sales tax, levied on the final consumer. And true, the 4% is levied at the consumption stage. However, unlike a sales tax, the general excise tax doesn’t discriminate between individuals and businesses and thus taxes business-to-business transactions. This type of transaction is usually exempt in sales tax states as the view is that purchases by a business are for the purpose of producing goods and services for customers of the purchasing business whether or not the purchased goods are actually incorporated into the products purchased by the customers of the purchasing business.
The general excise tax is levied at the 4% rate on purchases made by businesses where the goods or services are to be consumed by the purchasing business and at the 0.5% rate if the goods or services being purchased by the business are for subsequent resale to customers of the purchasing business. For example, the janitorial service that is hired to clean the bathrooms of a department store where the bathrooms are for the convenience of the department store customers is taxed at the 4% rate because the service is being “consumed” by the department store and not being resold to the department store customers. Similarly, the rent of the space by the department store is also taxed at the retail rate of 4% because, though the store space or location is a convenience to the customer, it is not being resold to the department store’s customers.
However, the cost of the rent and janitorial service and the 4% tax must be recovered by the department store if it is to stay in business. That cost then gets built into the shelf price of everything sold in that department store. So be it the aloha shirt or that prom gown, the cost of those purchases made and consumed by the store, including the 4% imposed on those purchases, is included in the price tag.
Back all of that up and recognize that the janitorial service purchases cleaning supplies like brooms, mops and detergents and the shopping center landlord purchases security services or window washing services and puts the 4% on top of all of those purchases, that too will add to the cost of the aloha shirt and prom gown.
Now up that tax rate from 4% to 5% and suddenly another penny becomes real money as the cost of goods and services is affected by an increased general excise tax rate. It will affect all goods and services sold in the state, even in counties where they may choose not to impose the surcharge.
The other major facet that differentiates Hawaii general excise tax from the retail sales tax is the fact that all transactions are taxed including the sale of services. With a retail sales tax, generally only goods are subject to the tax. In fact, Hawaii is the envy of all of the other retail sales tax states as they would love to levy their sales tax on services. And if it were not for the fact that the general excise tax applies to services, the nearly $2 billion in annual tax revenues would be but a fraction of that as nearly 60% of the general excise tax base is comprised of sales of services.
Because the purchase of goods and services is subject to the general excise tax at all stages and on business-to-business transactions, the cost of the tax is embedded in all subsequent prices charged that attempt to recover prior costs. And it is for this reason that the pithy statement is true that “only people pay taxes” as costs incurred by businesses must be recovered in the selling price.
Thus, the purchases made by the statistical family include the cost of the general excise tax levied at all prior stages of the transaction chain. Thus, the cost of the tube of toothpaste at $1.99 is cost plus markup plus all the prior levies of the general excise tax. Raise the tax rate and the cost of the tube of toothpaste will go up by the total of all the prior levies of the tax.
So the proposal to increase the rate by 1% is more than just another penny to our family.

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