Over the last month as Hawaii’s unique “gas cap” law went into effect, consumers debated and decried the high cost of gasoline at the pump. And while the jury is still out as to whether or not the law is beneficial for Hawaii consumers, the fact of the matter is that crude oil prices remain high.
While most motorists have learned that Hawaii has one of the highest fuel tax rates in the nation when the state and local fuel tax rates are combined and that the general excise tax is imposed on gasoline, they may be surprised to learn that the fuel oil purchased by Hawaii’s electric companies is also subject to the general excise tax and at the full retail rate of 4% no less.
One would think that the purchasers of fuel oil which is burned to generate electricity – the same energy in another form – which is then sold to families and businesses would at least pay the lesser wholesale rate of 0.5% that would recognize that the energy bought in one form is being resold in another form. But not so, the purchase of fuel oil by the electric company is interpreted as a sale for consumption by the electric company. This is because the fuel oil is not identifiable as such when the final product of electricity is sold to the electric company customer.
While public utilities, such as the electric company, do not pay the general excise tax on their sales of energy to the public, they do pay the in-lieu public service company tax. The public service company tax rate is greater than 4% because part of the public service company tax is levied in-lieu of the real property tax and that portion generated by the rate greater than 4% goes to the counties.
As crude oil prices soar, the amount of the general excise tax will also rise, adding to the cost of electricity generated by those power plants which use fuel oil. As most consumers have realized, that little line called “fuel adjustment” has continued to rise over the past year and one has to ask how much of that is attributable to the 4% general excise tax being imposed on the fuel oil.
Given that energy is so much a part of daily life, the rising cost of fuel oil along with the attendant general excise tax will make living and doing business in Hawaii all that more expensive. While state lawmakers may not be able to control the cost of fuel oil – although some would like to think they can control the price of gasoline – they certainly can control the taxes paid on the purchase of that fuel oil.
And before anyone jumps on the idea that this is just a tax break for the electric companies, one must remember that what those companies can charge consumers is closely monitored by the public utilities commission. Thus, any “break” on the amount of taxes paid on the purchase of fuel oil will show up in the rates charged consumers.
Reducing the general excise tax rate on the purchase of fuel oil by public utilities is not without precedent. Lawmakers reduced the rate of the tax imposed on condiments purchased by restaurants for the convenience of their customers. In that case, the tax department had opined that since the restaurants were not reselling the condiments but making them available to their customers as a convenience, the restaurants were “consuming” the condiments and therefore they were taxable at the full retail rate of 4%. Lawmakers changed the policy and allowed the 0.5% rate to be imposed on those purchases with the reasoning being that the cost of those purchases is already recovered in the sale of the food products by the restaurant. Thus, the restaurants were viewed as reselling the condiments albeit in the price the restaurant charged for the food or meal they sold.
Keeping energy costs at a reasonable level is crucial to the economic future of Hawaii as businesses factor in all of the costs of doing business when making that decision to locate or continue to do business in Hawaii.
If soaring energy costs make Hawaii goods and services uncompetitive on the world market, it is unlikely that those businesses and, therefore, the jobs they create will remain in Hawaii.
While state policymakers may not be able to do anything about controlling the cost of fuel oil burned to generate electricity, they certainly can do something about the taxes imposed on that fuel oil. Since the general excise tax is a percentage of the value of the price charge, as crude oil prices and therefore fuel oil prices rise, so will the amount of the tax.
Now there is an issue that lawmakers can do something about.