The column on the impending general excise tax surcharge that ran a couple of weeks ago sparked a number of questions and raised a number of red flags for taxpayers across the state.
Some of these issues and questions were raised at a recent workshop where representatives from different industries put their inquiries on the table. In some instances, representatives of the tax department admitted that they had not even contemplated the problem and needed to consider these problems.
For example, where will the surcharge apply on commissions received by sales people? Well, for real estate sales people, that might be a slam dunk for administrators who point out that, of course, the commission is tied to the sale of property and, therefore, if the property is located in Honolulu, the general excise tax rate would be 4.5%. Perhaps so, until one person suggested that a real estate sales person could be located on a Neighbor Island and be searching for a home for a client that plans to move to Honolulu to take a new job.
The real estate sales person never goes to Honolulu, but searches the multiple listings or the Internet to find his client a couple of houses to inspect in Honolulu. One of those homes is purchased and the real estate sales person receives his commission on the sale. The service performed by the sales agent is performed on the Neighbor Island, but the property which generated the payment for that service or “commission” would be taxable – in the department’s opinion – at the 4.5% rate because the property is located in Honolulu.
A similar question was raised with respect to commissions earned for the sale of travel. One provider of incentive travel located in Honolulu noted that they purchase travel services for their clients where the travel service is, in many cases, provided on the Neighbor Island. These services could include ground transportation like a tour bus for sightseeing Waimea Canyon on Kauai or a chartered boat for fishing off the Kona Coast or an eco-hiking tour of Haleakala. If one were to apply the same logic as in the case of the real estate agent, the place where the travel experience takes place should dictate the rate of the tax. In this case, since all of the travel experiences take place on the Neighbor Islands, the commission should be tied to those destinations and therefore be just 4%.
But in this case the department argues that the service being provided is the arranging of the tours and, therefore, because the travel arranger is located in Honolulu, the tax rate should be 4.5%. This would then contradict the argument that the real estate agent should pay 4% because the property is located in Honolulu even though it is the commission that is being received for services performed by the agent located on the Neighbor Island.
Another issue raised by participants is the rate that would apply to interest income received by a business. Since interest income received by a business is part of the company’s gross income, it is subject to the general excise tax. Whether interest is earned on idle funds or on a seller financed sale, the interest is subject to the 4% or 4.5% general excise tax. Again, one has to ask, at what rate?
If the interest earned is from an institution that is located on a Neighbor Island, should the rate be 4% or if it is from an institution located in Honolulu will the rate be 4.5%? And what if that interest is earned because the seller financed the sale of a backhoe to a Maui construction firm? In the department’s interpretation, since the backhoe is being used on a Neighbor Island site, the sale would be 4% even though it is sold by a Honolulu-based business. If that logic is followed, then the interest earned from the financing of that sale should be 4% as well. This is an issue that the department has not contemplated at this point, but it will certainly influence how businesses account for their interest income.
Finally, the department explained that under the surcharge, they will treat the four counties as individual states for the sake of transactions that take place across county lines and apply the surcharge for those transactions under the state’s use tax. Thus, where a customer purchases a computer from a Big Island provider, the Big Island company, if it has no presence or nexus in Honolulu, would pay only a 4% general excise tax on that sale while the customer in Honolulu will be responsible for paying the 0.5% surcharge rate under the use tax. And, yes, the department acknowledges that the use tax is difficult to enforce on all retail purchases.
The problem with that approach is that the use tax applies only when the purchase is made from a seller who is not “licensed” under the general excise tax law. Given that all businesses in Hawaii must be licensed, it appears that this approach cannot work without changing the law. And only the legislature can do that!