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Key Difference For Commissioned Agents

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By Lowell L. Kalapa

Another facet of the proposed rules that would implement the county surcharge on the general excise tax divides the house when it comes to commissioned agents. If readers will recall, these proposed rules change the philosophy of the tax from one based on where the business is located to one that is based on where the goods or services sold by that business are consumed. 

For example, in the case of a business that leases equipment, like a tractor or back hoe, the rate of tax is determined by where the equipment is used. So in the case of a leasing business located in Honolulu that leases equipment that will be used on Maui to build a house, the rate imposed will be 4%. However, a Maui company that leases similar equipment for a project located in Honolulu will have to pay 4.5% on the income received from leasing the equipment. 

Similarly, a Kauai taxpayer who has rentals both on Oahu and on the Neighbor Islands will pay 4.5% on the rent received from the Oahu rental and 4% on the income received from the Neighbor Island rentals. However, such is not the case with taxpayers who receive their compensation in the form of commissions. 

Under the proposed rules, real estate agents who are paid by commission will determine the rate of the general excise tax based on where the real property from which the commission is received is located. So a Maui real estate agent who receives a commission for having sold a condo in Kihei will pay the general excise tax on that commission at the rate of 4%. 

However, if that same Maui real estate agent sells a condo on Oahu, the commission received from that sale will be subject to a general excise tax rate of 4.5% because the real property is located in Honolulu where the surcharge applies. 

That same logic does not apply in the case of all other commissioned agents. The proposed rules specify that for all other commissioned agents, the rate on the commission received is determined by where the agent is located. For example, lets take the case of a travel agent who receives a commission for selling a tour of, say, Waimea Canyon on Kauai. Despite the fact that the tour is on a Neighbor Island, if the commissioned agent is located on Oahu, the tax rate will be 4.5%. 

This is inconsistent with the theory that the rate of tax is determined by where the products or services are consumed. Given that the commission is not paid until the tour is paid for or taken, it is obvious that the “goods or services” have to be paid for and consumed where delivered. Should the department prevail in this interpretation, it could be setting itself up for some serious litigation. 

Another inconsistency exists with respect to interest income that may be earned as a result of a deferred payment. For example, a stove is purchased on an installment basis where interest is charged on the residual balance. On one hand, according to the rules the tax rate on the purchase is determined by where the goods are to be consumed or used. So in the case of a stove sold from a Honolulu appliance store to a customer on the Big Island, the tax rate on that transaction would be 4% because the stove will be used on the Big Island. 

However, if the customer on the Big Island decides that he wants to buy the stove on an installment basis, paying a little bit of the cost of the stove at a time and interest on the remaining balance, according to the proposed rules, the interest income would be taxed at a 4.5% rate as the appliance dealer is located in Honolulu. Thus, the customer on the Big Island would be better off getting a loan from a local finance company on the Big Island and avoid having to pay 4.5% on the residual of the installment plan balance. 

Because of these inconsistencies, taxpayers may still be waiting for guidance on who is responsible for paying the additional 0.5% surcharge and who is not. It also underscores the fact that no matter what the planners of Honolulu’s mass transit system say about what they believe the county surcharge will generate, the truth of the matter is that no one knows for sure at this point because the rules have yet to be adopted and they are far from being absolutely clear as to who will be paying the county surcharge. 

While the proposed rules were heard last week in Honolulu, they have yet to pass review by the attorney general and others who must make sure that they are clear and defining and not subject to litigation. After that, barring any further changes, they must be submitted to the governor for approval and then be published. 

With the implementation date of January 1, 2007 just around the corner, it will be a miracle for those rules to be in place and for taxpayers to be educated by that deadline.

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