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Privilege For Doing Business At Heart Of General Excise Tax

posted in: Weekly Commentary | 0
By Lowell L. Kalapa

(Released on 04/01/07)

Apparently people still believe that Hawaii has a sales tax like those found all over the mainland where the tax is imposed on the customer at the point of retail sale for consumption by the purchaser.

Nothing could be farther from the truth when it comes to Hawaii’s general excise tax which is unique, found no where else in the nation. Unlike the retail sales tax which is a tax on the consumer, the general excise tax is imposed on the business for the “privilege” of doing business in Hawaii.

In other words, the tax is imposed for the privilege of selling goods and services to consumers in Hawaii. And unlike the retail sales tax that is imposed only on the final consumer of the goods, the general excise tax is imposed every time a transaction takes place. Note well that the retail sales tax is imposed on goods and not on services unlike the general excise tax which is also imposed on services. In fact, many new residents who have moved here from the mainland and take up sales professions where they are compensated with a commission for a sale don’t realize that the general excise tax is due on the commissions they receive. These include real estate sales persons and home sales representatives.

While the tax rate on sales of goods and services purchased for final consumption is the full 4% rate – 4.5% on Oahu because of the mass transit surcharge – the tax rate on goods and services purchased for resale is set at the lesser 0.5% rate. This reduced rate recognizes that if all wholesale transaction were also taxed at the retail rate, the tax would add substantially to the final cost of the goods and services sold.

However, the lesser half percent rate applied only to goods until a few years ago, as it was difficult for lawmakers to imagine that services could be resold. After all, when someone comes to clean you windows, they are cleaning them for your final consumption. However, as the economy evolved it became more evident that services, indeed, could be purchased for resale to the customer of the person purchasing the services. Thus, the depyramiding of the general excise tax was extended to services just a few years ago.

The theory behind the depyramiding of goods and services is that if the transaction involved goods and services that would be subjected to the full retail rate of 4% (4.5%) at a later stage, then the current transaction should be afforded the lesser half percent rate. But then again some taxpayers want to interpret this logic in their own way to satisfy their particular situation.

Such is the case this session of businesses that give a warranty to their customers, promising that if anything goes wrong with their product, they will make it right by fixing the problem. This pertains in particular to car sales.

Car dealers believe that warranty work should be subject to the lesser half percent rate because it represents work that was paid for by the purchaser of the vehicle when the vehicle was first purchased and taxed at the full retail rate. Thus, when the customer takes the vehicle back to the dealer to have something fixed, they believe that the work should be subject to the reduced rate of a half percent arguing that the service is being resold to the manufacturer who sold the warranty to the customer at the time the vehicle was sold.

The problem with that logic is that the manufacturer was not the seller of the vehicle. It was the local dealer who sold the vehicle to the customer and paid the full retail rate of 4% (4.5%). That dealer had purchased the vehicle from the manufacturer who paid the lesser half percent on that sale to the dealer.

But when the warranty work is done by the dealer, the dealer bills the manufacturer for the work, as it is the manufacturer who has made the warranty promise that the product is free of defects. Of course, if the manufacturer were actually performing the work, there would be no compensation, but it is not. Instead, the work is being done by the dealer – who is not the manufacturer but an entirely separate entity – and the repair work is actually being consumed by the manufacturer who had made the promise to the purchaser of the product that the product would be repaired should it be defective.

While the automobile dealers argued that other states don’t tax such warranty work, they seem to forget that the general excise tax is a unique creature unto itself. Since the manufacturer never paid the full retail rate on the “sale” of the warranty, there is little basis to argue that the warranty work paid for by the manufacturer should be subject to the lesser half percent rate.

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