By Lowell L. Kalapa
(Released on 08/05/07)
How often we chuckle at the old saying “don’t tax you, don’t tax me, just tax that man behind the tree!” And that quip is really true when it comes to being taxed by government.
We would all like to believe that we should not have to pay some tax knowing all the time that sooner or later government is going to have to get those dollars from someone in order to keep the wheels of government running. Elected officials in Hawaii usually define that “man behind the tree” as Hawaii’s visitors. After all, visitors can’t vote to throw the elected officials out of office. Another great target for the tax burden is businesses in Hawaii, again because there are far fewer people who own businesses than there are plain old residents who are employees or consumers.
However, when it comes to the general excise tax, one has to remember that it is not the same as the sales tax found on the mainland in some 40 other states. The general excise tax is imposed for the “privilege of doing business in Hawaii.” It is not a tax that is imposed on the final consumption of goods or products. Thus, exemptions from the general excise tax generally are based on the observation that if the tax is imposed on a certain transaction and it skews normal behavior or makes the taxpayer structure his or her business inefficiently, then an exemption might be appropriate.
For example, we discussed how the general excise tax created an inefficiency by not only imposing the tax on the service fee the professional employment organization (or PEO) charged for leasing an employee to a small business but also taxed the amount that was disbursed to the employee as salary, benefits, and insurance premiums. Similarly, where the general excise tax creates inefficiencies that merely exacerbate the cost of living in Hawaii, such as being imposed on stevedoring activities in a state that relies on the import and export of goods, an exemption helps to mitigate the cost of living in Hawaii.
On the other hand, exemptions that are based solely on the emotional or wanting to duplicate what is available under a retail sales tax scheme usually ignore the philosophical basis for the tax. For example, proposals to exempt food and drugs from the tax constantly make their way into the legislative hopper based largely on the fact that many other sales tax states exempt food and drugs from their sales taxes – note well that prescription drugs are already exempt from the general excise tax, a political decision made back in the 1980’s.
The problem with exempting food and drugs from the general excise tax goes back to the basic philosophy of the tax and that is that it is a tax for the “privilege of doing business in Hawaii.” By providing such an exemption, it is really sending a message that those businesses that sell groceries and non prescription drugs are able to do so without having to pay for that “privilege.” Meanwhile, those businesses that sell clothing or say, toilet paper (just as essential), must continue to pay for the “privilege” of doing business in Hawaii.
The same goes for those nonprofit organizations that complain that they must pay the general excise tax on the money they raise from selling sausage or roasted chickens for their organization. The argument is that this is a fundraising activity the proceeds of which will be used to further the exempt function of that organization and therefore should be exempt from the general excise tax.
What the supporters seem to overlook is that those same sausages or chickens or even Christmas cards are being sold by a for-profit business and the sales of those sausages are in direct competition with the sales of the identical sausages by the for profit store just down the street.
While that may not sound fair, another way to look at it is whether or not the sale of the sausage when it was sold to the nonprofit organization was taxed at the full 4% (4.5%) retail rate, or if the transaction was subject to the lesser 0.5% wholesale rate. If the sale was subject to the lesser rate, the subsequent sale should be taxed at the full retail rate. This is something that the nonprofits should question when it comes to fundraising activities like dinners purchased and resold as tickets. They should question the restaurant or hotel whether or not they are being charged the lesser rate because the ticket to the dinner is being taxed at the full 4% (4.5%) rate.