By Lowell L. Kalapa
(Released on 10/07/07)
Taxpayers are sometimes confused over which rate of the general excise tax applies to the sale of their goods or services because there are at least two, if not three, rates with which businesses must contend.
As previously noted, the general excise tax is not the same as the retail sales tax found on the mainland in some forty other states. It is a tax on the seller and not on the purchaser although it is usually shown out separately on the billing invoice or the sales receipt. The general excise tax is levied on taxpayers who want to do business in the state and the rate of tax may vary depending on the type of sale or where the sale is made.
To clear the decks so that some of the nuances of the tax can be discussed further, the rate of the general excise tax where the goods or services are going to be “consumed” or used by the purchaser is 4%. However, as of January 1st, that “retail” rate went up on sales made to consumers in Honolulu to 4.5%. The additional half percent rate differential is to be used to fund the mass transit project on Oahu. The department of taxation’s interpretation of where the increase applies looks at where the goods or services are to be consumed rather than where the taxpayer-business is located, which is the opposite of the idea of the tax being a tax for the privilege of doing business in the state. Thus, the application of the mass-transit half percent rate looks more like a retail sales tax in that the rate is determined by who is the purchaser rather than who is the seller.
Thus, goods or services sold to a consumer in Honolulu are taxed at the 4.5% rate even though the seller may be located on a Neighbor Island. The glaring exception to this rule is in the area of commissioned Realtors who may be located on a Neighbor Island and may make a sale to a Neighbor Island resident, but because the property is located in Honolulu, the commission on that sale of property in Honolulu triggers a 4.5% rate on the commission earned from the sale even though the person handling the sale is located on a Neighbor Island.
Now that we have the half percent surcharge out of the way, let’s look at some other rate issues. Unlike the retail sales tax structure found in other states on the mainland, the general excise tax has more than one rate that can be applied depending on the type of transaction. As noted above, if the sale of goods or services is for the purchaser’s consumption or use, the full retail rate applies. However, if the sale of the goods or services is for resale, then the rate applied to that transaction is the wholesale rate of one-half of one percent or 0.5%.
Until a few years ago, the 0.5% wholesale rate applied almost solely to the resale of goods, as it appears that policy makers had a difficult time imagining that services could be resold. However, after much persistence and a substantial growth in the service sector of the economy, it became clear to lawmakers that services could indeed be resold. For example, a surveyor’s services of a car accident may be purchased by the attorney representing a claimant to prove that his client was not at fault in the accident. The surveyor’s services are not for the attorney’s consumption but benefit the client of the attorney. Thus, the surveyor’s services, when sold to the attorney, are taxed at the lesser 0.5% rate as those services will be folded into the services provided by the attorney and sold to the client and taxed at the full 4% rate.
Similarly, catered sandwiches sold to a fishing boat tour operator for consumption by the paying passengers of the fishing tour would be subject to the 0.5% rate as the cost of the catering would then be folded into the tour price and subject to the full 4% rate. Entertainment contracted by a hotel to entertain guests purchasing a luau package that also includes a lei greeting and souvenir drink glasses would all be subject to the lesser half-percent rate because those items are resold to the luau guest purchasing the package of services.
Finally, there are transactions where the general excise tax is not applicable. For example, given that the tax is levied for the privilege of doing business in Hawaii, people who sell goods or services only once or twice in a lifetime are said to be involved in a “casual sale,” that is the person does not sell such items on a regular, on-going basis. Selling your used car because you purchased a new one might be considered a “casual sale.”
Then there are situations where a person may secure the goods and services on behalf of another person from a vendor. He pays in advance for those goods and services with the expectation that he will be reimbursed for the cost of the goods or services. He receives no other compensation, fees, commissions or remuneration when he is reimbursed by the third party. The amount received by the “middle man” is not subject to the general excise tax. Because the entire amount to be reimbursed was taxed at the 4% rate, there is no amount that has gone untaxed, thus no additional general excise tax is due.