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Yield Of The General Excise Tax Due To Its Unique Structure

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By Lowell L. Kalapa
(Released on 12/09/07)

People often call Hawaii’s general excise tax a sales tax because, like the retail sales taxes found on the mainland, it is usually tacked on the sales receipt when a customer makes a purchase. But as many businesses know, it is anything but a sales tax.

Unlike the retail sales tax which is usually applied only on goods sold for final consumption, the general excise tax is imposed on nearly every transaction that takes place in the state of Hawaii. It applies not only to the sales of goods but it is applied to the sale of services. So where a driver may take his car into the shop for service in Los Angeles and pays $50 for the oil change, his brother in Hawaii takes his car into the shop in Honolulu and is charged the same $50 fee for the lube job, but is also billed an additional $2.36 for the general excise tax. And because the service station owner needs to pass on as much of the tax to the customer, the amount applied to the $50 charge is not just the 4.5% but the 4.5% that will be due on the amount of the tax passed on to the customer. This amounts to 4.712% of the $50 charge.

This is because the general excise tax is a tax on the gross income of the business. As a result, the amount passed on to the customer becomes a part of the business’ gross income which is then subject to the general excise tax. In the case of the retail sales tax, what the business on the mainland collects from the customer as the sales tax is the amount the business hands over to the state or county government. Always no more than what was charged to the customer and in some cases a little bit less as some states and counties allow that business to keep a portion of the tax as a service fee for acting as the “tax collector” for the state or county. No such luck in Hawaii.

Another unique feature about the general excise tax is that if the sale of the goods or service is for resale and not for consumption by the purchaser, the tax is still imposed albeit at a lesser rate of 0.5%. The retail sales tax is just that, imposed only on sales where the goods are being purchased for consumption and not for resale. Thus, as noted above, nearly every single transaction that takes place in the state is subject to the general excise tax at either the 0.5% rate or the 4% retail rate (4.5% in Honolulu).

While the general excise tax certainly adds to the cost of doing business in Hawaii, what exacerbates the situation by comparison to states with retail sales taxes is that goods and services purchased by businesses for use in their operations are also taxed under the general excise tax. This is not true of most retail sales tax states. Goods purchased by businesses for use in their operations are viewed as necessary for the production of the goods and services or the production of income and, therefore, are not subject to the retail sales tax. That is not true in Hawaii where, as noted previously, every transaction is subject to the tax including purchases by businesses.

As a result, the general excise tax with its comparatively low rate, produces more than half of the tax revenue for Hawaii. If the general excise were truly a retail sales tax as is found on the mainland, instead of the 4% (4.5%) rate, it would take a rate of 10% or 11% to generate the more than $2.5 billion it produced in the past fiscal year. This would be amongst the highest, if not the highest, state rate in the nation. That’s because the portion represented by retailing of goods is only about 40% of the total tax base for the general excise tax.

So while lawmakers enjoy the fruits of this very unique tax, it comes at a very heavy price, the climate in which businesses must survive. As the cost of rent, energy, and raw materials rises, so does the amount of the tax, making the situation even more difficult for businesses to survive. If, in fact, nothing is done to alleviate the impact of the tax on both the cost of doing business and the cost of living, Hawaii may again find itself between a rock and a hard place as businesses fail and workers are put out of work.

As the 2008 legislative session looms on the horizon, it is not too early to begin working on tax relief that will improve the outlook for businesses and the economy as a whole. With the national economy beginning to stagger, can its effects not be far behind for Hawaii? Hopefully, Hawaii will not fall into the same economic funk it experienced in the past decade. Let’s hope lawmakers realize that now and not when the hole is too deep out of which to climb.

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