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Relatively Obscure Franchise Tax Adds To Tax Burden

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By Lowell L. Kalapa
(Released on 8/7/11)

While most folks know about the general excise tax that they pay at the checkout counter at the grocery or department store and resent the annual rite of filing their personal income taxes every April, there are a number of taxes which all taxpayers pay, albeit indirectly, in the goods and services we consume each day.

Probably the most pervasive are the taxes levied on the utilities that serve us each day, be it electricity, telephone service or gas energy. Because families and businesses could not survive without power or communications, the cost of these goods and services is embedded in everything we consume or do in this state. Remember how important energy and communications were to the community during the last earthquake a couple of years ago? Luckily, that glitch in our island way of life occurred on a Sunday so the loss of power and communications was not as critically apparent as it would have been had it been a work day.

Nevertheless, that loss of power and communications underscored how much they are a part of our daily lives and Hawaii’s tax system takes full advantage of that fact. Not only do the public utilities pay a tax that is levied in lieu of the general excise tax and the real property tax, that is imposed by the county, but they also pay another tax for those companies that run their transmission lines over public rights of way or overhead in the airspace above our heads. For that privilege, all utilities pay a franchise tax of 2.5% of the gross income, that is, all but the phone company which was granted a royal charter by King Kalakaua and thus did not have a franchise.

At the turn of the 20th century, franchises granted specific companies the exclusive right to serve a particular geographic area of the island with their type of product. For example, on the island of Maui a company known as A.F. Tavares, which later became known as Hana Electric Light and Power Company, was granted the exclusive right to serve the Hana area with electric service. Another company which was originally known as the Lahaina Ice Company was granted the exclusive right to serve the western side of Maui and later became known as the Lahaina Electric Light and Power Company.

Because these rights and privileges were often negotiated, the rate of the franchise tax sometimes differed widely depending on when those franchises were granted. Again, for example, the Lahaina Ice Company was granted its franchise as early as 1907 and was required to pay a franchise tax rate of 1% of gross income while the A.F. Tavares franchise was granted in 1923 and that company was asked to pay at a rate of 2.5%.

As businesses evolved, many of the smaller companies were subsequently absorbed by the companies we know today that provide Hawaii’s families and businesses with electric and gas power. However, it was not until 1982 that a single tax rate of 2.5% was applied to all franchises, regardless of the prior negotiated rate. This brought uniformity to all franchise holders.

Although this particular tax is imposed by state law, the proceeds of the franchise tax accrue to the county in which the public utility is located. Thus, the public utility franchise tax is actually a windfall for the counties as they benefit from a tax that is imposed by the state.

What has stuck in the craw of the counties all these years is the fact that the telephone company does not hold a “franchise” and, therefore, is not subject to the public utility franchise tax. Again, this is because King Kalakaua was one of the first customers of the phone company with a telephone in Iolani Palace from which he could call the royal boathouse. In exchange for getting one of the first telephones, the King granted the fledgling company, then known as Hawaiian Bell Telephone Company, a royal charter to operate throughout the kingdom. Whereas a “franchise” granted the right to serve a particular geographic area of the islands, the royal charter granted the phone company the exclusive right to serve all of the islands. Since it is a charter and not a “franchise,” the phone company is not subject to the utility franchise tax.

Regardless, the fact that the energy utilities and, to some degree the communications utilities, have to pay these additional taxes is not very widely known. However, the fact that the cost of these taxes gets passed on to the customers of these services, albeit hidden in the cost of the services being provided, these taxes merely add to the burden that needs to be borne by families and businesses alike.

Thus, while many may not know about these taxes, they nevertheless add to our tax burden.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.


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