By Lowell L. Kalapa
(Released on 11/11/12)
Despite often being referred to as Hawaii’s sales tax, the general excise tax is indeed unique among the states that do, in fact, have a retail sales tax. It is often referred to as a multi-rate, multi-stage tax that is imposed both on wholesaling and retailing and on services as well as goods.
A couple of years ago, the state legislature decided that the budget shortfall was far too great and that the gap could not be closed solely by reductions in spending. On the other hand, with elected officials under the gun insofar as reelection, especially those members of the House of Representatives who must run for office every two years, legislators shied away from direct increases in taxes especially on residents. Instead they resorted to hiking the TAT or hotel room tax, stealing money from a fee that was supposed to be dedicated to building a dedicated rental car facility, increasing income tax rates on higher income individuals and suspending many time-honored exemptions from the general excise tax.
Because the general excise tax is levied on people who want the privilege of doing business in the state, lawmakers figured that the general public would not notice that the exemptions were temporarily suspended. However, many of those exemptions have a direct impact on all taxpayers such as the exemption for stevedoring activities which affects nearly 100% of what we consume whether shipped from out of state or between islands.
Others, like the exemption from the general excise tax on the sale of agricultural products to interstate carriers, highlighted the anomaly that perhaps the exemption was not necessary. With respect to this exemption, the original exemption applied to only locally grown agricultural products. However, when the exemption was declared unconstitutional as it discriminated against the sale of agricultural products that weren’t locally grown, the condition that the products be locally grown was deleted. As a, result there was little reason to exempt those products sold to interstate carriers from the general excise tax as it did not and could not help local agricultural products. It is one exemption that lawmakers may want to permanently repeal.
However, the exemption known as the contractor and subcontractor deduction did raise the question of whether or not that treatment of income is appropriate. Under the contractor/subcontractor deduction, a general contractor may be asked by the client or homeowner to build or install a certain type of material for which the general contractor does not have the expertise. This might be something like tile work or installing granite counter tops. So the contractor will subcontract that work out to a craftsman who has that expertise. When it comes time to pay the general contractor, the general contractor keeps only that amount of the payment that is for his or her work and deducts the amount due the subcontractor and pays the 4% general excise tax only on the amount the general contractor kept. The subcontractor then pays the 4% general excise tax on the full amount received from the general contractor. Thus, there is only one 4% general excise tax on the amount paid for the job by the client or homeowner.
This provision dates back to the original adoption of the general excise tax in the 1930’s. Thus, it has been around nearly as long as the general excise tax. And back then very few people could imagine a service could be resold to someone else, because a service is provided in the here and now and it was difficult to imagine that someone could turn around and resell a service. Thus, special treatment of gross income was adopted to insure that the full 4% retail rate was not paid twice on the same amount.
However, since that time practitioners and administrators have come to realize that there are other services performed that can be sold for resale by someone else. As a result, about a decade ago the general excise tax law was amended to recognize that not only can goods be purchased for resale, but services can also be purchased for resale. To insure that those services purchased for resale were not subject to being taxed twice at the full retail rate of 4%, the law was amended to impose the lesser 0.5% rate on those services that the purchaser intended to resell to his or client or customer.
When the suspension of the contractor/subcontractor deduction expires next June, lawmakers should consider putting contractors and contracting work under the provision that recognizes the purchase of services for resale. There other unique provisions of the general excise law to which this treatment should be applied like tourism related activities.