Complex Rules Determine Who Will Pay Honolulu’s General Excise Tax Increase
When Hawaii’s state legislature decided to allow county governments on each of the four islands to vote separately on a .5 percent rate hike in the state’s general excise tax (GET), currently at 4 percent, to pay for the proposed mass transit system serving Honolulu, it was trying to avoid making taxpayers on all four islands pay the hike, according to Lowell L. Kalapa, president of the Tax Foundation of Hawaii . But with Oahu the only county to approve the rate increase scheduled to go into effect on January 1, the state’s Department of Taxation has been forced to propose rules to determine who pays the tax on transactions involving parties on Oahu and one of the other islands and under what circumstances.
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While Hawaii has a personal income tax and a small corporate business tax, it does not have a sales tax and raises nearly half of its revenue from the general excise tax levied on all gross business income. Because the GET is charged at every level of production, from material supplier to manufacturer to wholesaler to retailer to consumer, the tax is cumulative and the rate hike will be significant for anyone doing business in Hawaii, according to Kalapa, writing for hawaiireporter.com.
Mainland businesses who sell products in Hawaii and who do not have a GET license because they do not have a physical presence in the state, do not pay the tax, but consumers who purchase from mainland businesses pay a use tax on the products they buy. Kalapa maintains that, historically, the GET is based on where the business is located and is an “origins” tax, and that altering this concept can generate use tax issues or interstate commerce violations.
The state Department of Taxation’s proposed rules, which were released on November 8, create exceptions for businesses involved in leasing equipment and different kinds of exceptions for commissioned agents.
A Maui real estate agent, for example, who receives a commission on the sale of a condo in Kihei, will pay the GET of 4 percent on the sale. But if the same agent sells a condo on Oahu, the GET rate will be 4.5 percent, the new rules say, because the property is located in Honolulu. But for all other commissioned agents, Kalapa says, the tax on commissions received will be determined by where the agent is located.
The GET for leased equipment will be based on where the equipment is used. So if a Honolulu company leases equipment for constructing a house on one of the other islands, the company will pay the 4 percent tax, a change in principle from the business tax, Kalapa says. The interstate commerce issue could arise when a consumer in Oahu purchases a computer from a supplier on a neighbor island instead of a mainland business. The consumer would pay the 4 percent GET rather than the use tax, setting up a potential trade violation.
The Hawaii State Department of Taxation Council on Revenue projects that total revenue for 2006 will be $4.3 billion, of which $2.3 billion will come from the GET and use taxes. Personal income tax will generate $1.5 billion in revenue and corporate income taxes $1.3 million.