General Excise and Use Tax in Hawaii

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May 08, 2018

General Excise and Use Tax in Hawaii

I. Overview of General Excise and Use Tax

A. Productive Tax

Hawaii has eighteen separate tax laws. Two major components of the Hawaii tax system are the general excise tax and the compensating use tax. These taxes provide the largest source of tax revenue for Hawaii, accounting for over $3.2 billion, or 44% of all tax collections and 51% of all General Fund collections, for the fiscal year ending June 30, 2017.

The general excise tax is a product of the Great Depression. It was adopted in 1935 to address the fiscal crisis of the Hawaii territorial government. It replaced a business excise tax, which today would be considered a value added tax.

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The general excise tax is a productive tax with a broad base and relatively low 4Yo retail rate; it is considered easy to administer.

The general excise tax is supplemented by the use tax which is imposed on the landed value of tangible personal property, and the value of services, imported or purchased from an unlicensed seller for use in Hawaii. Hawaii Revised Statutes (HRS) $$ 238-2, 238-2.3.

In the City and County of Honolulu, where roughly % of the State's population resides, a surcharge of 0.5% is added to all transactions subject to 4% general excise or use tax. HRS s237-8.6.

B. "Wide net" of Tax

"In enacting . . . [the general excise tax], the legislature cast a wide and tight net." In re Island Holidays. Ltd., 59 Haw. 307, 316, 582 P.2d 703, 708 (1978). The tax is "imposed upon entrepreneurs for the privilege of doing business," and "applies at all levels of economic activity . . . and to virtually all goods and services." In re Central Union Church, 63 Haw. 199,202,624 P.2d 1346,1349 (1981). It is levied “on account of their business and other activities in the State measured by the application of [prescribed] rates against values of products, gross proceeds of sales, or gross income, whichever is specified". HRS $ 237-13. In re C. Brewer & Co. Ltd., 65 Haw.240,243-44,649 P.2d 1155, ll57 (1982). GET covers "virtually every economic activity imaginable." Pratt v. Kondo, 53 Haw. 435, 436, 496 P.2d l, 2 (1972).

C. Distinguished from a Retail Sales Tax

Unlike a retail sales tax, the general excise tax is not a single-stage tax limited to the final sale of tangible property. The general excise tax is imposed on the gross income from all business activities, including the performance of services, income from the licensing or use of intangible property, and income from rentals and royalties. HRS $ 237-13. Moreover, the general excise tax is levied on the business rather than the consumer. Most income is taxed at the retail 4% rate. A ½% rate is imposed on income derived from wholesaling, manufacturing, producing, and certain business-to-business activities. A special 0.15% rate is imposed on commissions earned by licensed insurance solicitors, general agents, or sub-agents.

D. Distinguished from a Value Added Tax

Unlike a value added tax, the general excise tax is imposed on gross income, with few deductions, at each stage of production or distribution. The general excise tax pyramids; it is a cumulative tax, not merely applied to the value added at each stage of production or distribution, but at each stage taxing again the values added at all earlier stages. The general excise tax, therefore, may be paid several times by different businesses on a particular activity before it reaches the ultimate consumer.

E. Legal Incidence upon the Business

The legal incidence of the general excise tax is upon the business, and not the consumer. Thus, the tax is imposed even if the consumer is a tax-exempt organization, the federal, state or city government, or a foreign diplomat. The fact that the business may, and often does, visibly pass on its general excise tax obligation to the consumer is immaterial and does not shift the legal incidence of the tax to the consumer. The general excise tax law does not require the business to pass on the tax. The pass on of the tax is a matter of contract between the business and the consumer.

1. Taxation of income received from sales to a tax-exempt organization and taxation of income received by a tax-exempt organization

The gross income received from sales to a tax-exempt organization is subject to the general excise tax. This is because the tax is imposed on the business selling to the exempt organization, and that business is not exempt. Tax-exempt organizations are also subject to the use tax on imports of tangible personal property, services, and contracting, like any other consumer.

2. Taxation of income received from sales to the government

The gross income received from sales to the federal government, state government, and county government may be subject to the general excise tax because the general excise tax is levied on the business, rather than the government. The legal incidence of the general excise tax falls on the business.1 The pass on of the tax by the business to the government is a matter of contract between the business and the government. That the tax is passed on to the government does not invalidate the tax. United States v. New Mexico,455 U.S. 720 (1982).

3. Taxation of income received from sales to diplomats

The gross income received from sales to diplomats used to be subject to the general excise tax, notwithstanding treaties and federal statutes which exempt diplomats from sales taxes. 2 Hawaii's position not to exempt income received from sales to diplomats was based, in part, upon a decision by the Comptroller General, 37 Comp. Gen. 772 (May 16, 1958), which confirmed that the Hawaii general excise tax is a tax upon the vendor, not the United States. The gross income was subsequently exempted. Section 237-24.3(11), HRS.

F. County Surcharge

Effective January 1, 2007, a county surcharge is in effect for all transactions taxable under the General Excise Tax Law or Use Tax Law at the retail 4% rate. HRS $$ 237-8.6, 238-2.6. The surcharge is 0.5% for transactions sourced in the City &, County of Honolulu, and is not in effect for any other county. (Kauai County adopted a surcharge taxing ordinance in December 2017,3 and the surcharge will take effect in January 2019.) Some points to keep in mind:

  • The surcharge also may be, and commonly is, passed on to customers. Thus, retailers who used to add 4.166% to their bills as tax are adding 4.712% to bills for transactions within Honolulu. See Department of Taxation Announcement No. 2006-15.
  • Transactions subject to the wholesale GET rate, and imports for resale at retail subject to the 0.5% Use Tax rate, are not surcharged. Only transactions subject to the retail 4% rate are surcharged.
  • All taxpayers are now required to segregate their tax liability by county, and face heavy penalties (10% of the amount of surcharge and tax due on the return, regardless of the amount of deficiency) if they do not. HRS $ 237-8.6(g;). Taxpayers doing business only in one county need to identify that county on their return; taxpayers doing business in multiple counties either file Form G-75 or supply an equivalent schedule electronically.
  • The tax is a surcharge on the existing general excise and use tax, and not an independent county level use tax. Thus, a Honolulu person importing an article or a service from a business in another county in Hawaii is NOT liable for Use Tax or the surcharge, because the Use Tax is imposed only on imports from businesses not subject to the State's taxing jurisdiction and the surcharge applies only if the rctail4o/o tax applies.
  • In 2011, as mentioned in section VIII.A.3 below, legislation was enacted to suspend a number of GET exemptions for two years (between July 1, 2011, and June 30, 2013).  Act 105, SLH 2011. The suspension of exemptions does NOT apply to the surcharge, so all exemptions in effect before the suspension still apply to the surcharge.

Hawaii Administrative Rules (HAR) $$ 18-237-8.6-01 to -10 provide guidance as to where different transactions that had connections to more than one county would be sourced for surcharge purposes. However, during consideration of the rules, practitioners expressed a strong desire that only one set of rules be used to determine both the county in which transactions are sourced for surcharge purposes and the jurisdiction to which they are sourced for GET and Use Tax purposes. The Department agreed,4 making these rules arguably one of the most significant rules packages to be issued in the GET/use Tax area.

In general, these rules provide:

  • For tangible personal property, the transaction is sourced at the place where the property is delivered. HAR $ 18-237-8.6-02.
  • For services, the transaction is sourced at the place where the services are intended to be used or consumed. HAR $ 18-237-8.6-03.
  • For commissions, the transaction is sourced at the place where the services generating the commission were performed. However, commissions connected with real estate are sourced to the location of the real estate. HAR $ l8-237-8.6-04.
  • For the rental or lease of tangible and intangible property, the transaction is sourced where the property is used. HAR $ 18-237-8.6-05.
  • For the rental or lease of realty, the transaction is sourced where the realty is situated. HAR $ 18-237-8.6-06.
  • For contracting, the transaction is sourced where the job site is located. HAR $ 18-237-8 .6-07. This is true even for work of the design team (architects and engineers) because that work is classified as contracting.
  • For interest (on a debt), the transaction is sourced where the control of the investment is located. HAR $ l8-237-8.6-08.
  • For amusements, the transaction is sourced where the amusements take place. HAR $ r8-237-8.6-09.
  • Other transactions are sourced based upon the rules for allocating gross income for the business activity which is the most similar to the taxpayer's particular business activity. HAR $ 18-237-8.6-10.
  • In most of the above instances, the taxpayer is given the option to allocate gross income based upon any reasonable allocation method that clearly, fairly, and properly reflects the gross income to the appropriate taxation district, provided that the allocation method is documented.

1. The income received from sales of intoxicating liquor, tobacco products and cigarettes, and other tangible personal property to the federal government is exempt by statute. HRS $ 237-25(a). If, however, services are provided with the tangible property (e.g., contracting work, neither the services nor the tangible property is exempt. HRS $237-25(c). [Historical note: This exemption, however, was suspended for two years ending June 30, 2013. Act 105, sLH 2011.]

2 See e.g., the Vienna Convention of Consular Relations, 2l U.S.T. 77, T.I.A.S. No. 6820, 596 U.N.T.S. 261 (entered into force with the United States on December 24,1969).

3 Kauai County, Hawaii, Ord. No. l02l (Dec. 11,2017).

4. See, for example, TIR No. 2009-2, at 3 (stating that the "used or consumed" test to source services is embodied in the county surcharge rules).

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