Lack of understanding of general excise tax creates confusion
Hawaii’s general excise tax is the envy of every other state that imposes a retail sales tax because of its broad base — it is applied at nearly every transaction.
Retail sales taxes, found in more than 40 states, are usually imposed only on goods and then, only on the end-user or consumer of the goods. Hawaii’s GET is imposed not only on goods, but also on services. It is imposed even when the goods or services purchased will eventually be resold to someone else.
The other significant difference is that Hawaii’s GET is a liability of the business selling those goods or services “for the privilege” of doing business in Hawaii, whereas a retail sales tax is the liability of the customer. In states with retail sales tax, the business is merely a collection agent for the city, county or state government that levies the tax. In some cases, the business collecting the tax for the state or county is compensated for that chore by being able to retain a portion of what is collected. With the GET, the amount paid to the state tax collector is a percentage of what the business puts into the cash drawer, including the amount sometimes shown as the GET. The state rate is 4 percent, but in Honolulu the additional 0.5 percent for the rail system is tacked on to the basic state rate.
Since the amount “passed on” to the customer as the GET becomes a part of what the business collects and puts into the cash drawer, when it comes time to pay the tax collector what’s due, the business must pay 4 percent on the amount that has been passed on to the customer. As a result, consumers see a rate of either 4.16 percent on the neighbor islands or 4.712 in Honolulu. Some argue that businesses should charge only the statutory rate of 4 or 4.5 percent. The Department of Taxation is only interested in the amount being remitted to the state. However, it is against the law for a business to state there is no GET imposed on a transaction.
A business can show the tax amount separately, but that is not required by law. In fact, before the changes made to the Internal Revenue Code in 1957, businesses did not separately show the tax because it was viewed as a tax on the gross income of the business. Only when the deduction for state sales taxes was added to the Code did the retail community pursue the IRS recognition of the tax as a “retail sales tax” for federal purposes, then the tax began to be shown separately.
Today, because of price competition among businesses, nearly all businesses list the GET as a separate line item. Showing the tax separately also helps shift the blame to government for the added cost to the price of a product or service. However, merely charging the tax separately does not relieve the business of the tax burden. Because the 4 percent tax is levied on everything in the cash drawer, including the passed on tax amount, the business must pay part of the GET due out of its markup or margin. When a business, such as a grocery store, operates on a slim profit margin, the amount of GET paid out of the margin leads to a “make-it or break-it” point.
For the customer, the GET is just another charge added to the bill, but for a business, the tax can determine whether or not it can stay in business. One might say the tax is being passed on to the customer, so the business should be able to pay the tax and stay in business. That might be true for a business that can charge whatever it wants because the demand is high for the product or service it sells, but where there is competition, the profit margin for goods or services may not be sufficient to cover the cost of the tax. If a business cannot charge enough for the product or service to cover the GET obligation that can’t be passed on, it will soon be out of business.
Because GET is a tax on gross income, it is due whether a business is profitable. Take, for example, a business that is having a “going-out-of-business” sale, and selling everything below cost. The business is making no profit on those sales, yet the GET will still be due on the amount taken in from the sale.
For the average taxpayer who believes the cost of the tax can just be passed on to the customer, they don’t see that the business must still take something out of its mark up to pay the tax over and above what was passed on.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.