Purchases of goods and services for resale afforded lesser rate
A reader asked if the services of another business, which they had procured for their client, fall under an exempt reimbursement under the general excise tax law.
Unfortunately, because the taxpayer was also providing a service in connection with the services procured from the other business, the charge for their services would be considered an additional consideration and, therefore, the entire amount received from the client, including costs of the services of the other business, would be subject to the full retail rate of 4 percent.
However, another part of the GET law recognizes that services purchased on behalf of a client represent a purchase of goods or services intended to be resold, and not for consumption by the purchasing business.
For many years, it was difficult for policymakers and administrators to conceive that services could be purchased for resale. As a result, the law only recognized that tangible goods could be purchased for resale. A state-hired consultant recommended a lesser rate in the 1960s. Until that time, the retail rate was applied to all transactions, partly because the rate had been rather low and the tax was not shown separately.
When the rate was increased to 4 percent, during the 1965 session, the onerous, pyramiding feature of the tax became more apparent. Even though pyramiding became an issue, eventually addressed by lowering the tax rate on purchases of goods for resale, services were always perceived as being consumed by the person who made the purchase and taxed at the full retail rate.
Near the end of the 1990s, it was demonstrated that services could be purchased by a business, then resold for consumption by its client. The first step in this direction came with the leasing and subleasing of real property. The rental of real property is considered a sublease to another business at the full retail rate on every stage of a leasing and subleasing transaction, with the heaviest tax burden falling on the last sublessee, in many cases a small business.
Once the leasing and subleasing of real property was addressed by affording a lesser rate to income from a subleased portion of the original lease, policymakers and administrators realized that services could be resold.
The resale of services was also recognized in the treatment of subcontracting services rendered through a general contractor. This is what is known as the subcontractor deduction but was limited to construction contracting. This provision allowed a general contractor, who outsourced a certain type of specialized work to a subcontractor, to pay the tax only on the amount he retained. For example, a general contractor without the license or expertise needed to lay tile subcontracts the work to a tile firm. The subcontractor deduction allows the general contractor to subtract out the amount that will be paid to the subcontractor and pay the full retail rate of 4 percent only on the amount the general contractor retains. The subcontractor then pays the retail rate of 4 percent on the amount received from the general contractor.
This splitting of income was part of the original GET law. A similar provision was added in the late-1980s when tourism-related services were purchased for resale to visitors at, say, a tour desk in a hotel.
The tour operator paid 4 percent on what was received from the hotel tour desk and the tour desk salesperson paid the 4 percent on the difference of what was paid to the operator and what the visitor paid the tour desk.
When it was realized there are many other businesses that purchase services that benefit the customer or client, the lesser wholesale rate of 0.5 percent was extended to the purchase of services for resale to the customer or client. For example, a lawyer who needs to have the scene of a traffic accident surveyed in order to prove who was at fault secures the services of a surveyor that will ultimately benefit his client. The surveyor is told that his services will be resold to the lawyer’s client. The surveyor then pays the 0.5 percent rate on the income of that job. Thus, the transaction will not be taxed twice at the full retail rate of 4 percent.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.