Passing on the general excise tax is not possible for some
A number of questions about Hawaii’s general excise tax seem to resurface with great regularity as old-timers and newcomers encounter the peculiarities of this unique tax.
The most often asked question is the rate of the tax. Statewide the rate is 4 percent, while on Oahu the rate is 4.5 percent. However, retailers have taken to charging 4.16 percent on the Neighbor Islands and 4.712 percent on Oahu.
While some may think that it is illegal, the only prohibition in the law is against a business that states it is not charging the customer the general excise tax. The additional 0.16 percent and 0.212 percent represent the amounts the retailer would have had to pay on the amount passed along to the customer as the general excise tax. While the retailer may not be able to recover every penny paid on the amount passed on as the general excise tax, the addition of this additional rate on the tax secures much of what the retailer had to pay on the tax.
If this all seems strange and hardly understandable, readers have to remember that the general excise tax is a tax on the gross income received by the business. Thus, not only is the tax due on the shelf price of the product or service, but it is also due on that amount visibly passed on as the general excise tax. That’s right, the retailer has to pay the 4 percent (4.5 percent on Oahu) on the amount that is visibly passed on to the customer.
As for the tax department, it really doesn’t pay attention to what has been charged to the customer. All the department is interested in is that when that general excise tax return is filed, the amount of gross income is taxed as the prescribed 4 percent or 4.5 percent.
On the other hand, the retailer can say that he is not passing the tax along to his customer and, therefore, does not show any additional amount on top of the shelf price charged. While it may look like that the retailer is not adding on the tax, the retailer must, nonetheless, pay the 4 percent (4.5 percent) when it comes time to file the general excise tax return.
In fact, years ago the tax was never shown out separately, but businesses still paid the tax. It was not until the federal Internal Revenue Code was amended to allow the deduction of state sales taxes that businesses started to show the tax out separately.
Hawaii businesses actually went to the federal government to ask that if they showed the general excise tax out as a separate charge, would the federal officials recognize it as deductible, even though, technically, the general excise tax is not a sales tax. With a nod from the Internal Revenue Service that agreed to recognize the general excise tax as a deductible “sales” tax, businesses began to show the tax as a separate charge.
Another question often raised by those who have to fill out the general excise tax return is why do insurance agents and sub-agents get to pay the general excise tax on their commissions at a substantially lower rate of 0.15 percent, while other businesses must pay the full 4 percent on their commission income. The history of this special rate dates back to the 1970s when the Legislative Reference Bureau was asked to do a study of commission agents. The researcher found that at that time there were three types of commissioned agents who were prevented from passing on the cost of the general excise tax to their customers. Two of those were prohibited by another jurisdiction’s rules, while insurance agents were prohibited by state law from passing on the cost of the tax imposed on their commissions.
That’s because once an insurance premium is calculated based on the insured’s characteristics, there is no additional charge that can be added as that is what the actuarial value of the person or property is calculated to be. Thus, the state’s insurance law prohibits the passing on of the cost of the general excise tax.
Lawmakers did, however, recognize that in order to put insurance on a competitive basis with other commissioned agents, they should pay what those commissioned agents must pay out of their pocket, and that was determined to be 0.15 percent, or the amount of the tax passed on to customers of other commissioned agents. And lest anyone think that insurance customers got a deal, at the same time the reduced rate for insurance agents’ commissions was adopted, a concurrent increase in the insurance premiums tax rate was also adopted to make up for any loss of revenues.
Oh, and those other commissioned agents who are prohibited from passing on the tax? They include travel agents on commissions earned on the sale of airline tickets, which is prohibited by federal law from being passed on to customers, and taxi drivers, who are prohibited by county ordinance from passing on the tax to their customers.
These are but two of the many questions posed by those who are unfamiliar with this unique tax.
* Lowell L. Kalapa is president of the Tax Foundation of Hawaii.