Businesses have options on excise tax
I am fully aware of the state's 4 percent tax on all purchases made in Hawaii, but I am very curious about the additional 4 percent tax on top of the usual 4 percent tax, which amounts to 4.16 percent on the purchase. Under what provision of the law can merchants add 4 percent on top of the regular 4 percent excise tax?
Answer: There is nothing in the law that either allows or prohibits merchants from charging customers 4.16 (or 4.166) percent for the state's general excise tax, according to the state Department of Taxation.
Right off the bat, your question is an example of the confusion that surrounds the GET.
It is not a sales tax or a tax on purchases, as is found in many other states. Therefore, it is not a tax on consumers.
The general excise tax is a tax imposed on a businesses' gross receipts, which the state has decided should include the amount collected for the GET.
The state doesn't care whether you, as a purchaser of goods or services, pays the tax. It just wants to make sure that the merchant or service provider pays the state 4 percent of its gross receipts.
It's up to merchants to decide how to handle their tax burden.
"By law, they're not required to pass it on," said Denise Inouye, supervising tax specialist with the state Department of Taxation's Rules Division.
This is where it gets confusing.
Some merchants choose not to visibly pass the tax onto consumers, opting instead to build it into the cost of a product or service.
Other merchants opt to "visibly" pass on the GET as a straight 4 percent. More and more, because they are being taxed on the tax, merchants are also choosing to show consumers that the cost includes not only the 4 percent GET, but the 4 percent on the 4 percent.
The Tax Department gives three examples of how this works:
» Business X charges customers a flat $125, opting not to visibly pass on its GET. It pays the state $5, which is 4 percent of $125, so pockets $120.
» Business Y opts to visibly pass on the 4 percent GET, so customers pay $130 ($125 plus $5). But it ends up paying the state $5.20, which is 4 percent of $130.
» Business Z visibly passes on the 4 percent GET, and opts also to have customers pay for the added expense of the GET. So it charges customers $130.21. It keeps $125 and pays the state $5.21.
Basically, "the 4.166 (percent) is the closest you get to collecting the 4 percent on the 4 percent on the 4 percent," Inouye said.
She emphasized that what the consumer sees as 4 percent, 4.16 percent of 4.166 percent "is not a tax on the consumer, because it's not a sales tax." It's the merchant's way of showing what percent of the purchase cost will be paid to the state.
Inouye also explained that, prior to 1986, the federal government allowed residents in the state of Hawaii to claim the GET as a sales tax deduction on their income tax returns, if vendors showed the tax on receipts.
That's how and why the GET started showing up on receipts, Inouye said. But that income tax provision was repealed for the tax year beginning in 1987.
Meanwhile, under consumer protection laws, merchants are not allowed "to collect and represent more than" what their tax liability actually is, Inouye said.
All this is bound to get more complicated when the City and County of Honolulu begins levying an additional 0.5 percent excise tax to help fund a rail transit system. Exactly when that tax begins to take effect has not yet been determined.
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