New GET surcharge affects all businesses somehow
STARTING in 2007, the general excise tax rules are changing. The general excise tax is based upon gross income. The tax is collected from the person receiving the income, unlike most Mainland sales taxes.
Effective Jan. 1, a 0.5 percent county surcharge tax (CST) will be imposed on taxpayers subject to the 4 percent general excise tax in the City and County of Honolulu for the purpose of funding mass transit. The additional surcharge will affect taxpayers currently doing business on Oahu that are subject to the 4 percent general excise tax.
Currently, retailers charge their customers 4.166 percent excise tax on purchases. Where does the 0.166 percent comes from? The general excise tax is assessed on gross receipts of a transaction. Gross receipts are defined to include tax that may pass to a customer. Thus, this tax to the customer will be greater than the tax rate of 4.0 percent or the new rate of 4.5 percent. Starting January 1, 2007 the maximum tax rate to be passed to Oahu customers will be 4.712 percent.
The most critical questions related to the new CST involve who must pay the surcharge, or more specifically, which transactions are subject to the CST. While it may seem obvious that an Oahu business selling to a customer on Oahu is subject to the CST, it is not as simple when a transaction takes place across county boundaries or if the transaction is a service.
The underlying principle of the proposed sourcing rules is similar to the application of general excise tax to out-of-state transactions. Therefore, neighbor island businesses that have "substantial nexus" on Oahu may be subject to the CST. "Substantial nexus" is created by the business having a physical presence on Oahu, which includes the presence of employees or property on Oahu.
SALES OF tangible personal and real property are relatively simple to track by county. The destination of where the personal property is delivered or where the real property is located determines CST applicability. In addition, if a neighbor island business sells goods to a customer on Oahu, this transaction is only subject to the CST if that business has nexus on Oahu.
Services and commissions, on the other hand, are more difficult to source. Services should be sourced to the county where they are intended to be used, while commissions are sourced to the county where the services are rendered, with the exception of real estate services. Real estate commissions are sourced to where the real estate is located. In addition to the complexity that will arise in determining what constitutes a service versus a commission, sourcing intangible items may prove to be challenging.
Beginning Jan. 1, all businesses will be required to keep track of their transactions by county on their general excise tax returns regardless of the applicability of the CST. Therefore, Neighbor Island businesses that do not do business on Oahu, and therefore are not subject to the CST, are still required to allocate gross receipts by county. Failure to allocate gross receipts correctly may result in a 10 percent penalty of the total excise and surcharge tax due.
With the implementation date of the new surcharge just around the corner, it is important to note that all Hawaii businesses will be affected by the new CST sourcing rules, not just businesses that operate on Oahu. It seems there is no way to avoid the CST. Is your business prepared?
Nicole Wyngaard is a tax manager for the Honolulu office of Grant Thornton LLP. She can be reached at email@example.com