Cashier Gina Sarida pays out change to a cash customer at Hilo Hattie's Nimitz store. Tracking the government's retail revenues could get more complicated if counties are given sales tax authority.

A taxing idea

County officials insist the issue
is home rule, but retailers see
a proposed sales tax as
one more financial burden

Hawaii retailers are worried that a retail sales tax being considered by the Legislature won't just add a new tax burden to Isle residents and visitors, but also will be difficult and costly to handle.

The idea, which could add a 1 percent tax on the price of all goods purchased in stores, would cost money to implement, said Retail Merchants of Hawaii, a retailers' trade association.

And Hawaii's workers, already having a hard time making ends meet, would face an added cost of living, the association said.

But backers of the measure, primarily the counties, say the issue isn't about a tax burden but about home rule, giving the counties the right to determine some of their own funding sources. The tax would be separate from the long-standing 4 percent state excise tax on retail, and other, transactions.

State Sen. Donna Mercado Kim (D, Moanalua Valley-Aiea-Pearlridge-Kalihi Valley) labeled in media reports -- mistakenly, she said -- as the source of the measure, agrees it is a counties-rights issue.

She said she didn't introduce it, isn't pushing it and the only reason she held hearings on it was that it was requested by the counties as a way to make up a budget shortfall.

Whatever its origin, most retailers don't like it.

Cashier Gina Sarida puts a customer's purchases in his bag at Hilo Hattie's Nimitz store.

And some worry that a one-point tax is being misunderstood. Businesses already pay a 4 percent general excise tax on their revenues. If they choose to add that 4 percent to their customers' bills, that money is taxable, so it's necessary to add 4 percent of the 4 percent.

That's why most businesses add 4.16 percent to the bill. Another 1 percent makes it 5.16 percent and that is a 24 percent increase in the amount of tax that gets tacked on to the bill.

Sen. Kim says it is a little soon to get worried. "It's just enabling legislation" and it is changing all the time, she said. In the end, if the bill does pass, all it would do is allow the county governments to make a decision as to whether their constituents would accept an additional tax.

She sees herself and the Legislature as "just a conduit" to handle something the counties want.

Honolulu City Council Chairman Donovan Dela Cruz agreed it is a county issue. "To us, it's a home-rule issue," he said. "It doesn't mean the county is actually going to do it, but if counties are going to determine their own financial destiny, they need to have certain authorities."

The alternative is to have counties adjust the only flexible income source they have, real estate taxes, which means if taxes have to rise homeowners get unfairly hit, Dela Cruz said.

The debate is not about the tax increase, it is about home-rule, he said. When a mayor makes a budget proposal, that's when the local councils and their voters get to choose how to fund it, said Dela Cruz.

That argument doesn't satisfy retailers, who believe their customers are hard enough hit as it is, and they may need to spend money on new accounting systems to handle the complication of two kinds of tax.

An informal survey Retail Merchants of Hawaii conducted among 80 large, medium and small retailers indicated it could cost business more than $7 million to change the way they handle and report the different taxes, said Carol Pregill, Retail Merchants executive director. Her survey showed that large companies would each have to spend $200,000 to $500,000 and the small ones would see an expense of $1,000 to $5,000 just to change their accounting to collect and explain the tax, she said.

Anyway, Pregill said it seems like just another way for government to avoid having to live within its means.

"It's a bad idea," said Paul Kosasa, president of ABC Stores. "It's hard to enforce," he said. ABC has computerized cash registers and could probably configure them to handle another tax, but many businesses can't do that, Kosasa said.

He worries more about giving counties a new way of raising money at the expense of consumers.

"They'll find another way to get revenue and that is putting a tax on food and medication and all the other essentials that we're paying taxes on already," Kosasa said.

Paul DeVille, president and chief executive officer of Hilo Hattie, said it would cost his business a lot of money to implement, even if cash-register changes could be made with relative ease. The complications come in separating out how much of the company's tax money should go to the county and how much to the state and if it should happen that food and beverages get exempted, that would make it even more complicated, he said.

"It will cost me an unknown number. Whatever they estimate, it will be an under-under-estimate," DeVille said.

That sort of added cost and a new tax just adds to the widespread image of Hawaii as a hard place to do business, an image that is bolstered in part by the high level of taxes in the islands, DeVille said.

He said he and his management have thought a lot about it and have to join the Retail Merchants and others in opposition. DeVille said he also has to oppose it "as a taxpayer and someone who is going to feel the brunt every time I go in and buy something."

Legislators say the carry-over retail sales tax bill from last session, HB1554, is still very much a draft and it is clear they have tried to avoid some problems.

For example, the language being looked at now makes it clear that the 4 percent general excise tax must not be imposed on the 1 percent sales tax.

If it is imposed, a $100 item would become $101. Then the business would have to pay a 4 percent general excise tax on the $101 in revenues and if it chooses to pass the excise tax along to the customer, the bill reaches $105.04. And the added $5.04 could be treated as revenue, incurring an additional 4 percent tax, bringing the total tax bill to a little more than $5.24.

Even if all those wrinkles are worked out it is still going to be an added tax and it seems sure to happen as lawmakers carry on their constant search for new ways to increase revenues, said Lowell Kalapa, president of tax watchdog, the Tax Foundation of Hawaii.

"You better get off the track, 'cause that train is coming down," Kalapa said.

It will cause additional bookkeeping and extra work for businesses, but it also clearly is a tax increase, "even though elected officials are rallying around and saying it's a home-rule issue," Kalapa said.

The politicians are all looking at the money because a 1 percent retail tax on Oahu would generate about $120 million a year. Under the current wording of the bill, the county would have to give up its $30 million share of the hotel room tax, but the state is "drooling" over that money while the county looks at a net gain of $90 million, Kalapa said.

Maybe that's not so bad, according to Walter Watanabe, store manager and a director of Shirokiya Inc. He doesn't see it as that much of a problem to crank the tax charge at the cash register to around 5 percent from 4 percent and figures the store can handle the accounting and reporting.

He pointed out government services depend on money, and said if it has to come from somewhere, retailers can handle some of it.

"We can live in our old ways and say we don't want an increase," but there would be no additional funding for government and no increase in revenues and basically no improvement in government services, Watanabe said.

Honolulu attorney and Certified Public Accountant Ronald Heller said the new tax would complicate accounting and make life harder, and more costly, for businesses. But he worries more about what it could mean in the form of more taxation in the future.

"Once you open the door with a 1 percent tax, what is going to stop them down the line looking at it and saying 'let's go to 1.5 percent, or 2 percent,'" Heller said.

At a simpler level, it's like kids demanding a bigger allowance from their parents, said Daryl Yamaguchi, owner of Umeke Market Natural Foods and Deli on Kalanianaole Avenue across the street from Kahala Mall.

"What about reducing your spending? What are you spending it on?" Those would be common-sense questions to ask, Yamaguchi said.


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