Ka Wai Ola - Office of Hawaiian Affairs, Volume 5, Number 4, 1 April 1988 — Taxes and You [ARTICLE+ILLUSTRATION]

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

CJnderstanding HawaiVs Tax System

As the current legislative session winds down, let's take a moment to reflect on the various proposals to change our Hawaii tax system and perhaps gain a better understanding of our tax system and how it works.

The bulk of the taxes collected by the state eome from the general excise tax whieh is the 4 percent we see tacked on at the cash register and the net ineome tax whieh we as individuals pay eaeh year along with our federal ineome tax. Together, the general excise tax and theincome tax contribute nearly two-thirds of all the taxes we pay to state and county governments in Hawaii. The third largest contributor to the tax calabash is the real property tax whieh is paid to the county where the property is located.

Since we took a look at the net ineome tax last month and hopefuliy you all have filed your returns for this year, let us leam about this "general excise tax" whieh we sometimes mistake for a sales tax. Indeed, there is a difference between the 4 percent tax we pay here in Hawaii on all our purchases and t he tax we pay on our souvenirs at Disneyland. The tax that we find on the mainland is a retail sales tax and is actually due from the customer. The business merely acts as a representative for the loeal department of revenue in collecting the tax. In some states, the business is paid to collect the retail sales tax for state or county governments. Here in Hawaii, the tables are turned. The general excise tax is due from the business. In fact, the general excise tax is called a "privilege tax" imposed for the privilege of doing business in the state. In fact if you are thinking about starting up a business be it silk-screening T-shirts or a luneh wagon, you need to get a general excise tax license.

The tax is measured against all the ineome the business takes into its cash registers. This gross amount of ineome is then multiplied by the tax rate of either 4 percent or 0.5 percent, and we'll talk more about those rates later. If the tax is really the responsibility of the business, why do they "pass" the tax on to us as customers in the store? Many years ago, the business community decided that the public should know that a part of the price paid by consumers was due to the general excise tax. Since the tax was based on gross ineome, businesses merely included the amount of the tax in the shelf price of the items sold in their stores. So, they requested that they be allowed to show the tax separately and add it on after all the purchases were rung up on the cash register. That is

why we see the 4 percent tax added on at the end of our grocery bill or at Sears when we shop for clothes. All the tax department is interested in is making sure that they get their 4 percent of the total amount placed in the cash register. This means that in addition to the shelf price, the amount eollected from you and me as the passed-on tax is subject to the 4 percent tax rate. Thus, there is a 4 percent on top of the 4 percent you and I pay.

Let's go back to those two different rates. There is the 4 percent rate that we all see every day in the store, and then there is the 0.5 percent whieh we don't often see. However, there is some logic to these two different rates. Generally, the full 4 percent rate is imposed on retail sales, that is, a sale where the purchase is for final use by the purchaser and for resale or to be used to make another product whieh will eventually be resold. On the other hand, the 0.5 percent rate is paid by the seller when the purchaser intends to resell the product to someone else, either for final use or for again a resale. In order to get this Iower rate, the purchaser has to show the seller a "resale" certificate whieh he ean obtain from the Department of Taxation.

These 0.5 percent sales are usually called "wholesale" sales, but the rate also applies to agricultural producers or farmers as well as to manufacturers when they sell to someone who intends to resell their products to final consumers. Why do these people have this lower rate? Because the general excise tax is imposed on all businesses, eaeh and every sale is subject to tax. If these sales of goods were all taxed at the full 4 percent rate, the final cost to the consumer would be huge as every time a product is turned over from manufacturer to jobber, to wholesaler, to retailer and ultimately to you and me as eaeh transaction would carry the full 4 percent rate. This phenomenon is known as "pyramiding." By reducing the rate to 0.5 percent, the impact of the tax is lessened and the cost to final purchaser is that mueh less. However, a peculiar situation occurs with services.

Since services are always viewed as being done for the final consumer, nearly all services are taxed at the full 4 percent rate. As a result, those services or items we purchase whieh involve a ehain of services reflect the added cost of the full 4 percent tax. Next time we will look at some problems with the general excise tax as highlighted by legislative proposals during the 1988 session.