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

Taxes and You

By Lowell L. Kaiapa, Director Tax Foundation of Hawaii " TA%f;e £ / TAXES

Addressing Some General Excise Tax Problems

In the recently adjourned legislative session, proposals amending the general excise tax outnumbered those whieh proposed changes to other types of state taxes. Why were there so many bills in the general excise area? It is because the 4 percent tax is so comprehensive, affecting all activities, be it the sale of goods or the provision of services. Let's look at some of the proposals whieh got more than apassing glance from lawmakers. One of the major parts of Govemor John Waihee's tax reform package last year was to exempt goods sold for use or sale outside the state from the general excise tax. In the rush of the session, a drafting error occurred whieh effectively excluded locally grown agricultural products and fish from the exemption. So a measure was submitted to correct this error. In the meantime, it was discovered that Hawaii's largest agriculturalindustry,sugar,would stili not qualify for the exemption even if the sugar was grown for sale outside the state. It was learned that the various sugar producers transfer the ownership of the sugar crop to the California and Hawaiian cooperative whieh then ships the raw sugar to Califomia to be refined and sold. Because the title passes in Hawaii, the sugar was deemed sold at the point the title goes from plantation to the cooperative and therefore not entitled to the export exemption.

Lawmakers expressed surprise upon leamingof this problem as they believed they had approved the exemption to help the sugar industry, to keep the plantations, and therefore insure employment for plantation workers. After several weeks of working on the problem, a solution was found in the current law to recognize that since the sale was made to an agricultural cooperative, the general excise tax law provides that the incidence of sale or transfer of title takes plaee onee the goods are sold by the cooperative. Since the plantations are the members of the cooperative, title really does not change hands in the state but when the sugar is sold from the refinery in California. Thus, with some minor changes to the law, the export exemption will now apply to sugar as it applies to all sales made by cooperatives for delivery outside the state. For example, the export exemption will apply to a papaya cooperative or anthurium cooperative as the case may be. Another issue addressed with an exemption from the general excise tax involves the building of Honolulu's "garbage to energy" disposal plant. In order to address the escalating costs of the project, the city and its bond counsel reasoned that a project like the "garbage to energy" plant would have provided a substantial tax benefit if it were owned by a private company. However, because the city is not subject to state and federal

ineome taxes, the tax benefits would be wasted. After some discussion, the city eame up with a plan to sell the facility to a private eoneem, insuring that it had the right to use the plant, provided the purchaser paid a premium for owning the plant whieh would then provide a tax shelter for the private owner. However, to make the deal attractive, bond counsel wanted to make sure that the ownership of the project by a private party would not incur other state taxes. Thus a measure was introduced to exempt the project from all state taxes. Initially opposed by the department of taxation, the measure underwent a substantial revision upon discovering that most of the project was already exempt from the general excise tax. In the end, an exemption was granted for the "rental payments" made by the city to the operator for payment to the private owner who in turn paid the city the same amount. This particular measure was an excellent case in point of how comprehensive the general excise tax is. Although the amount of the "rent" was merely a paper transaction whieh circulated the funds among all participants in the tax shelter, the tax would have been imposed at the rate of 4 percent on eaeh turnover of the funds even though the city was in essence paying itself this amount of money. Another proposal sought to exempt the activities of a stock exchange whieh may be located in Hawaii. Because the general excise tax is unique in being imposed on all activities, there was a fear that the tax would be imposed on amounts that usually are not taxed in other states. The proponents who are working on attracting a stock exchange to relocate to Hawaii wanted to exempt stock exchanges, period. However, when it was pointed out to lawmakers that even the proponents did not know exactly what activities or services were provided by a stock exchange, the measure was substantially revised.

Again, after a quick lesson or two in what activities are carried on in a stock exchange, the measure was redrafted to exempt only those activities whieh were truly unique to the stock exchange. These activities or sources of ineome included membership fees for seats on the exchange, transaction fees charged to private brokers, and listing fees charged for listing a stock on the exchange. If there is one eommon element in all of these measures that the reader should note, it is that eaeh of these exemptions is for a specific and unique type of activity. These exemptions were approved on the basis that it would not create discriminatory preference at the expense of existing businesses. Next month, we will take a quick review of the tax measures finally approved by the 1988 legislature.