Review of General Excise and Use Tax Exemptions and Exclusions
A Report to the Legislature of the State of Hawai‘i
Report No. 20-09 June 2020 OFFICE OF THE AUDITOR STATE OF HAWAI‘I
Tax Like an Egyptian: The wholesale rate, the retail rate, and tax “pyramiding”
HAWAI‘I’S GET is applied to the gross receipts or gross income from business activities in the State, including both wholesale and retail transactions. This is in contrast to a sales tax, which is typically taxed only at one level – the point of sale. The imposition of GET on business transactions at all levels results in what is commonly referred to as tax “pyramiding” – essentially tax on tax – with tax being imposed at various points on the same goods or services as they move through the chain of production and distribution to the eventual consumer. Having a tax on a tax results in higher total costs and provides an incentive for firms to consolidate operations in order to avoid taxes. For example, a car manufacturer incorporates an engine purchased from another company into its final product; GET is paid by the engine seller, which includes that tax payment in the amount it bills to the manufacturer, and again by the manufacturer on the revenue it receives when the automobile is sold. To avoid the additional cost to the consumer caused by the pyramiding of GET the manufacturer may decide to build the engines in-house.
In order to reduce the effects of tax pyramiding, Hawai‘i imposes a lower rate – 0.5 percent – on wholesale or business-to-business transactions of goods or services intended for resale. The retail rate – 4 percent – is generally applied only at the consumer level.
Some of the exemptions discussed in this report – most notably the contractor-subcontractor and federal cost-plus contractor exemptions – attempt to eliminate tax pyramiding by exempting certain business-to-business transactions from GET
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THIS REPORT assesses certain tax exemptions and exclusions from Hawai‘i’s General Excise Tax (GET) and Use Tax. Section 23-71 et seq., Hawai‘i Revised Statutes (HRS), requires the Auditor to annually review different tax exemptions, exclusions, and credits on a 10-year recurring cycle, including provisions for the Public Service Company Tax and Insurance Premium Tax. Appendix A includes the full list of tax provisions required to be reviewed each year of the 10-year cycle, which began in 2019.
Beginning in 2020, we also will annually review credits, exclusions, and deductions provided under the Income Tax and Financial Institutions Tax on a five-year recurring cycle that was established under Section 23-91 et seq., HRS. The complete list of tax provisions that will be reviewed during each year of that cycle is also included in Appendix A.
About This Report
As described by the Department of Taxation (DoTax), Hawai‘i’s GET and Use Tax, combined, apply to nearly all business activities in Hawai‘i, resulting in a $111 billion tax base. In FY2018, GET and Use Tax revenues accounted for $3.55 billion, or 31 percent of the State’s total revenue of $11.32 billion. Notwithstanding, lawmakers may choose to exempt or exclude certain revenues from taxation to promote certain social and economic goals. Since these exemptions and exclusions reduce revenues to the State, the analysis and recommendations in this report aim at better informing policymakers about the purposes, costs, and benefits of various GET and Use Tax provisions to allow for improved policymaking.
This report reviews 13 tax provisions: 6 GET and Use Tax exemptions and 7 GET exclusions.1 Overall, we found, with one exception, there is insufficient data to determine whether the exemptions reviewed are meeting their stated or inferred purposes. We recommend the one exemption that is not achieving its purpose be repealed and the Legislature consider including clearly articulated purposes along with specific metrics for measuring effectiveness in all new or amended tax preferences. As noted throughout this report, we struggled to determine the purposes of the provisions reviewed, and in some cases, were unable to even infer the purposes. Additionally, we had no objective means to assess whether provisions were achieving their purposes. Including clearly stated purposes for each tax provision and metrics for us to assess performance will permit a more thorough and meaningful analysis of exemptions. We further recommend that all seven exclusions be removed from the schedule of future reviews. As explained below, the exclusions represent revenue that was never intended to be subject to GET. Taxpayers, generally, are not required to have a GET license or to file a GET return to benefit from the exclusions. For that reason, DoTax does not compile information about the use of many of these exclusions.…
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