Saturday, August 24, 2019
Hawai'i Free Press

Current Articles | Archives

Sunday, August 18, 2013
Purchases of Goods and Services for Resale Afforded Lesser Rate
By Lowell L Kalapa @ 5:01 AM :: 2761 Views :: Taxes

Purchases of Goods and Services for Resale Afforded Lesser Rate

by Lowell L. Kalapa, Tax Foundation of Hawaii

A reader of this commentary called to ask if the services of another business which they had procured for their client fall under an exempt reimbursement under the general excise tax law.

Unfortunately, because the taxpayer was also providing a service in connection with the services procured from the other business, the charge for their services would be considered an additional consideration and, therefore, the entire amount received from the client, including the costs for the purchase of the services of the other business, would be subject to the full retail rate of 4%. However, another part of the general excise tax law recognizes the services that were purchased by a taxpayer on behalf of his client represent a purchase of goods or services intended to be resold to the client and not for consumption by the purchasing business.

For many years it was difficult for policymakers and administrators to conceive that services, like goods, could be purchased for resale. As a result, the general excise tax law only recognized that goods, or tangible personal property, could be purchased for resale. A lesser rate was recommended by a consultant hired by the state in the 1960’s to evaluate the tax thus mitigating the pyramiding of the tax. Until that time, the retail rate was applied to all transactions partly because the rate had been rather low and the tax was not shown out as a separate charge.

However, when the rate was increased to its current 4% as part of a revenue raising package during the 1965 session, the onerous feature of the tax known as pyramiding became more apparent. But again, even though pyramiding of the tax became an issue that was eventually addressed by lowering the tax rate on purchases of goods for resale, services were always perceived as being consumed by the person who made the purchase of the service and, therefore, taxed at the full retail rate of 4%.

It was not until almost the end of the 1990’s that it was demonstrated that services could be purchased by a business for its client and, therefore, resold for consumption by the client. The first step in this direction came with the leasing and subleasing of real property. Inasmuch as the rental of real property is considered a subleased to another business at the full retail rate on every stage of a leasing and subleasing transaction, merely exacerbated the cost of the tax with the heaviest burden falling on the last sublessee that in many cases was a small business.

Once the leasing and subleasing of real property was addressed by affording a lesser rate to income from a subleased portion of the original lease, policymakers and administrators could now see how services could be resold. Another early recognition of the fact that the tax could pyramid by imposing a retail rate of tax on a service that was already imposed with a retail rate is the treatment of subcontracting services that are rendered through a general contractor. This is what is known as the subcontractor deduction but was limited only to construction contracting. This provision allowed a general contractor who outsourced a certain type of specialized work to a subcontractor to pay the tax only on the amount he retained. For example, a general contractor who does not have the license or expertise to lay tile subcontracts the work to a tile firm. The subcontractor deduction allows the general contractor to subtract out the amount that will be paid to the subcontractor and pay the full retail rate of 4% only on the amount the general contractor retains. The subcontractor then pays the retail rate of 4% on the amount received from the general contractor.

This splitting of income was part of the original general excise tax law. A similar provision was added in the late 1980’s when tourism-related services were purchased for resale to visitors at say a tour desk in a hotel. The tour operator paid 4% on what was received from the hotel tour desk and the tour desk salesperson paid the 4% on whatever was the difference paid to the operator and what the visitor paid the tour desk.

When it was realized that there are many other businesses that purchase services that will benefit the customer or client of that business, the lesser wholesale rate of 0.5% was extended to the purchase of services for resale to the customer or client. For example, a lawyer who needs to have the scene of a traffic accident surveyed in order to prove who was at fault secures the services of a surveyor that will ultimately benefit his client. The surveyor is told that his services will be resold to the lawyer’s client. The surveyor then pays the 0.5% rate on the income of that job. Thus, the transaction will not be taxed twice at the full retail rate of 4%.

- 30 -


TEXT "follow HawaiiFreePress" to 40404

Register to Vote


808 Silent Majority

808 State Update AM940


ACA Signups Hawaii


Affordable Hawaii Coalition


Alliance Defending Freedom

Aloha Conservative Alliance

Aloha Life Advocates

Aloha Pregnancy Care Center

American Council of Trustees and Alumni

American Mothers of Hawaii



Antonio Gramsci Reading List

A Place for Women in Waipio

Audit The Rail

Ballotpedia Hawaii

Better Hawaii 

Blaisdell Memorial Project

Broken Trust

CAFR Hawaii

Castaway Conservative

Children's Alliance Hawaii

Children's Rights Institute

Christian Homeschoolers of Hawaii

Citizens for Recall

Cliff Slater's Second Opinion

Coffee Break

Conservative Forum for Hawaii

CSIS Pacific Forum

DAR Hawaii

DVids Hawaii

E Hana Kakou Kelii Akina

E Māua Ola i Moku o Keawe

Farmers For Choice Hawaii


Fix Oahu!

Follow the Money Hawaii

Frank in Hawaii

Front Page Magazine

Frontline: The Fixers

Genetic Literacy Project

Get Off Your Butts!

God, Freedom, America

Grassroot Institute

Hawaii Aganst Assisted Suicide

Hawaii Aquarium Fish Report

Hawaii Aviation Preservation Society

Hawaii Catholic TV

Hawaii Christian Coalition

Hawaii Cigar Association

Hawaii Coalition Against Legalized Gambling

Hawaii ConCon Info

Hawaii Credit Union Watch

Hawaii Crime Victims' Rights

Hawaii Crop Improvement Association

Hawaii Debt Clock

Hawaii Defending Marriage

Hawaii Defense Foundation

Hawaii Families for Educational Choice

Hawaii Family Advocates

Hawaii Family Forum

Hawaii Farmers and Ranchers United

Hawaii Farmer's Daughter

Hawaii Federalist Society

Hawaii Federation of Republican Women

Hawaii Firearm Community

Hawaii Fishermen's Alliance

Hawaii Future Project

Hawaii Gathering of Eagles

Hawaii History Blog

Hawaii Homeschool Association

Hawaii Jihadi Trial

Hawaii March for Life

Hawaii Meth Project

Hawaii's Partnership for Appropriate & Compassionate Care

Hawaii Public Charter School Network

Hawaii Rifle Association

Hawaii Right to Life -- Big Island

Hawaii Right to Life -- Oahu

Hawaii Shield Law Coalition

Hawaii Shippers Council

Hawaii Smokers Alliance

Hawaii State Data Lab

Hawaii Together

Heritage Foundation

HI Coalition Against Legalized Gambling



Hiram Fong Papers

Homeschool Legal Defense Hawaii

Honolulu Homeless Crisis

Honolulu Navy League

Honolulu Traffic

Horns of Jericho Blog

House Minority Blog

House Republican Caucus YouTube


Hump Day Report

I Vote Hawaii

If Hawaii News

Imua TMT

Inouye-Kwock, NYT 1992

Inside the Nature Conservancy

Inverse Condemnation

Investigative Project on Terrorism

Iowa Meets Maui

Jackson v Abercrombie

Jihad Watch

Judgepedia Hawaii

July 4 in Hawaii

Kahle v New Hope

Kakaako Cares

Kau TEA Party

Kauai Co GOP

Keep Hawaii's Heroes


Land and Power in Hawaii

Legislative Committee Analysis Tool

Lessons in Firearm Education

Lingle Years

Malulani Foundation

Managed Care Matters -- Hawaii

Malama Pregnancy Center of Maui

Mauna Kea Recreational Users Group

Middle East Forum--The Legal Project

Mililani Conservatives for Change

Military Home Educators' Network Oahu

Missile Defense Advocacy

MIS Veterans Hawaii

Muslim Brotherhood in America

NAMI Hawaii


National Christian Foundation Hawaii

National Parents Org Hawaii

National Wind Watch

New Zeal

NFIB Hawaii News

No GMO Means No Aloha

Northwest Economic Policy Seminar

Not Dead Yet, Hawaii

Now What I Really Think

NRA-ILA Hawaii

Oahu Alternative Transport

ObamaCare Abortion Hawaii


OHA Lies

Opt Out Today

Pacific Aviation Museum

Patients Rights Council Hawaii

PEACE Hawaii

People vs Machine

Pritchett Cartoons 

Pro-GMO Hawaii


Rental by Owner Awareness Assn

Republican Party -- Hawaii State

Research Institute for Hawaii USA

Rick Hamada Show

RJ Rummel

Robotics Organizing Committee

Salvage The Rail

Save the Plastic Bag

School Choice in Hawaii

SIFE Remington

SIFE W. Oahu 

Sink the Jones Act

Smart About Marijuana--Hawaii

St Marianne Cope

State Budget Solutions Hawaii

State Policy Network

Statehood for Guam

Tax Foundation of Hawaii

The Harriet Tubman Agenda

The Long War Journal

The Real Hanabusa

Time Out Honolulu

Truth About Trade & Technology - Hawaii

UCC Truths

Union Members Know Your Rights

US Tax Foundation Hawaii Info

Valor in the Pacific

VAREP Honolulu

West Maui Taxpayers Association

What Natalie Thinks

Whole Life Hawaii