Wholesaling:  What You Don’t Know

by Tom Yamachika, President, Tax Foundation Hawaii

Every so often, we at the Foundation are asked about Hawaii tax laws. A couple of recent inquiries focused on when the “Wholesale Rate” in the Hawaii General Excise Tax (GET) kicks in.

The answer is that you as a taxpayer can never really know, but you can protect yourself just the same.

Huh?

Most of us are familiar with the GET retail rate. It’s 4% or 4.5%, and it appears on invoices as 4.166% or 4.712%. (This is because any dollar billed for tax becomes part of the seller’s revenues and is taxed the same as the rest of its revenue.)

The wholesale rate applies when a seller’s goods or services are being resold by its customer. So, if a farmer sells an avocado to a market for $1 and the market sells it to me for $1.50, the market pays the retail tax (4.5% of $1.50) and the farmer pays the wholesale tax (0.5% on $1.00).  County surcharge is not allowed on wholesale sales, so the 0.5% doesn’t get doubled to 1%.

But think about it for a minute. How does the farmer know what the market is going to do with the avocado once the sale takes place?  Sure, markets usually resell their inventory to retail buyers like you or me. But the farmer still doesn’t know what happens to the avocado he sold. Maybe the market owner gets hungry and uses it in a sandwich. Maybe some punk sneaks into the store and swipes it. And if that avocado isn’t in fact resold, then the farmer’s wholesale rate may be in trouble.

Fortunately, there is a solution to this information gap. It’s called a resale certificate (Form G-17 for goods).  Basically, the market signs a paper saying that it intends to resell the avocado and gives that paper to the farmer. In that form, the market agrees that if it lied on the form and that lie caused the farmer’s tax to go up, then the market would pay the farmer the difference in tax.

In that way, the farmer really doesn’t know what is going to happen to the avocado but is protected by the market.

And if the market isn’t willing to sign the paper, then the farmer can simply treat the avocado as sold at retail.

There are other kinds of wholesale sales recognized by the GET Law. If, for example, an accounting firm asks me to resolve a client’s tax question, I bill the accounting firm, and the firm bills its client, then my service is being resold and I get the wholesale rate. Just as with the farmer, however, I don’t necessarily know whether my service is in fact resold. So, I ask the accounting firm to give me a resale certificate. For services the form number is G-82.

The determination of whether some good or service is being resold can get very complicated. If Ms. Clean manufactures little bars of soap and sells them to a hotel for them to leave in guest rooms, is that a resale on the theory that the hotel’s guests are buying the amenities from the hotel with their room rate?  (Under Hawaii law, the answer is yes.)  In this situation also, Ms. Clean has only a general idea how the soaps are supposed to be used and, therefore, needs a resale certificate from the hotel saying that its soaps are going to be used in that way.

The wholesale rate under GET is not easy, but protecting yourself when the rate is claimed is not difficult.