SBH Sunrise
Dec. 28, 2006
Kurt Kawafuchi
State Tax Director

Thurs., December 28
SBH Sunrise Networking
Kurt Kawafuchi
Macy¹s Pineapple Room
7 - 8:30 am

Wed., January 10, 2007
SBH 31st Annual Conference
Ala Moana Hotel | 8am - 2pm

Wed., January 17, 2007
State Legislature Opens
State Capitol 10am

SBH TV
Sundays 4:30 pm
Channel 54

INSIDE THIS ISSUE

Wall Street Journal writer John Fund was in town for the annual Grassroot Insittute of Hawaii George Washington awards dinner on November 11. He joined the SBH Leadership Circle for a special function on Sunday, November 12 at the Gyotaku Restaurant. Fund briefly spoke on the outcome of the recent election. He is shown with SBH member and Small Business Person of the Year, Tom Jones (left), owner of Gyotaku Restaurant.

General Excise Tax Surcharge Around the Corner

by Lowell Kalapa, Tax Foundation of Hawaii

In November, the state Department of Taxation held hearings on rules that will outline how the half-percent surcharge on the General Excise Tax for Honolulu’s mass transit project will be administered.

The rules take a marked digression from how the general excise tax has been perceived since its inception more than 70 years ago. The general excise tax has always been a tax for the privilege of doing business in Hawaii. It, unlike the traditional retail sales tax found on the mainland, is a liability of the business for the “privilege” of doing business in Hawaii. Thus, persons must be licensed under the general excise tax law in order to conduct business - sell goods or services in Hawaii. Mainland businesses who do not have a physical presence in Hawaii are not and cannot be licensed under the general excise tax because they are not doing business in Hawaii. Thus, the tax is “origin” based.

The proposed rules that would govern the 0.5% surcharge move the general excise tax from an origin-based transaction to a destination-based transaction in order to determine whether or not the surcharge applies. Thus, a purchase made from an Oahu store and shipped to a Neighbor Island customer would not incur the 0.5% surcharge because the goods or services would be “consumed” on the Neighbor Island.

On the other hand, the proposed rules specify that if a Neighbor Island business sells goods or services to an Oahu customer, the 0.5% surcharge would apply only if that Neighbor Island business has “substantial nexus” on Oahu. This Asubstantial nexus@ is created by the business having a physical presence on Oahu which includes the presence of employees and representatives or property on Oahu. So if a Neighbor Island business sends a sales person to Oahu to promote its products, say jellies or cheese, it would appear that company would have to pay the surcharge on all of its sales to its Oahu customers.

Why the change in approach or philosophy of the general excise tax? Well, the legal beagles note that if the surcharge is not imposed on where the goods are consumed but on where the business is located, a possible violation of interstate commerce might occur. This is because purchases of goods and services from an out-of- state business would incur the complementary use tax which is imposed on the consumer when a purchase is made from an unlicensed vendor.

For example, if an Oahu customer has a choice of purchasing a computer from a Neighbor Island source or from a source outside the state, not imposing the surcharge on the Neighbor Island vendor would create a disadvantage for the purchase from the out-of-state vendor as that transaction would be subject to the surcharge when the use tax is paid by the customer.

Imposing the “substantial nexus” on the Neighbor Island business attempts to put that vendor on the same basis with the out-of-state vendor. However, if the Neighbor Island vendor never goes to Honolulu and has no place of business in Honolulu, a purchase from that vendor would incur only the current 4% rate. The interstate commerce violation may still exist.

The department, at one point early on in the discussions, suggested that the use tax could be imposed on purchases from the Neighbor Island vendor just like it is imposed on the purchases from out-of-state sellers. However, that attempt was thwarted when it was pointed out that the use tax applies only to purchases made from vendors who are not licensed under the general excise tax law. And, as noted earlier, everyone who wants the privilege to do business in the state must be licensed under the general excise tax law, including businesses on the Neighbor Islands.

Using the “substantial nexus” test will be difficult to enforce without more clarity from the rules or guidance by the tax department. For example, will there be a fine line that defines physical presence of a business when a sales representative, or for that matter the owner of a Neighbor Island business, visits Honolulu? How will the department determine whether or not that visit to Honolulu constitutes doing business in Honolulu? Will the department decide that participation in a trade show in Honolulu constitutes doing business in Honolulu and therefore all sales to customers of that business who reside in Honolulu incur the 0.5% surcharge?

It appears that part of the effort to draft the proposed rules in this manner is not to impose the surcharge on Neighbor Island businesses and customers. However, in the long run, what everyone should admit is that the added cost of the surcharge will be imbedded in everything everyone in this state consumes. Next time we look at another aspect of the General Excise Tax surcharge.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. For more information, go to: http://www.tfhawaii.org.

31st Annual SBH Conference First for the New Year

The 31st annual Small Business Hawaii Conference will be held Wednesday, January 10, 2007 at the Ala Moana Hotel from 8 am to 2 pm. A special awards luncheon is included.

Theme is "Small Business 2007: Contributing to Hawaii's Dynamic Economic Change."

It will be the first major business and investment conference of the New Year and will combine information, education and networking with a series of panels, individual speakers and special events.

Governor Linda Lingle has been invited to speak about her plans for the next four years.

Topics will include workers' compensation, business theft, marketing tips and more. Business awardees , exhibits, a silent auction and small business success stories will be presented.

Special discount registration rates apply for SBH members and their guests.

Send in the reservation form on page 4 with your payment. Call Darlyn Evangelista at 396-1724 for more information. For sponsorships, call Malia Zimmerman at 306-3161.

$7.25 Minimum Wage Begins January 1

Beginning January 1, 2007 Hawaii’s current minimum wage increases from $6.75 to $7.25 an hour.

The current federal minimum wage is $5.15 an hour.

Hardest hit will be the restaurant industry which sees no increase in the 25¢ tip credit.

The Hawaii minimum wage will be responsible for higher costs and reduced opportunities for the untrained seeking to enter the work force.