House Bill 58, the “Frankenbill” we wrote about earlier, has cleared the legislature and is on the governor’s desk, waiting to become law. In the calendar years 2022 to 2023, some exemptions from general consumption tax (GET) will be suspended. This article explains some of them and who is likely to be affected.
Back in 2011, the legislature passed Act 105 (Session Laws of Hawaii 2011), which suspended 31 different GET exemptions for two years in order to address the economic situation after the great recession of 2008. In mid-2020, the State Auditor’s Office released the 2020-05 report, which sought to quantify the impact of the exemption derogations based on the 2018 figures. It used the latest available data in case lawmakers wanted to consider suspending the exemptions again in response to the COVID-19 crisis.
That year, however, lobbyists were ready to fight for exemptions their clients were interested in, and managed to reduce the list of suspended exemptions from 31 (which were on the original list in Senate Law 56) to just 11. Some of the exceptions left will have little financial impact.
For others, the financial implications are not visible to the public as only a handful of taxpayers are eligible for the exemption and the Treasury Department does not publish information about these exemptions in order to protect taxpayers’ confidentiality. We consider the following two essential exceptional suspensions.
Sales to the federal government. Since the federal government can import everything it needs without a Hawaii use tax and / or GET, local sellers looking to sell to the federal government (including military exchanges and commissioners) would be at a disadvantage if they had to pay 4% of their sales while their extra-state competitors did not.
That’s part of the science of why the exemption was made. The big losers here are local companies trying to get Uncle Sam to buy their products or store them for resale at the commissioners and exchanges.
In 2018, the volume of business that was covered by this exemption was nearly $ 1.4 billion, resulting in a GET exemption of just over $ 49 million.
Sublet allowance. Much land is leased in Hawaii. Large landowners in the days of the Kingdom of Hawaii transferred their holdings to the state of Hawaii, and because they didn’t want to part with their land, they leased it instead. For example, tenants, particularly larger tracts of land that have become shopping malls, have sublet their land to shops.
Larger stores could rent some of their space to smaller stores, and so on. The problem is, there was a 4% GET to be paid for every lease and sublease, which quickly added up when there were more than a few lease levels. In 1997, our legislators enacted the sublease allowance, which allowed a person who both received and paid lease rent to deduct 87.5% of the rent paid. This deduction was intended to mimic the economics of wholesale and retail price where wholesalers were given a 0.5% tax rate on reselling their products and at which they paid their 4% GET retail price.
The auditor estimated that this deduction caused an annual revenue loss of approximately $ 6.8 million based on 2018 numbers.
The big losers would be the smaller stores renting from bigger stores renting from grocery chain folks. There will be a lot more tax payable throughout the chain, and the tax is usually passed on to the tenants occupying the space. Be aware that this will increase the retail prices of goods sold by these stores.
In our opinion, these are the two largest exceptional suspensions. Our governor is now getting the first crack in deciding whether these suspensions will come into effect.
Tom Yamachika is President of the Hawaii Tax Foundation.