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The Honolulu Advertiser
Posted on: Wednesday, December 3, 2003

Excise tax gets paid over and over

By Dan Nakaso
Advertiser Staff Writer

Brian and Mary Melzack get taxed 4 percent every time they pay for janitorial services for their chain of Bestsellers Books & Music stores, another 4 percent whenever they hire marketing consultants and an extra 4 percent to pay for advertising.

Brian Melzack, co-owner of the downtown Bestseller Books & Music store, plans on opening another location at Koko Marina Center. In that process, he says, he gets hit with the state excise tax every time he gets another bill.

Bruce Asato • The Honolulu Advertiser

And just like every other small business caught in the same situation, the Melzacks also have to turn around and charge the same state excise tax on every book and CD they sell.

But the tax they charge — actually 4.16 percent — never seems to add up to the same tax they pay to keep their stores running.

"The bottom line," Brian said, "is this tax has us completely at a disadvantage."

The Legislature is expected to consider bills aimed at some aspects of the excise tax in the upcoming session. But none of them will take on what is perhaps small businesses' biggest gripe over the excise tax — the tax that they must pay and charge one another.

The Melzacks are building a new Bestsellers Books & Music store at Koko Marina Center, and Brian feels like he's getting hit with the excise tax every time he gets another bill.

Because he is.

"The architect comes in with drawings — bingo, plus the tax," Brian said. "The construction people — plus tax. Everything, plus tax, plus tax, plus tax. That adds up to a lot of money."

Hawai'i's excise tax is the only one of its kind in the country — although New Mexico has a similar one — and affects all retail goods and sales.

"I don't especially like taxes of any kind, especially the ones that I have to pay," said Jack Suyderhoud, professor of business economics in the University of Hawai'i College of Business Administration. "But it has certain positive features, which is it generates an awful lot of revenue at a relatively low rate."

But small businesses are hit hardest of all, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.

Larger retailers typically have their own bookkeepers, janitors and security guards and don't have to pay the excise tax to hire their services separately, Kalapa said.

Big-box retailers also can ship good directly from the docks and into their warehouses, Kalapa said. So they don't have to pay the additional excise taxes that small businesses face from shippers and even wholesalers — who can charge the tax for the rent of storing goods.

"That 4 percent really hurts small businesses because they don't have the economies of scale like the Costcos and Circuit Citys," Kalapa said. "Mr. and Mrs. Taniguchi's store on Kaimuki Avenue gets hit with it at so many stages. Lawmakers don't realize that that 4 percent being embedded in goods and services and rentals and warehousing shaves the profit for small businesses."

But eliminating the excise tax would mean a $1-billion-a-year loss in taxes. To make up for it, Kalapa said, legislators would have to create a sales tax ranging from 11 to 12 percent — which would jump to 16 to 17 percent if they chose to exclude taxing food sales. "The revenue impact is just too much for lawmakers to swallow," he said.

One lawmaker, state Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), however, has been arguing against the tax for 30 years.

"It's an insidious tax," Slom said. "It's the only tax in the country on a statewide level that taxes services as well as goods."

Slom believes that instead of raising taxes to make up for eliminating the excise tax, legislators need to cut spending.

"Make the government cut back like everybody else," Slom said. "The thing that hurts is that you've got to pay that tax first and every other time you turn around."

Chip Fogg, owner of Windward Window Cleaners, hates the excise tax and gets around it whenever he can by ordering over the Internet.

By both paying and charging the tax, Fogg said, "Technically you're not supposed to lose money. But nobody figures in the cost for computing that in your bill, for separating it from your sales on the 30th of every month, for writing the check and for paying for the stamp to put it in the mail every month."

The actual responsibility for figuring out Fogg's excise tax each month falls on his office manager, Lisa Beauford, who sought help from a certified public accountant.

She bought a computer program on the CPA's advice. But each month the program computes an amount that's either too high or too low. So Beauford ends up figuring out the only tax of its kind by hand.

"It is weird," Beauford said. "The program doesn't want to acknowledge Hawai'i's excise tax."

Reach Dan Nakaso at dnakaso@honoluluadvertiser.com or 525-8085.