Q. A sign in a store said they were adding 4.712 percent in state tax. I thought Hawai'i's general excise tax was raised on Jan. 1 to 4.5 percent from 4 percent on O'ahu. Is what the store doing legal?
A. Yes, a store on O'ahu is allowed to charge up to 4.712 percent in passing along the excise tax.
Moreover, you're not alone in wondering what's going on here. The state Tax Department and the Tax Foundation of Hawaii report they've received calls from consumers and businesses asking about the new county surcharge.
"We experienced a pretty significant spike in our calls beginning with the new year," said Sandy Yahiro, state Tax Department deputy director. "About half of the calls coming in we would attribute to the county surcharge."
The Tax Department tried to notify businesses of the change, but found itself answering questions on Jan. 1 about what was allowed and how to tax certain types of goods and services. It did tell people of the pending change but some businesses had problems deciphering whether it applied to some of their Neighbor Island sales and what rate could be passed on to consumers.
As is too frequently the case with taxes there are a maze of rules that apply and result in businesses being allowed to charge the higher rate.
Explaining this is a little involved. But let's begin by noting the general excise tax, while often looked upon as a sales tax, isn't one. If it were a sales tax you most likely would be charged 4.5 percent.
For purposes of explanation it's best to imagine the general excise tax as a levy on business receipts.
Keep that in mind in the following example.
A customer walks into a store, and pays $100 for a fishing pole. The store adds $4.50 in passing along the 4.5 percent excise tax.
Total business receipt is $104.50 ($100 plus $4.50).
At tax time the state applies the 4.5 percent tax not to the purchase price of $100, but to what the business collected — $104.50. So what the business pays to the state is 4.5 percent of $104.50, or about $4.70.
To help businesses out, the state started allowing them to collect more than the rate set by law. At a 4.5 percent tax rate, the most they can collect is set at 4.712 percent. It's against the law to pass on more than this.
If you go to a Neighbor Island the tax rate is still at 4 percent. The maximum businesses can pass on to you is 4.166 percent.
Businesses aren't required to pass this on to customers.
But most do.
Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or firstname.lastname@example.org