One of the biggest tax hikes in Hawai'i's history will take effect in January, and it could catch many of the state's 114,000 small businesses unprepared.

The state's general excise tax will increase on O'ahu from a maximum of 4.166 percent to 4.712 percent to help pay for a proposed mass-transit rail system. The tax increase was signed into law in August 2005, but city and state officials spent months fighting over who would be responsible for collecting the tax, and rules governing the increase are not expected to be finalized until December.

That leaves retailers and other businesses just about a month to digest the rules and change billing systems to account for the new half-percentage-point tax hike.

"We're going to do the best we can, and we expect to have everything in place Jan. 1," said state tax director Kurt Kawafuchi. "The reality is, no matter how good a job we do some people aren't going to know about it."

Many consumers and some business owners remain unaware of the need to begin collecting the tax in January.

"I really forgot all about it," said Claire Takashima, owner of Uyeda Shoe Store in University Square. "I've asked all my customers, 'Were you aware (of the tax hike)?' ... and no one realized it."

At the very least, most businesses will need to reprogram cash registers to charge the higher tax. For Takashima, who uses a manual, hand-cranked cash register, that will take some work.

"I was just doing 4 percent and absorbing the difference before," Takashima said. "Now I will have to raise it to 4 1/2 percent. It's going to take some customers by surprise."

The tax department plans to start a campaign to educate businesses about the increase after a Nov. 8 public hearing. The plans include sending out letters to the state's 414,000 active excise-tax filers and holding informational seminars. The tax department has not yet released details of the seminars and said it is having trouble hiring staff to help with the education program.

DURING HOLIDAY CRUNCH

It doesn't help that the changes will need to be made during the busy holiday shopping season when many managers will likely be distracted.

The Christmas shopping season isn't a good time to try to educate businesses about a new tax, said Bob Taylor, president and chief executive of Maui Divers.

Then again, "I don't think there's any right time for a tax increase," he said.

The state and city are increasing the tax to fund work on a new mass-transit system due to open in 2012. The system, which would run from West O'ahu to downtown Honolulu, is projected to cost $3 billion. The increase in the general excise tax is expected to rise about $200 million annually to partially subsidize the project.

ISLE-TO-ISLE TANGLE

Because the transit system is for O'ahu, other islands are not required to collect the increased general excise tax in most cases.

That complicates the job businesses will have in applying the new tax. For example, an O'ahu business that sells a product to a Maui business will not need to collect the surcharge. However, a Maui business with an O'ahu presence that sells a product to an O'ahu business must collect the added tax.

Carol Pregill, president of the Retail Merchants of Hawaii, a trade group representing 200 retailers, said larger companies will likely be able to handle the change, but small businesses might have a tougher time climbing the learning curve.

"The reality is the larger companies have the resources to deal with this," Pregill said. "My sense is it's going to be a burden on the smaller businesses. That's a given."

For businesses such as Maui Divers, which operates in multiple counties, accounting systems need to be adjusted to deal with situations such as customers returning an item purchased on O'ahu to a store on Maui. Taylor said it will cost the retailer about $5,000 to change billing systems to collect the new tax.

Just how many businesses will be caught by surprised when the tax hike takes effect remains to be seen. Some may become aware of the change only when it's time to file their monthly or quarterly excise tax returns. By then it may be too late to collect the tax from customers.

"Are they all up on it? I doubt it," said Taylor of Maui Divers. "I imagine that if they're not aware of it, and they haven't charged the tax, they may have to absorb that cost."

Determining when the new tax applies gets more complex when commissions are involved. For example, when an O'ahu travel agency sells a sightseeing tour on Kaua'i to a Kaua'i customer, the commission is subject to the half-percent tax increase. However, if an O'ahu Realtor sells a property on Maui the commission is not subject to the higher tax rate.

Tax department head Kawafuchi said he has spoken to many business groups about the tax increase over the last six months. The tax department has also posted the proposed rules online at www.state.hi.us/tax/tax .html, which should help businesses understand when to collect the tax.

PROBLEMS PREDICTED

"The rules are kind of broad, so you're not going to answer every question," said Kawafuchi. "But they should cover 80 to 90 percent of the issues."

The tax department is training 15 added phone representatives to handle what it expects will be 225,000 excise-tax related calls next year.

However, state Sen. Sam Slom, president of Small Business Hawaii, thinks businesses won't have time to adjust to the rules before they take effect.

"I think there are a lot of problems there and they're trying to put a happy face on it," said Slom, R-8th (Kahala, Hawai'i Kai). "Errors will be made and I think there will be a great deal of problems with it."

Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, also foresees problems implementing the complex rules on such short notice.

"They're not going to make (the deadline) and if they make it, they may end up with rules that can be challenged."

Meanwhile groups such as the Retail Merchants of Hawaii are pushing members to get ready for the Jan. 1 change via newsletters and other educational outreach.

"We fought this all the way to Kapolei," Pregill said. But now, "This is the law and we've got to make this happen."

The Chamber of Commerce of Hawaii, which has 1,100 members, has yet to decide on how to inform businesses of the pending tax change.

"We probably will at some point, but I don't have it on my agenda at this time," said Bryna Stankiewicz, the chamber's vice president for marketing.

Reach Sean Hao at shao@honoluluadvertiser.com.