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HomeMy WebLinkAbout2007-02_County_Surcharge_on_State_Excise_Tax .►<' ` •° p� Lincoln S.T.Ashida Harry Kim off. Mayor Corporation Counsel Gerald Takase -o---_ Assistant Corporation -q oF'M�'' Counsel COUNTY OF HAWAII OFFICE OF THE CORPORATION COUNSEL 101 Aupuni Street,Suite 325 • Hilo,Hawaii 96720-4262 • (808)961-8251 • Fax(808)961-8622 March 19, 2007 Sent via email; no hard copy will follow Corporation Counsel Numbered Memorandum 2007-02 Memorandum TO: OFFICE OF THE MAYOR HAWAII COUNTY COUNCIL OFFICE OF THE COUNTY CLERK ALL COUNTY DEPARTMENTS AND AGENCIES ALL COUNTY BOARDS AND COMMISSIONS FROM: CRAIG T. MASUDA —� Deputy Corporation Counsel RE: COUNTY SURCHARGE ON STATE EXCISE TAX Act 247 of the 2005 State Legislature authorized the counties to collect a surcharge on the State Ekcise Tax. As of January 1, 2007, only the City and County of Honolulu has enacted an ordinance authorizing the collection of this additional tax at a rate of 0.5%.1 Please note, however, that contracts entered into prior to June 30, 2006, which do not provide for passing on increases in taxes within the terms of the contract are not subject to the 0.5% surcharge.2 Collection of this 0.5% surcharge is administered by the State Department of Taxation, and the State Department of Taxation developed Chapter 18-237-8.6 of the Hawaii Administrative Rules (hereinafter"HAR") for the administration of this surcharge. HAR Chapter 18-237-8 is premised on two primary factors: 1. Allotment of income to a tax district within or outside the Oahu Tax District. 2. Physical presence within or outside the Oahu Tax District. I Ordinance 07-001,Revised Ordinances.of the City and County of Honolulu. Sec.6-60.1. Z Section 237-8.6(c),Hawaii Revised Statutes. Hawaii County is an Equal Opportunity Provider and Employer March 19, 2007 Page 2 of 3 Allotment of income is dependant upon whether the subject of the taxis a tangible item such as a good, personal property, or real property, or an intangible item such as a service. For intangible items such as a service and for real property, further analysis is required to determine where the service is used or consumed.3 Physical presence means the presence of one or more employees, representatives, property or closely-related subsidiaries within the tax district where the item is intended to be used or consumed.4 Purchase of Goods Personal Property, and Tangible Items Other than Real Property For the purchase of goods,personal property, and tangible items other than real property, consideration must first be made as to the relative tax districts of the seller and buyer. If the buyer is outside of the Oahu Tax District;then no surcharge is applicable. In the case of the County of Hawaii acting as the buyer, this should be the norm. This includes cases where the County of Hawaii is buying goods from any of the other counties. Therefore, in no case should a vendor be assessing the County of Hawaii the surcharge of 0.5%to the State Excise Tax where the item is to be used or consumed in Hawaii County. Selling of Goods Personal Property, and Tangible Items Other than Real Propert y For the selling of goods, personal property, or other tangible items to a buyer in the Oahu Tax District, consideration must be made on whether the seller has substantial nexus or physical presence to the Oahu Tax District. Physical presence means the presence of one or more employees,representatives,property or closely-related subsidiaries.5 This substantial nexus would not likely include an employee briefly visiting the Oahu Tax District for a sale or delivery.6 In the case of the County of Hawaii selling goods to an Oahu entity, unless there is a substantial nexus to the Oahu Tax District, there should be no instance where the surcharge of 0.5%would apply. Likewise, where the County of Hawaii is selling goods to any other(non- Oahu) county, there should be no surcharge. Purchase and Sale of Real Property For the purchase and sale of real property, income is allocated solely based on the location of the real property. For the purchase of real property from the County of Hawaii or the purchase of services to be performed in the County of Hawaii, no surcharge should be assessed. Pursuant to HAR 1 8-237-8.6-06, allocation of income from the sale of real property is 'HAR 18-237-8.6-03. 4 HAR 18-237-8.6-01 -Definitions. 5 HAR 18-237-8.6-01 -Definitions. 6 Based on examples provided by HAR 18-237-8.6,a substantial nexus appears to mean a permanent presence in the district,such as an office or permanent station of an employee or representative,for the tax year. March 19, 2007 Page 3 of 3 allocated to the tax district in which the sale occurs. Therefore, any sale of real property occurring within the County of Hawaii to any person is not subject to the surcharge. Purchase of Service HAR 18-237-8.6-03 allocates income from the service provided to the tax district where the service is used or consumed, including but not limited to construction. Any service or work performed for the County of Hawaii occurring within the County will have its income allocated to the Hawaii Tax District. Therefore, contractors or other service providers should not assess the surcharge for services provided within Hawaii County, regardless of where they are from. Where the County of Hawaii contracts for services to be done on Maui or Kauai, no surcharge is applicable, since Maui, Kauai, and Hawaii counties have not enacted surcharge ordinances. However, if any county contracts a service to be performed on Oahu, then income is allocated to Oahu and is therefore subject to the surcharge of 0.5%. Conclusion It should be noted that in the limited instances where the County of Hawaii could rightfully be assessed the 0.5% surcharge, the County always has the.option of negotiating with the vendor to not pass on this surcharge to the County. Further, as stated previously, contracts entered into prior to June 30, 2006, which do not provide for increases in taxes are not subject to Act 2477 or the 0.5% surcharge. There should be relatively few instances where the County of Hawaii should be assessed the surcharge of 0.5%. Should you have any questions or comments please contact me at your convenience. CTM:mc sAdepts\corp counsel\numbered memo 2007-02 3-19-07 CTMmc 7 Act 247 of the 2005 State Legislature.