Act 71 reduces the effect of the "pyramiding" of the general excise tax (GET) on service transactions by treating those transactions similar to the wholesale sales of tangible personal property.¹ A more expansive test for property-to-service, service-to-service, service-to-property, service-to-contracting, and services-to-transient accommodations rental transactions will allow these "wholesale" transactions to qualify for a 3.5% rate beginning January 1, 2000. Act 71 provides for the phase-in of the "wholesale" rate over seven years until the .5% rate is reached in 2006.

The property-to-service, service-to-service, service-to-property, service-to-contracting, and services-to-transient accommodations rental transactions must satisfy the requirements of Act 71 to qualify for the reduced rate. The reduced rate is not applicable to the purchase of overhead because overhead is consumed by the purchaser; there is no pyramiding of the GET when it is not resold. The property must become an "identifiable element" of the service rendered or the service must become an "identifiable element" of the service, property, contracting, or transient accommodations being sold the customer. Act 71 grandfathers property-to-service and service-to-service transactions that qualify for the .5% rate under the prior law and repeals the prior law in 2006 when Act 71 is fully phased-in.

The Department is authorized to implement the tax rate changes by prescribing tax forms and instructions that require tax reporting and payment by deduction, allocation, or any other method to determine tax liability with regard to the tax changes.

This Act 71, and Act 70, SLH 1999, relating to the GET exemption for exported services and contracting and the imposition of a new use tax on imported services will be discussed in a 3-hour workshop by the Department. The workshop will be held on Wednesday, August 25, 1999 from 8:30 a.m. to 11:30 a.m. at the State Capitol Auditorium. The registration deadline is Wednesday, August 11. The cost for the workshop is $25 per person and an additional $5 late registration fee will be charged after August 11. If you have any questions regarding the workshop, please call Frank Ruff or Lynne Kuroda at: 808-587-1577.

Forms and other tax information may be downloaded from the Department's website at: http://www.state.hi.us/tax/tax.html. On Oahu, forms may be ordered by calling the Department's Forms Request Line at: 587-7572. Persons who are not calling from Oahu may call: 1-800-222-7572 to receive forms by mail or 808-678-0522 from a fax machine to receive forms by fax.
 

/s/
RAY K. KAMIKAWA
Director of Taxation
 

1 Pyramiding occurs because the GET is levied on almost all receipts of a business at each transaction in the economic chain.  Thus, the GET accumulates as property or service passes through the economic chain.