 Pitfalls of the Subcontractor Deduction
By Tom Yamachika, President This week we’ll look at another general excise tax exemption that the State Auditor has put under the microscope in Report No. 20-05. It affects the construction industry, and the price tag the Auditor put on it, based on 2018 numbers, was $19 million. The primary benefit of this exemption occurs when a construction contractor hires and pays other people qualifying as contractors to build a project. Suppose, for example, a general contractor is paid $100,000 to build an annex to an existing house. The general contractor hires a plumber and an electrician, paying $5,000 to each. Current law says that the plumber and electrician pay GET on the $5,000 each that they get, and that the general contractor is only taxed on the remaining $90,000. If a subcontractor needs to sub out part of its job, say the electrician needs to hire another electrician and pays the second one $2,000, the same rules apply at that level. The first electrician pays GET on only $3,000, and the total tax on the project remains the same. There are, of course, wrinkles . First, the contractor hiring the subcontractor needs to be a contractor in the construction industry. Many vendors who do work for the government are called contractors, but they do not qualify as contractors in the GET sense. Next, if money is paid to someone not a contractor, then the special treatment fails. Let’s say the plumber hired a design consultant and bought pipes from a supply house, and paid each $1,000. The plumber still needs to pay GET on the $5,000, and the plumber’s vendors each need to pay GET on the $1,000 as well, although at the 0.5% tax rate, assuming the transaction is documented properly. If we suspended this GET provision as we did in 2011-2013, then all sub-vendors would be in the same situation as the plumber in this example. The general contractor would have to pay GET on the whole $100,000. Each sub-vendor, and each sub-sub-vendor, would have to pay GET as well. The result would be even higher construction prices than what we are suffering through now. Is that what we want when the lack of housing, affordable or otherwise, is a major problem here? At the same time, the complexity of the current system is a major problem. Many of the clients I’ve represented were confused over at least some of the aspects of the subcontract deduction system I’ve briefly explained above. Maybe we should transition over to a simpler system. Guam has a gross receipts tax, and they had a subcontract deduction system like the one in Hawaii until 2010. As we have written about before, Guam’s system is that there is no subcontract deduction, so the general contractor pays tax on the whole contract, but the subcontractors are exempt on their payments from the general contractor. In theory, that system yields the same tax revenue as the current one, but there are fewer moving parts. Issues about whether the subcontractors are really subcontractors or are simply wholesalers can be sorted out at the vendor level without putting the tax on the main contract at risk. And if for policy reasons we want to forego GET on the main contract, such as if the contract is to build affordable housing, then we allow an exemption at the general contractor level instead of increasing complexity by letting the exemption propagate through to all of the subcontractors. How about that, lawmakers? Let’s do something constructive for the construction industry and our economy.
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Visitors to Maui: Attention
Hawaii State Department of Health Maui District Health Office Recommendations The following are safety guidelines recommended to all travelers arriving into Maui County: Before booking your lodging, ensure that location will accommodate you should you require quarantine or isolation if you become suspected of being contagious, awaiting test results for, or needing to be isolated as a positive case of COVID 19. Maui has limited quarantine locations to place sick or suspected sick nonresidents. Before booking your rental car, check the agency policy on refunds should you be unable to utilize your rental due to illness or suspected illness. Quarantine and isolation last up to 14 days, during which time you will prohibited from leaving your hotel room or other place of lodging except to obtain medical care. Check the refund policy for activities, tours, lodging and other arrangements that may need to be changed or canceled in the event of illness. Be aware that some third-party booking agencies and companies have a no- refund policy. If you are suspected or confirmed to be ill with the COVID19 virus you will be required to quarantine and isolate for up to 14 days. You will be unable to leave your place of lodging except to access urgent medical care. It is recommended that you obtain travel insurance, including policies that cover COVID related issues, that may assist in your ability to change the date or circumstances of your travel plans should you need to quarantine or isolate in place, as well as assist you if you need to be transported out of Maui or Hawaii for medical or other reasons. It is recommended that you obtain and carry proof of medical insurance, and that it is applicable to healthcare needs in Maui. Maui County has 1 acute care hospital: Maui Memorial Medical Center is a 219-bed not-for-profit organization, whose website states: Maui Memorial Medical Center will bill your health plan carrier(s) according to the information provided at registration. You'll be asked to present your current health plan coverage cards and to pay all co-pays, deductibles, coinsurance and fees for noncovered services when registering and checking in for services. Please check your health plan to determine if a provider is participating. If your plan's requirements are not followed, you may be financially responsible for all or part of the services rendered in the hospital. Be prepared for delays at points of entry into Hawaii. All travelers will undergo a screening which may include: temperature check, detailed survey form completion, interviews, nasal swab test, detainment and xxxx If you are suspected of being ill you will be referred to the Department of Health for further investigation. You will not be allowed to fly: You are on the Known Quarantine List; You have symptoms including but not limited to: xxxx Helpful and recommended websites for Hawaii’s travelers and situational awareness in Maui County: https://hidot.hawaii.gov/coronavirus/ https://www.mauicounty.gov/2370/COVID-19-Coronavirus-Information Continue to prevent the transmission of disease by adhering to CDC recommended disease prevention guidelines: wear a face covering over your nose and mouth, keep distance of at least 6 feet from others whenever possible, cover your mouth and nose when you cough and sneeze, wash your hands frequently and do not travel when you feel sick. https://www.cdc.gov/coronavirus/2019-ncov/travelers/travel-in-the-us.html Information, guidelines and recommendations are subject to change. Respect our culture and our desire to re-open our islands in a manner that we feel is safe for our residents and visitors. ~ Mahalo ~  The Giant Sucking Sound
By Tom Yamachika, President You may remember back in the 1992 U.S. Presidential campaign, independent businessman and candidate Ross Perot argued, on live TV: “We have got to stop sending jobs overseas. It's pretty simple: If … you can move your factory South of the border, pay a dollar an hour for labor, ... there will be a giant sucking sound going south.” We are going to have a similar problem, and soon. In 2016, Pacific Business News observed: “Over six years, from 2010 to 2016, we lost 30,000 more people than moved here from other states. And the flight rate has been increasing … 2016’s outmigration rate was 10 times higher than 2010’s.” On June 1, University of Hawaii Economic Research Organization’s Executive Director Carl Bonham told lawmakers that we’re going to lose another 30,000 people in just two years. A more pessimistic scenario assumes we are going to lose that 30,000 people in ONE year. Schlurrrrp! Why is this happening? “Because tourism is such a dominant piece of the economy, many other state economies and county economies will recover, much more rapidly, and the job opportunities will simply not exist here that will exist in the rest of the country,” he said. “Think about at the end of this year and into January when our extended unemployment benefits have expired; if you don't have family ties in Hawaii, and you were working in tourism here and your unemployment benefits run out, there's absolutely nothing to keep you here.” So how are our lawmakers reacting to this? Our public worker unions seem to have zero sympathy for the plight of our taxpayers. HSTA’s Corey Rosenlee argued last month in Civil Beat that demands for “shared sacrifice” because of budget shortfalls should be rejected. UPW’s Dayton Nakanelua wrote that his union “must vigorously and respectfully oppose however, any plan to reduce public employee pay at any level, amount or through furlough.” HGEA’s Randy Perreira wrote a similar letter opposing a furlough (or pay cut) affecting his union members. So, where is the money for public workers going to come from? We could borrow it, but we’d eventually have to pay any loan back with interest. We could turn over rocks hoping to uncover moneys that various departments have squirreled away – but that will last only so long. Could we get lots of money through “revenue enhancement,” otherwise known as raising taxes? If we try that, we can certainly expect the giant sucking sound to get louder and deeper. In addition, the taxpayers who are left might not be able to pony up increased taxes because they simply aren’t able to afford it in addition to rent, utilities, and other costs of doing business. If anything, we need to make it easier to do business. If we in the private sector are allowed to do business and with fewer nonessential restraints, we don’t mind sharing some of the profits with government. We also need to think seriously about cutting costs. Just as there are obscure special funds we are currently finding, there are obscure programs and services that no longer can be justified. These need to get out of the way so the tax dollars the government does get can be more efficiently utilized. |
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