Finance Quarterly June 2011
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Real Property GET Issues
Property Management, Commissions, and Leasing
The Hawaii General Excise Tax (GET) is the universal, ubiquitous charge that you see when you pay for almost everything in this state. One of the unique features of the GET is that it applies to rents, services, and commissions, things that other states’ sales taxes usually don’t touch. So those who work with real property may not be aware of some of the GET’s “unique features” that this article will discuss in question and answer format. [This discussion is based upon the laws in effect as this article went to press in April 2011. The Hawaii Legislature is considering changes to some of the laws described in these examples.]
Property Management and Leasing
I manage a rental apartment for A. I collect $1,000 monthly rent for him, deduct my 15% commission and send A the $850 balance. I pay GET on my $150, so A needs to pay GET on the $850, right? Actually, A’s taxable gross income is $1,000. It’s imposed on the rent you collected for him. A isn’t allowed to deduct business costs like the property manager’s commission. This is explained in Hawaii Department of Taxation publications called Tax Information Releases (TIRs). This example was drawn from TIR 90-13.
But that means the $150 is subject to double taxation! Isn’t that wrong? Under a gross receipts tax, it is very possible for the same dollars to be taxed more than once along the same economic chain. If a supplier sells to a retailer and the retailer sells the same product to a consumer, both the supplier and the retailer are taxed on largely the same dollars. Unfortunately, that’s just how the GET works.
I manage a commercial property for B. Each month I collect $650 rent plus $200 in Common Area Maintenance (cAM) charges. $150 a month in real property taxes is also due, but the tenant pays the county directly, so B never sees a dime of that money. What’s the taxable gross income then? We have to add the base rent, CAM, and the property tax, totaling $1,000. The CAM charges are the responsibility of the owner, B, not the tenant, so when the tenant pays B’s bill B realizes income. The same is true with regard to the property tax. Tenant is paying B’s bill, so B realizes income. (TIR 92-5.)
How can there be GET on property tax charges? I know for a fact that property tax charges are not GET taxable when it comes to my own leasehold house. Your understanding is correct, but there is a big difference from B’s situation. The tax ordinances of all islands say that for long-term leases of residential real estate, the property tax is the responsibility of the lessee living on the property. There’s no gross income imputed to the lessor when the lessee pays her own property tax bill. The definition of a long-term lease depends on the county, but none of the counties allow this treatment for commercial real estate.
I manage a commercial property for C. Each month I collect $1000 rent. C’s property is leasehold, so C is paying $800 rent to D. Don’t tell me D is paying 4% GET on that rent too? Yes, D is paying 4% GET on that rent too. But, if written real property leases are involved, the law allows a break for C. C can deduct 87.5%1 of the rent paid to D. On Oahu, a further calculation is needed to negate the effect of the 0.5% county surcharge that D would pay, because wholesale sales are not subject to surcharge. Form G-71 will help you through these calculations.
1. Why 87.5%? the objective was to make the total tax paid equal that if the $800 was taxed at wholesale (0.5%) and the $1000 was taxed at retail (4%). In that scenario the total tax would be $40+$4=$44. actually, D pays 4% of $800, or $32. C’s taxable gross income is $1000 but has a deduction of 87.5% of $800, or $700. C’s taxable gross income is $300, and 4% of $300 is $12. D’s tax plus C’s tax is $44.
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