Opinion ID: 1387085
Heading Depth: 2
Heading Rank: 2

Heading: Competing Tax Classifications

Text: For the Fiscal Years Ending (FYE) in 1988, 1989, and 1990, respectively, Fuji reported the following revenues and imports subject to taxation under HRS chapters 237 (General Excise, or G.E. Tax) and 238 (Use Tax): TAX CATEGORY (rate) FYE 9/30/88 (tax) G.E. Tax: wholesaling (.005) $7,623,282.03 ($38,116.41) retailing (.040) $197,769.93 ($7,910.80) interest (.040) $15,782.24 ($631.29) other rentals (.040) $15,000.00 ($600.00) others (.040) $4,298.76 ($171.95) Use Tax: imports for resale (.005) $259,305.35 ($1,296.53) consumption (.040) $36,008.66 ($1,440.35) TAX CATEGORY (rate) FYE 9/30/89 (tax) G.E. Tax: wholesaling (.005) $8,715,098.62 ($43,575.49) retailing (.040) $249,772.08 ($9,990.88) interest (.040) $9,684.54 ($387.38) other rentals (.040) $15,000.00 ($600.00) others (.040) $4,298.76 ($171.95) Use Tax: imports for resale (.005) $261,488.79 ($1,307.44) consumption (.040) $36,008.66 ($1,440.35) TAX CATEGORY (rate) FYE 9/30/90 (tax) G.E. Tax: wholesaling (.005) $9,603,154.97 ($48,015.77) retailing (.040) $241,867.23 ($9,674.69) interest (.040) $9,596.64 ($383.88) other rentals (.040) $15,000.00 ($600.00) others (.040) $0.00 ($0.00) Use Tax: imports for resale (.005) $339,343.40 ($1,696.72) consumption (.040) $96,786.10 ($3,871.44) Accordingly, Fuji reported that it owed the following taxes: FYE 9/30/88 FYE 9/30/89 FYE 9/30/90 Ch. 237: $47,430.45 $54,578.54 $58,674.34 Ch. 238: $2,736.88 $5,038.51 $5,568.16 __________ ___________ __________ Total $50,167.33 $59,617.05 $64,242.50 TOTAL = $174,026.88 Based on its belief that photoprocessing constitutes a manufacturing activity as opposed to a service activity, Fuji included two types of sales in the wholesaling category: 1) photoprocessing sales to drug stores, supermarkets and other retailers, see HRS §§ 237-4(1) and -13(1) (Supp.1992) (taxing wholesale sales at the rate of one-half of one percent) [3] ; and 2) sales of color print paper and developing chemicals to minilabs. HRS §§ 237-4(2) and -13(1), supra note 3. Fuji considered its imports of color print paper and developing chemicals for use in its own photoprocessing operations to be imports for use in manufacturing. Accordingly, Fuji concluded that these imports were (i) not taxable to the extent used to manufacture products sold at wholesale, see HRS § 238-2(1)(B) (1985), [4] and (ii) taxable at the rate of one-half of one percent to the extent used to manufacture products sold at retail. See HRS § 238-2(2)(B), supra note 4. To the extent that Fuji imported color print paper and developing chemicals for resale to the minilabs, Fuji maintained that it had already accounted for this activity through its calculation of sales at wholesale; therefore, Fuji concluded that these imports were not subject to use tax. See HRS § 238-2(1)(A) (1985). [5]
The Department of Taxation assessed Fuji an additional $98,437.31 (plus interest) [6] after reclassifying the photoprocessing activity as a service rather than as manufacturing. Consequently, the Department of Taxation took the position that the tax filings submitted by Fuji had: 1) overreported its wholesaling activities, see HRS § 237-13(2)(A) (Supp. 1992) [7] ; 2) failed to report services provided for an intermediaryi.e., gross receipts from photoprocessing activities with stores and supermarkets  see HRS § 237-7 (1985) (defining service business or calling) and HRS § 237-13(6) (Supp.1992) (indicating that such service businesses are taxable at the rate of four percent, or .040) [8] ; 3) underreported its retailing activitiesi.e., sales of color print paper and chemicals to minilabs, which consumed the property in a service business see HRS §§ 237-16(a)(1) & (b) (Supp.1992) [9] ; 4) failed to report services provided through direct dealings with United States government agencies, prepaid mailers, and other customers, see HRS § 237-13(6) (Supp.1992) (indicating that such services are taxable at the rate of one-half of one percent, or .005); and 5) underreported its imports for consumption i.e., its use of color print paper and developing chemicals in a service activity (photoprocessing). See HRS § 238-2(3) (1985). [10] After recalculating the total taxes owed, the Department of Taxation assessed Fuji the following amounts remaining due: FYE 9/30/88 FYE 9/30/89 FYE 9/30/90 Ch. 237: $5,475.49 $6,580.02 $9,985.83 Ch. 238: $20,228.06 $28,082.79 $28,085.12 Interest as of 10/31/91: $5,654.81 $4,852.83 $2,284.26 __________ __________ __________ Total $31,358.36 $39,515.64 $40,355.21 TOTAL = $111,229.21 Adding $5,906.47 in interest accrued after the final notice of assessment and prior to payment, Fuji eventually paid $117,135.68 to the Department of Taxation under protest. See supra note 6.