B-167150, SEPTEMBER 26, 1969, 49 COMP. GEN. 204

TAXES -- STATE -- GOVERNMENT IMMUNITY -- RENTED EQUIPMENT THE HAWAII GENERAL EXCISE TAX IMPOSED ON A MOTOR VEHICLE RENTAL AGENCY, WHICH ALTHOUGH IN THE NATURE OF A SALES OR GROSS RECEIPTS TAX LEVIED ON THE LESSOR IS BY TRADITION, CUSTOM, AND USAGE PASSED ON TO THE LESSEE AS A SEPARATE ITEM IN THE BILLING AND ADDED TO THE RENTAL PRICE OF THE VEHICLE, IS NOT A TAX WITHIN THE SCOPE OF THE EXEMPTION CONTAINED IN SECTION 237- 25AA)(3) OF THE HAWAII REVISED STATUTES PERTAINING TO THE SALE OF VEHICLES TO THE UNITED STATES AND THE FEDERAL GOVERNMENT IS LIABLE TO THE LESSOR OF THE CARS FOR THE EXCISE TAX UNLESS THE RENTAL AGREEMENT PROVIDES OTHERWISE. THE DETERMINATION OF UNITED STATES LIABILITY TO PAY A STATE SALES TAX DEPENDS ON WHETHER THE INCIDENT OF THE TAX IS ON THE VENDOR OR VENDEE, AND WHEN IMPOSED ON THE VENDOR, THE UNITED STATES UNDER ITS CONSTITUTIONAL PREROGATIVE IS NOT IMMUNE FROM LIABILITY UNLESS EXPRESSLY EXEMPT.

TO THE HERTZ CORPORATION, SEPTEMBER 26, 1969:

YOUR LETTER OF SEPTEMBER 11, 1969, CONCERNS THE APPLICABILITY OF THE HAWAII GENERAL EXCISE TAX TO THE RENTAL OF MOTOR VEHICLES BY THE UNITED STATES.

YOU ADVISE THAT THE HAWAII GENERAL EXCISE TAX, ALTHOUGH IN THE NATURE OF A SALES OR GROSS RECEIPTS TAX LEVIED ON THE VENDOR (HERE, THE LESSOR), IS BY TRADITION, CUSTOM, AND USAGE PASSED ON TO THE RENTER (OR LESSEE). YOU STATE THAT THE AMOUNT OF THE TAX, WHICH IS AT A 4 PERCENT RATE PRESENTLY, IS SEPARATELY STATED AND IS IN EFFECT ADDED TO THE RENTAL PRICE OF THE MOTOR VEHICLE; AND THAT THE AMOUNT OF THE TAX IS COLLECTED FROM THE RENTER (OR LESSEE) BUT THAT THE FEDERAL GOVERNMENT IS NOT PAYING THE TAX AND CONSIDERS ITSELF NOT TAXABLE.

YOU REPORT THAT THE STATE OF HAWAII HAS RECENTLY CONCLUDED AN AUDIT, AND HAS HELD HERTZ INTERNATIONAL LIABLE FOR THOSE TAXES, AND TAKES THE POSITION THAT THE RENTALS TO THE FEDERAL GOVERNMENT ARE TAXABLE. PRESUMABLE--ACCORDING TO YOUR LETTER--THE STATE IS RELYING ON SECTION 117- 21.5(4)(C) AND DOES NOT TREAT A RENTAL WITHIN THE MEANING OF THE TERM "SOLD" AS REFERRED TO IN SECTION 117-21.5(3). (THE CITED STATUTORY PROVISIONS ARE APPARENTLY CODIFIED AS SECTION 237-25(C) AND 237-25(A) (3), HAWAII REVISED STATUTES.)

YOU STATE THAT HERTZ IS CAUGHT IN THE MIDDLE--IN THAT HAWAII MEASURES ITS EXCISE TAX BY ITS GROSS RECEIPTS AND, WHEN IT IS ADDED TO THE BILL, THE FEDERAL GOVERNMENT RENTER DOES NOT PAY IT--WITH THE EFFECT THAT HERTZ IS OBLIGED TO ABSORB THIS 4 PERCENT TAX WHICH IS ADDED TO THE RENTAL PRICE.

YOU REQUEST A DECISION AS TO WHETHER FEDERAL GOVERNMENT RENTERS IN HAWAII SHOULD PAY THE AMOUNT OF THE TAX ADDED TO THE RENTAL PRICE.

CONCERNING THE PAYMENT OF STATE SALES TAXES GENERALLY, OUR OFFICE HAS HELD THAT THE QUESTION OF WHETHER THE UNITED STATES IS REQUIRED TO PAY FOR AN ITEM PROCURED IN A STATE AT A PRICE INCLUSIVE OF THE SALES TAX IMPOSED BY THAT STATE RESTS UPON A DETERMINATION OF WHETHER THE INCIDENCE OF THE TAX IS ON THE VENDOR OR ON THE VENDEE. WHERE THE INCIDENCE OF THE TAX IS ON THE VENDOR, THE UNITED STATES HAS NO RIGHT- APART FROM STATE LAW OR STATE STATUTORY REGULATIONS PROMULGATED THEREUNDER BY STATE AUTHORITIES-- TO PURCHASE (OR LEASE) ITEMS WITHIN THE TERRITORIAL JURISDICTION OF THE STATE ON A TAX FREE BASIS. SEE ALABAMA V KING AND BOOZER, 314 U.S.1;24 COMP. GEN. 150; 32 ID. 423 (1953); ID. 577 (1953); 33 ID. 453 (1954); AND 41 ID. 719 (1962). ON THE OTHER HAND WHERE THE INCIDENCE OF THE TAX IS ON THE VENDEE, THE UNITED STATES IN PURCHASING OR LEASING ITEMS FOR OFFICIAL USE IS ENTITLED UNDER ITS CONSTITUTIONAL PREROGATIVE TO MAKE PURCHASES OR TO LEASE FREE FROM STATE TAXES AND TO RECOVER ANY AMOUNT OF SUCH TAXES WHICH MAY HAVE BEEN PAID BY IT.

IT IS CLEAR FROM A READING OF SECTION 237-13, HAWAII REVISED STATUTES, THAT THE HAWAII GENERAL EXCISE TAX IS A BUSINESS PRIVILEGE TAX IMPOSED ON PERSONS IN THE BUSINESS OF SELLING PROPERTY, FURNISHING SERVICES OR OTHERWISE ENGAGED IN A BUSINESS IN THE STATE AND THAT THE AMOUNT OF THE TAX IS MEASURED BY THE GROSS INCOME OR GROSS PROCEEDS OF SALE OF THE BUSINESS. MOREOVER, WE FOUND NOTHING IN THE HAWAII GENERAL EXCISE TAX LAW WHICH REQUIRES A VENDOR OR A PERSON FURNISHING SERVICES TO COLLECT THE AMOUNT OF THE TAX FROM THE VENDEE OR THE PERSON BEING FURNISHED THE SERVICE. THUS, THE LEGAL INCIDENCE OF THE TAX INVOLVED HERE IS ON THE VENDOR OR THE PERSON FURNISHING A SERVICE. HENCE, THE UNITED STATES WOULD NOT BE CONSTITUTIONALLY IMMUNE FROM SUCH TAX ABSENT AN EXEMPTION PROVISION IN THE STATE LAW OR REGULATIONS PROMULGATED PURSUANT THERETO.

SECTION 237-25(A)(3), HAWAII REVISED STATUTES, EXEMPTS FROM THE TAX IN QUESTION "SALES" AND "GROSS PROCEEDS OF SALES" OF TANGIBLE PERSONAL PROPERTY TO THE UNITED STATES. HOWEVER, SECTION 237-25(C) PROVIDES THAT NOTHING IN SECTION 237-25:

*** SHALL BE DEEMED TO EXEMPT ANY PERSON ENGAGING OR CONTINUING IN A SERVICE BUSINESS OR CALLING FROM ANY PART OF THE TAX IMPOSED UPON HIM FOR SUCH ACTIVITY, AND HE SHALL NOT BE ENTITLED TO DEDUCT ANY AMOUNT FOR TANGIBLE PROPERTY FURNISHED IN CONJUNCTION THEREWITH EVEN THOUGH HE SEPARATELY BILLS OR OTHERWISE SHOWS THE AMOUNT OF THE GROSS INCOME OF SUCH BUSINESS DERIVED FROM THE FURNISHING OF SUCH PROPERTY.

FURTHER, SECTION 237-7, HAWAII REVISED STATUTES, DEFINES "SERVICE BUSINESS OR CALLING" AS INCLUDING ALL NONPROFESSIONAL ACTIVITIES ENGAGED IN FOR OTHER PERSONS FOR A CONSIDERATION WHICH INVOLVES THE RENDERING OF A SERVICE "AS DISTINGUISHED FROM THE SALE OF TANGIBLE PROPERTY."

IN LIGHT OF THE PROVISIONS OF SECTION 237-25(C) AND SECTION 237-7 IT IS OUR OPINION THAT "RENTALS" TO THE UNITED STATES MAY NOT BE CONSIDERED WITHIN THE SCOPE OF THE TAX EXEMPTION CONTAINED IN 237 25(A)(3). THEREFORE CAR RENTALS (OR THE PROCEEDS FROM CAR RENTALS) TO THE FEDERAL GOVERNMENT IN HAWAII WOULD BE SUBJECT TO THE HAWAII GENERAL EXCISE TAX. WHETHER THE UNITED STATES WOULD BE REQUIRED TO PAY THE AMOUNT OF THE TAX TO THE LESSOR OF THE CARS WOULD DEPEND ON THE TERMS OF THE RENTAL AGREEMENT. IN OTHER WORDS THE UNITED STATES IS NOT CONSTITUTIONALLY IMMUNE FROM THE ECONOMIC BURDEN OF THE STATE TAX INVOLVED HERE IF BY CONTRACT OR OTHERWISE IT IS LIABLE TO THE VENDOR OR LESSOR FOR THE AMOUNT OF THE TAX.