The internet has revolutionized retail sales, and it’s taking a while for society to adapt. In the case of online transactions, the federal government so far has failed to develop a simple, national formula to tax the sales and remit the revenue to the state where the customer lives.
So it’s fallen to the states to claim what tax they can, and Hawaii is lagging badly in that effort. The introduction of House Bill 345, among other pieces of legislation this session, is an attempt to correct that. The measures should advance for further discussion of various approaches, to develop at least a starter formula for taxing online purchases.
Of course, consumers here have relished making online purchases for which the website does not collect a local tax from them. Hard-pressed to deal with the state’s high cost of living, skipping the tax on the bottom line has felt like a rare perk.
This measure, however, merely makes it easier for the state to collect tax that shoppers actually do owe; technically, they should be keeping track and sending the tax to the state tax office. Collection is impractical that way, but not if the online merchant, like their brick-and-mortar counterparts, charge for it up front.
The bill, then, would level the playing field for retailers, expecting the same processing from anyone doing significant business in the state, regardless if it’s face-to-face or online. It makes local sellers more competitive with the distant websites. Fairness to Hawaii businesses that hire locally and support the economy would be a net improvement.
Other states have a head start in this race for revenue in part because Amazon, the dominant online retailer, has opted to collect the sales taxes in the states that have them. Hawaii, which assesses a general excise tax (GET) instead, is excluded along with five other states that similarly lack a sales tax.
Amazon’s done this in larger states for some years. This was partly due to judicial opinions declaring that tax is owed to states where the merchant has a physical presence — a warehouse or other state-based operation.
Whether or not Amazon will next move on to states such as Hawaii with its GET is unclear, but the Legislature seems unwilling to wait and see. HB 345 would establish that having physical presence or a representative here would not be required of a business governed by state tax law.
Instead, the bill would set a $100,000 threshold as the minimum amount of business an online retailer must do in Hawaii before tax-collection duty would kick in.
There are some tweaks that may be needed in the legislation. For example, on HB 345, the state Department of Taxation (DOTAX) submitted testimony questioning one proposed exemption: Businesses that run a website hosted on a computer located in Hawaii but unaffiliated with the business wouldn’t have to collect or remit the taxes.
The department rightly questioned why a business with a Hawaii-based website would bear less tax responsibility than others.
DOTAX also registered some concern that the state could be sued by a business asserting that physical presence is required. That may be so, but it’s not sufficient reason to hold the bill.
The courts have taken a range of positions that have not yet resolved. As recently as November, the state Supreme Court in Ohio found that a $500,000 sales threshold was enough without physical presence.
That ruling doesn’t affect Hawaii directly, but it bolsters the sense that judges are recognizing the change in the business landscape. Online retailers surely see this, too.
Hawaii should assert its claim on online GET taxes by passing clear legislation. That should bring the major players to the table to negotiate further, settling tax law in this contentious area at last.
