Tax bill targets online stores

With Hawaii still losing out on state taxes from catalog and Internet sales, state lawmakers are getting creative.

A bill pending in the state House would give online retailers like Amazon.com a choice: collect and pay the state’s 4 percent general excise tax on sales from consumers in Hawaii, or provide the state with the names, dates and dollar amounts from each sale so the state Department of Taxation can collect the money annually.

Hawaii could be losing about $30 million a year in taxes due on Internet commerce — and perhaps as much as $122 million when mail-order catalog and other sales are counted — because the state has no efficient means of collecting the money.

Under state law, consumers are supposed to pay a 4 percent use tax on out-of-state purchases from catalogs or Internet retailers. But most consumers are unaware of the tax liability, and the state has no practical way to enforce the law except on large purchases, such as automobiles.

National catalog and online retailers have been protected by a U.S. Supreme Court ruling that shields them from state taxes unless they have a physical presence in the state.

While state senators believe Hawaii should band with 24 other states in the Streamlined Sales Tax Proj­ect, a cooperative strategy to collect the taxes owed, House lawmakers want to take more aggressive action.

Traditional brick-and-mortar retailers, which have lost sales as more consumers shop online, support elements of both the Senate and House approaches. But some traditional retailers — like their competitors in Internet commerce — believe the House version infringes on consumer privacy.

While the House version would not require catalog or online retailers that provide sales data to the state to detail exactly what consumers buy — just names, dates and dollar amounts — the information can still be revealing.

The Direct Marketing Association, a trade group based in New York, asked the House Finance Committee in testimony last month whether consumers would want the state to know about purchases from hypothetical catalogs such as "The Cancer Patient’s Resource Center" and "The Sexy Lingerie Shop."

"You can tell by the website what kind of stuff they’re buying," said Alicia Malu­a­fiti, a lobbyist who represents the DMA. "I don’t think people want (the state) to see their purchasing habits. It could be embarrassing."

Carol Pregill, president of the Retail Merchants of Hawaii, has also urged House lawmakers to delete the data-sharing option because of privacy concerns.

But Pregill said traditional brick-and-mortar retailers that have to pass the state’s general excise tax on to consumers are at a competitive disadvantage against out-of-state catalog and online retailers.

"I think every company has seen business erode because of online and remote shopping," she said. "It’s a fairness issue."

The Department of Taxation supports the House version and has told lawmakers that the state has to change its tax laws to address the new business model of Internet commerce.

The department estimated that the House version, like the Senate’s alternative, could provide up to $30 million a year.

The National Conference of State Legislatures, which prefers the Streamlined Sales Tax Proj­ect approach in the Senate, has estimated that uncollected use tax revenue in Hawaii next year could be as high as $122 million.

"It’s a very cleverly written bill because it has to be. We’re fighting the commerce clause (of the U.S. Constitution)," said state Rep. Isaac Choy (D, Manoa), who drafted the House version, now found in Senate Bill 1355.

In January a federal judge in Colo­rado granted a preliminary injunction to the Direct Marketing Association to halt a new law that required larger catalog and online retailers to inform customers that they have to pay the state’s use tax on out-of-state purchases. The law also required retailers to annually provide the state with customer names and the amounts of purchases.

The judge found that the Colo­rado law is likely discriminatory because it imposes customer reporting requirements on out-of-state retailers that are not expected of state retailers. The judge also found that the law creates an undue burden on interstate commerce.

The judge’s ruling was based on the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. The Supreme Court ruled that it was an unconstitutional burden on interstate commerce for North Dakota to apply a use tax on an out-of-state office supply company that had customers but no outlets or sales representatives in the state. The court determined that there must be a "substantial nexus" through physical presence in the state to prevent state taxes from interfering with the national economy.

State Sen. Carol Fuku­naga (D, Lower Makiki-Punchbowl), who has sought to bring Hawaii into the Streamlined Sales Tax Proj­ect for several years, said the House version would likely be challenged in court as unconstitutional.

Some retailers are voluntarily participating in the proj­ect, but states are unable to require retailers to cooperate unless Congress recognizes that it would not interfere with interstate commerce and changes federal law.

Fukunaga wants Hawaii to join the proj­ect so the state might attract tax revenue on a voluntary basis while Congress considers whether to take action.

"It allows you to collect taxes that are on your books, that have been due forever but that — up until now — you had no means of practically coming up with a mechanism to collect them," said Fuku­naga, who inserted the Senate version into House Bill 1183.

Some of the largest states, such as California, New York and Texas, are not participating in the proj­ect. A few have opted to go after the tax money on their own terms.

Texas sent Amazon.com, based in Seattle, a $269 million bill for uncollected state sales taxes last year because the online retailer has a distribution center in Texas. Amazon.com responded by announcing that it would close the Texas facility this month.

A New York law adopted in 2008 requires that Ama­zon.com and other online retailers collect and pay the state’s sales tax if the retailers have a presence in the state through affiliate websites.

Amazon.com has challenged the law in court.

Hawaii followed New York’s example with a similar bill in 2009, prompting Amazon.com and Overstock.com to cancel affiliate marketing agreements with websites in the islands.

Then-Gov. Linda Lingle vetoed the bill, and both online retailers restored the local partnerships. Lingle also vetoed a Streamlined Sales Tax Proj­ect bill. Lawmakers chose not to override the vetoes.

"We have a problem. We’re losing too much revenue," Choy said of the uncollected taxes. "It’s going to grow. We have to keep making these attempts."