Hawaii has been losing millions of dollars in revenue from general excise taxes because of Internet sales to island residents from out of state. Congressional action is needed to require payment of the taxes. In the meantime, Hawaii should join other states that have obtained cooperation of online retailers to collect lost sales taxes, estimated here to be at least $30 million annually and as much as $122 million.
The closing of nearly one-third of the 642 Borders books, music and video stores nationally, including the Waikele Center and Maui Marketplace outlets, has undoubtedly resulted from Internet competition. Along with brick-and-mortar retailers, state and local governments lose revenue because of online sales that go untaxed.
One strategy considered by the Hawaii Legislature would demand that online retailers either pay the 4 percent GET on sales made to consumers in Hawaii or provide the names, dates and dollar amounts from each sale to the state Department of Taxation so it can collect the money from purchasers.
But that "give us names" tack is wrong-headed: Not only would it infringe on consumers’ privacy, it probably would be determined in court to interfere with interstate commerce.
The U.S. Supreme Court ruled in 1992 that states cannot charge sales tax to an out-of-state retailer unless it has a "substantial nexus" through "physical presence" in the taxing states. When Hawaii threatened two years ago to collect taxes from mainland companies on sales through Hawaii-based sales affiliates that are paid for linking their websites to the retailer, Amazon.com threatened to cut ties with them.
Then in January, a federal judge in Colorado halted implementation of a new law that online retailers either pay Colorado sales taxes or provide a summary of purchases entering the state.
A House bill now being considered in Hawaii aims for a similar law — but its effectiveness would be doubtful. If the Colorado halt is upheld by the 9th U.S. Circuit Court of Appeals, it would apply to Hawaii.
A more timid but potentially useful approach has been taken by 24 states that are members of the Streamlined Sales Tax Project, which is voluntary for online retailers to collect state sales taxes. The National Conference of State Legislatures, which supports the effort, has estimated that Hawaii, by joining the project, could receive as much as $122 million next year from tax revenue it has not been collected from out of state.
At the same time, the conference is pushing for federal legislation "to close the sales tax collection loophole, which is estimated to cost states $23 billion" in lost sales tax revenue, the conference testified to Hawaii lawmakers. The alternative, which states abhor, would invite Congress to impose a national sales tax or a value-added tax.
Large states like New York, California and Texas have chosen to go after online retailers individually but their actions have been challenged in court. Hawaii would be prudent to align with the growing number of states asking companies to impose state taxes on Internet sales while urging Congress to allow states to require online payment of sales taxes, including Hawaii’s GET.