Internet taxation

Online shopping — e-commerce — is big business. Huge. It generated $231 billion in sales for U.S. retailers last year, according to technology and market research firm Forrester, and is expected this year to increase 13 percent, to $262 billion.

Not only is that a mountain of sales, it’s a mound of potential taxes. Members of Congress are currently engaged in a battle on whether to allow states to collect revenue off these web-store transactions; right now, they get zero. Of the states, count Hawaii among those renewing the push — and pull — to receive millions of dollars in taxes from consumers’ online purchases.

The congressional bill, called the Marketplace Fairness Act, would allow states to force online retailers making more than $1 million a year in Internet sales to collect sales taxes from all customers and pay those taxes to state and local governments. A bipartisan coalition in the U.S. Senate on May 6 easily approved the bill by a 69-27 vote; it now goes to the U.S. House.

In Hawaii, there’s been a legislative stalemate for years over requiring all online retailers to pay the state’s 4 percent general excise tax for out-of-state sales by Hawaii consumers.

Adversaries here are likely to return to the issue next January, with a microcosmic skirmish brewing anew between state Rep. Isaac Choy, a Democrat and multi-time sponsor of Internet sales tax legislation, and state Rep. Gene Ward, a Republican and strong opponent. Some estimates have Hawaii foregoing up to $122 million yearly in uncollected taxes from online sales.

"When it comes to the tax on the Internet," said Ward, who consistently opposes all tax increases, "I think we should leave the Internet alone. Once you get this taxation, there’s going to be pretty much a slippery slope where you then have a license to get on the Internet, you have a tax on the ISPs (Internet service providers), you have a tax on (Google’s) Gmail, you have unlimited kinds of incursions that the government is going to have in a second."

Unlike many other states’ sales tax, which is attached to purchases, Hawaii’s 4 percent general excise tax is levied on a company’s gross receipts — a tax on the seller instead of the buyer, which the company commpnly passes on to customers. By extension then, purchases made through the Internet by Hawaii buyers should be taxed, said Choy.

"To me," Choy said, "reality is it’s not an increase in tax. It’s a leveling of the playing field. It’s pure compliance."

Twenty-three states that have a pure sales tax have joined a Streamlined Sales and Use Tax Agreement in imposing it on companies for items sold online in those states.

The U.S. Supreme Court ruled in 1992 — before Internet commerce existed — that a company must have a "substantial nexus" through presence — "bricks and mortar" — in a given state in order to be taxed by that state. The federal bill may circumvent that limitation through congressional ability to regulate interstate commerce.

"The streamline and nexus are both consistent with the federal legislation, which allows for both," Choy said. "Hawaii doesn’t have a sales tax and that’s the reason why we have a difficult time adopting the streamline sales tax agreement. … The federal legislation allows for both types — nexus and streamline."

If the U.S. House approves the Senate bill, "It’s a done deal," and no Hawaii state legislation will be needed, Choy said. Ward agreed that enactment of that legislation "would pretty much wrap it up."

However, both legislators don’t expect that to happen. Choy said, "My opinion is it’s going to have a hard time passing the (U.S.) House, so we’ll be back to different states trying to pass their own legislation." Ward agrees.

Proponents of the bill in Hawaii have failed in getting the Legislature to join the streamline system. The cooperative has been endorsed by the National Conference of State Legislatures, which has estimated that Hawaii loses as much as $122 million a year in uncollected tax revenue from online sales.

"If successfully implemented, the actual amount raised could be in the multiple millions of dollars," according to the Hawaii Appleseed Center for Law and Economic Justice.

"With our existing law, we can tax what we call remote, those that don’t have presence here but have economic activity here," said Frederick Pablo, Hawaii’s taxation director.

In January, state Tax Appeal Court Judge Gary W.B. Chang required that online travel companies pay Hawaii $158 million for unpaid general excise taxes from 2000 through 2011 from sales of $2.7 billion for purchases of hotel rooms via the Internet.

In a news release, Pablo said Chang "correctly identified the GET as a tax that is imposed on almost all economic activity, including electronic commerce, such as the sale of Hawaii hotel rooms." Pablo declined to comment on whether the ruling could be applied to other circumstances because an appeal of the case is pending.

"Right now there is no mechanism to require the consumer to pay that to the state other than as part of your filing your income tax," said Carol Pregill, president of Retail Merchants of Hawaii.

"How are you going to do that?" she added. "The state does not have any mechanism to collect that, so what we’re going to require in this case is that the remote seller will collect that 4 percent like our sellers here collect the 4 percent and give back to the state."

The Supreme Court’s ruling was based partly on the fact that there are more than 9,000 different tax districts in the United States, each with its own set of rates. The bill in Congress would require that each of those districts simplify their tax codes and provide computer software to provide to online companies, which has improved enormously.

"Software is already available under the Streamline Sales (and Use) Tax Agreement," Choy said, "and it’s free."

The likelihood of the 11-page Senate bill becoming law this year are slight as House Republicans are organizing against it, contending it would be a tax increase rather than simple compliance with existing tax laws.

"It’s going to be a long, slow and drawn-out process," Choy said, "but, at the end of the day, I think the distinction is going to have to be made by Congress and not by states."

Meanwhile, the online shopping trend is not going away — but is only expected to grow, thanks to increased use of tablets and smartphones, as well as traditional retailers moving with the ecommerce evolution and growing their own online sales arms.

Market research firm Forrester says ecommerce, which already accounts for some 8 percent of U.S. retail sales, is expected to outpace sales growth at bricks-and-mortar stores over the next five years, reaching $370 billion in sales by 2017. By then, it is expected to reap one-tenth of all U.S. retail sales.