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Should Hawaii Tax Internet Sales?

Carol Fukunaga, Chair, Senate Economic Development & Technology Committee


In 2009, two approaches were proposed to collect uncollected Hawaii taxes: HB 1405, the so-called “Amazon nexus” bill, and SB 1678, the Streamlined Sales and Use Tax Agreement bill. Gov. Linda Lingle vetoed HB 1405 on July 1 and the Legislature chose not to override her veto. Whether the governor vetoes the “streamlined” approach or not, the following questions show why SB 1678 makes sense.

1. Why are we taxing Internet sales? Isn’t a federal moratorium in effect?

The federal moratorium applies to new taxes that target Internet transactions. However, Hawaii’s use tax (Section 238-2, Hawaii Revised Statutes) has been on the books for more than 40 years and is similar to use tax laws in 45 other states. Most Hawaii consumers don’t know that they owe the state a 4 percent tax on their out-of-state purchases (via catalog, direct mail and the Internet), and it’s virtually impossible for the state Department of Taxation to calculate/collect what individual taxpayers owe on such purchases.

2. What does the Streamlined project do?

The Streamlined Sales and Use Tax Agreement simplifies state tax systems, removes burdens to interstate commerce defined in a 1992 U.S. Supreme Court decision and levels the playing field between local and out-of-state retailers. Basically, the SSUTA project uses technology to accurately identify tax rates, and collect and remit state taxes.

Since 2005, out-of-state retailers have voluntarily collected and remitted more than $350 million in uncollected taxes to participating states.

SB 1678 aimed to allow Hawaii to participate in SSUTA by amending Hawaii tax laws to conform to SSUTA. These changes will take effect when Congress adopts national legislation endorsing the project’s approach, which is likely this year.

Given our state budget crunch, I believe the Legislature has a duty to enforce all tax laws rather than just a few.

Lowell Kalapa, President,
Tax Foundation of Hawaii


Consumers often shop with their laptops instead of at the local mall. It may be a matter of convenience, choice, pricing or availability, but avoiding the state’s general excise tax (GET) surely is not shoppers’ primary reason.

Nonetheless, state and local officials, as well as many retailers, believe Internet sales are unfair competition as out-of-state vendors do not collect the GET because they have no physical presence in Hawaii.

Forcing vendors to collect another state’s sales tax has been ruled unconstitutional as it inhibits interstate commerce. So some states have banded together to simplify the differences between their sales tax laws as a first step toward convincing Congress to adopt a law that would force out-of-state vendors to collect states’ sales taxes.

However, Hawaii’s GET is not a sales tax but a tax on gross receipts for the privilege of doing business in the state. Legislation has been introduced to rewrite Hawaii’s GET so it looks like a sales tax, but that could unintentionally jeopardize the productivity of the GET.

There is already a mechanism to collect the complementary-use tax that is due on all purchases from out-of-state vendors. While difficult to enforce, it is something that the consortium of states might consider. The out-of-state vendor would add up purchases by each customer and report the total to the customer and the tax department of the state where the customer files his or her income tax. The customer then would be obligated to report and pay the appropriate tax.

Local retailers need to recognize the added burden and liability exposure they would take on if they had to determine and collect another state’s sales tax. It is estimated that it would cost the state more to administer this plan than it collected.

In short, this is a lose-lose situation for Hawaii.

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