Lawmakers are advancing an assortment of bills this year to begin collecting state excise taxes that are owed for online sales of retail products, a step that one lawmaker estimates might haul in an extra $80 million a year for the state treasury.
There are no official estimates of how much the state loses each year because of untaxed online sales, so no one is sure whether that $80 million estimate by state Rep. Isaac Choy is accurate. However, lawmakers agree many millions of dollars are at stake.
A national study in 2009 by researchers at the University of Tennessee calculated that Hawaii would miss out on $60 million in untaxed online sales in 2012, mostly involving business-to-business transactions. The volume of online retail sales made directly to consumers has soared since then, meaning the stakes could be even higher for state government now.
Dozens of states have passed laws in recent years to apply state taxes to internet sales, but most of those efforts have been challenged in court. The U.S. Supreme Court has ruled that online retailers are not required to pay state sales taxes unless they have a physical presence in that state.
That means that even though online retailers have significant sales to Hawaii customers, they do not generally file and pay excise taxes in Hawaii. And while online buyers in Hawaii technically have a legal obligation to report their online purchases and pay tax on them, almost no one does.
House Finance Chairwoman Sylvia Luke said lawmakers had hoped the federal government would create a national system to help state and local governments collect taxes on internet sales.
That hasn’t happened, but a new push to try to capture those lost taxes was prompted this year by voluntary agreements that online giant Amazon.com recently reached with 36 states, she said. Amazon agreed to collect taxes for those states, but Hawaii was not among them.
Choy (D, Manoa-Punahou-Moiliili) said he has proposed internet sales tax bills year after year and has been frustrated that nothing has been passed. He said Amazon struck deals with states that had passed laws to try to collect online taxes, even if those laws were later overturned by the courts.
Hawaii tax collections have been mostly flat so far this year, which has also spurred lawmakers to look more aggressively for new sources of revenue. And in this case they are being encouraged by the local business community.
Tina Yamaki, president of the Retail Merchants of Hawaii, said in written testimony it is unfair to require that traditional stores pay the excise tax while online retailers don’t pay.
“This puts our local retailers at a disadvantage as this effectively makes products purchased at brick-and-mortar stores more expensive than products purchased online,” she said. “Many of our retailers statewide are already operating on a thin margin, especially mom-and-pop stores.”
She argued that taxing internet sales “would provide e-fairness by leveling the playing field for businesses in our community.” Yamaki said her organization has 200 members representing more than 2,000 storefronts, and said the retail industry in Hawaii employs about 25 percent of the local labor force.
Not everyone agrees. House Republican Leader Andria Tupola argued on the House floor last week that the state could instead “level the playing field” by eliminating the excise tax for local businesses.
“I think that because we always talk about cost of living, so many people rely on online sales to kind of offset that,” Tupola said.
House Republican Floor Leader Gene Ward last week described one of the bills that would result in the collection of taxes on internet sales as the “Big Brother Retail Bill.” Ward predicted the courts will eventually decide whether the state has the authority to force online retailers to pay Hawaii taxes.
In the state Senate, Ways and Means Committee Chairwoman Jill Tokuda said, “We definitely have to explore all options, so I think it’s something everyone will be taking a look at again. So we’ll see.”
One measure being considered by lawmakers would require out-of-state retailers to submit an annual report to the Tax Department detailing how much they sold online to Hawaii customers. That measure, House Bill 398, would also require online retailers to send notices to all online buyers warning them that they are required under state law to pay the state excise tax on each sale.
That bill mimics the approach used by Colorado. After the Colorado law was passed, online retailers agreed to collect taxes on internet sales on behalf of the state and deliver them to Colorado authorities rather than filing the required reports and notices required under the law.
That measure will be heard by the House Consumer Protection and Commerce Committee at
2 p.m. today in Room 329 of the state Capitol.
The House Consumer Protection Committee has already heard House Bill 345, which would try a different approach. That bill would define online companies with sales of $100,000 or more in Hawaii as businesses with a “presence” in this state, a designation designed to trigger requirements that they collect and file excise taxes on their sales here.
That measure was introduced by House Speaker Joe Souki and House Consumer Protection Chairman Angus McKelvey, and McKelvey said Monday he plans to give that bill preliminary approval in his committee Monday.
The Senate Committee on Commerce, Consumer Protection and Health is scheduled to hear a similar measure, Senate Bill 620, today at 9 a.m. in Room 229 at the Capitol.
The Chamber of Commerce of Hawaii, which represents about 1,600 Hawaii businesses, testified it supports HB 345 because it would help to “provide fairness and equity for all businesses.”
Another measure dealing with the same issue is House Bill 1413, which would establish a new “simplified sellers use tax remittance program” that out-of-state merchants could use to voluntarily collect Hawaii taxes from their online customers and remit them to the state. The sellers would then be allowed to keep 2 percent of what they collect on behalf of the state.
HB 1413 is modeled after a law passed by Alabama and was approved by the House Economic Development and Business Committee last week. The measure now goes to the House Finance Committee for further consideration, but the committee has not yet scheduled a hearing.
State Tax Director Maria Zielinski did not respond Monday to a request for comment on the issue.