Collecting taxes still tricky for Web-based purchases
QUESTION: Internet-based retailers without physical operations in Hawaii typically don’t charge and remit the state’s 4 percent general excise tax. How big of a priority has this revenue leak become for the state Department of Taxation given the budget deficit?
ANSWER: The collection of state tax on purchases made over the Internet is important to the state. However, legal hurdles have made it difficult for the state Department of Taxation — and most other states — to assess and collect these taxes on Internet purchases.
Q: Is paying the GET a responsibility of the online retailers, Hawaii consumers or both?
A: Several years ago the U.S. Supreme Court ruled that states could not impose state tax on catalog and online purchases unless the retailer had a physical presence in the state. As a result, because the state cannot legally impose the general excise tax on many Web-based sellers, the tax falls onto the consumer. The tax imposed on the consumer who purchased the goods is called a “use tax,” and the rate is similar to the 4 percent general excise tax rate. The Honolulu County 0.5 percent surcharge (for rail) would also apply for Honolulu residents.
Q: Do any consumers voluntarily pay the tax on their purchases?
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A: We have people reporting use tax; however, we cannot determine what the use tax is for.
Q: If a consumer wanted to pay the use tax on out-of-state purchases, how would they do it?
A: They could report it on Form G-26 “Use Tax Return — Imports for Consumption.”
Q: Do consumers face penalties for not paying the use tax on such purchases?
A: Penalties could possibly be imposed for nonpayment of use tax, but the Catch-22 is that we have no independent method of confirming that a purchase was made online or whether they paid the appropriate taxes through the retailer unless that information was provided. This then leads into concerns about exposing people’s purchasing habits.
Q: What approaches have been made to have out-of-state online retailers pay the tax?
A: Subsequent to the Supreme Court case, several states including Hawaii have attempted to develop legislation to address the growing number of Internet-based sales. Different approaches have emerged. In 2009 the state Legislature adopted, and then-Gov. (Linda) Lingle vetoed, laws which would have established the basis for taxing online retailers with affiliate marketing agreements and agreeing to adopt the Streamlined Sales Tax Project.
Q: Two pending proposals at the Legislature this year attempt to fix the leak: House Bill 1183 and Senate Bill 1355. Does the department prefer a particular bill?
A: The state House is supporting a bill which would require the online retailers to pay the general excise tax or be forced to share details about their sales to island residents. While we support the House’s efforts to collect taxes for the state, we do have some concerns about exposing residents’ purchasing habits. The state Senate is advocating for the SSTP proposal again this year. Although this approach is very similar to our existing use tax law, it would require us to give up some control over our state tax laws and implement numerous revisions.
Q: Can you add a final thought on this subject?
A: Regardless of the approach chosen by the state Legislature, the department believes that compliance by taxpayers is best achieved by making the law and implementation simple and easy.
— Interviewed by Andrew Gomes
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Editor’s note: “Akamai Money” seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put “Akamai Money” in the subject line.
