Last fall, when more than
30 states, Hawaii included, asked the U.S. Supreme Court to clarify how state taxes should apply to online retailers, the coalition headed by state attorneys general asserted that there’s no longer a justifiable legal reason to tax brick-and-mortar stores differently from online competitors.
In an encouraging move, the high court has essentially agreed, ruling last week that internet retailers can be required to collect sales taxes even in states where they have no physical presence.
The internet has changed the world of retail sales, with more and more people shopping online for the sake of low prices, wide selection and convenience of buying from home or smart phone. Also spurring the e-commerce revolution: many of those sales have been, in effect, tax-free.
In anticipation of the ruling, Gov. David Ige last week signed into law a bill stipulating that online businesses with significant sales are now subject to Hawaii’s general excise tax. While the new law will likely need tweaking, it’s a step in the right direction. It offers brick-and-mortar retailers here who have been hammered by the e-commerce revolution a fighting chance.
In Wayfair Inc. vs. South Dakota, the Supreme Court upheld a South Dakota law requiring online merchants to charge customers state sales tax if it has annual gross sales in the state of at least $100,000 or it conducts 200 business transactions a year. Hawaii’s new law, which goes into effect July 1, follows suit on that requirement.
Although South Dakota’s law served as the model for Hawaii’s, there are a few differences that could touch off challenges in the islands. For one, Hawaii’s law allows retroactive collection of taxes (dating back to the start of this calendar year.) A stand-off might be avoided by simply forgoing that collection from the year’s first half. The other matter could be more complicated.
Amid the explosion of online sales transactions, the federal government has yet to develop a simple, national formula to tax the sales and remit the revenue to the state where the customer lives. In an understandable nod tied to navigating thousands of different state and local taxing districts, the court ruling specified that small online merchants should be shielded from a too-heavy burden in tax collection compliance.
South Dakota is among two dozen states that has addressed that concern by signing on to the Streamlined Sales and Use Tax Agreement, under which states put in place a simplified sales tax system. Hawaii, which does not have a sales tax, is not a member of that group. So, it’s unclear whether the new state law will hold up to challenge.
Even so, if the 2019 Legislature must amend the new law to make it stick, it will be worth the effort as the tax collection would be a windfall for state coffers.
The Supreme Court first picked up the issue of collecting sales tax nationwide five decades ago when it decided that a catalog retailer whose only contact with a state was by mail didn’t have to collect sales tax on sales made there. Customers were tasked with paying the sales tax to the state themselves.
But observers say that practice has not panned out. Apparently, most customers have not realized they owed the tax, and few paid it. According to long-standing Hawaii law, if you buy something from a merchant who doesn’t have to pay our general excise tax and you import it into Hawaii, then you are supposed to pay the levy called the “use tax.”
Knowing that the state is already entitled to collect a tax from online shoppers may ease the pain of having to dig a bit deeper into one’s wallet to pay for an item purchased via e-commerce. What’s more, given that the new state law can bolster local brick-and-mortar businesses, which are key components in maintaining a healthy economy in Hawaii, we should
welcome it.
