Hawaii reconsiders taxing out-of-state sales
Not for the first time, the Hawaii Legislature is considering imposing its general excise tax on businesses without a physical presence in the state. Four measures seeking to tax remote sales were considered in 2017, though none were enacted.
Under Senate Bill 2508, introduced Jan. 19, 2018, certain persons that systematically and regularly engage in business in Hawaii would be considered to have nexus, a connection substantial enough to trigger a tax obligation. This would include persons with sales or rental income in Hawaii.
Only businesses making a certain amount of income or conducting a certain number of transactions in Hawaii during a given year would trigger nexus. However, as introduced, the measure doesn’t specify how many transactions or how much income that would be.
If enacted, the bill is set to take effect July 1, 2018. It’s currently under review in the Senate Judiciary Committee.
Senate Bill 2514, also introduced Jan. 19, would impose a tax obligation on out-of-state companies that do a certain amount of business in the state.
According to the text of the bill, any person selling tangible personal property (TPP), products transferred electronically, or services for delivery into Hawaii, “who does not have a physical presence in the State,” would be required to remit the general excise tax “as if the person had a physical presence” in Hawaii, provided either of the following conditions are met in the prior or current year:
- The person had gross revenue in excess of $5,000 from sales of services, TPP, or products transferred electronically for delivery into Hawaii
- The person made 200 separate sales of services, TPP, or products transferred electronically for delivery into Hawaii
The measure is currently under review in the Senate Ways and Means Committee. If enacted as written, it would apply to taxable years after Dec. 31, 2017.
Economic nexus challenges physical presence precedent
Both bills under consideration base nexus on a business’s economic ties to the state, challenging the precedent that a state can only compel businesses that are physically located in the state to collect and remit sales tax.
States have long chafed at the physical presence limitation, which has been challenged numerous times — perhaps most famously in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the seminal Supreme Court decision that most recently upheld the physical presence standard.
Quill was decided before the birth of ecommerce. Many states now insist, as South Dakota stated in its economic nexus law, that the inability to collect sales tax revenue from remote sellers is “seriously eroding the sales tax base.” In the absence of congressional action on this issue, states have been broadening the way they define nexus and looking for a way to challenge Quill. They may have found it in economic nexus.
For the first time since Quill was decided, the Supreme Court on Jan. 12, 2018, has agreed to hear a challenge to it. South Dakota v. Wayfair, Inc. centers on a 2016 South Dakota economic nexus law similar to those now under consideration in Hawaii. The question presented is, “Should this Court abrogate Quill’s sales-tax-only, physical-presence requirement?”
The Supreme Court is expected to come to a decision in June 2018. As it deliberates the issue, states like Hawaii and New York are pressing ahead with nexus-expanding legislation of their own. No matter what the Supreme Court decides, states are unlikely to abandon their efforts to increase revenue by taxing remote sales.
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