Hawaii considers use tax reporting for non-collecting sellers

Like many states, Hawaii is feeling the impact of ecommerce on its purse. It may be ready to do something about it in 2018. The Hawaii Legislature is currently considering measures that have seen some success in increasing remote sales tax revenue in other states.

Online sellers with no physical presence in a state do not have nexus, or an obligation to collect that state’s sales tax. While Hawaii doesn’t have a sales tax, it does impose a general excise tax (GET) on companies doing business in Hawaii. And just as sales tax generally can’t be imposed on companies that don’t have nexus in a sales tax state, GET can’t be imposed on businesses that don’t have nexus with Hawaii.

This physical presence requirement was upheld by the Supreme Court of the United States in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), prior to the birth of ecommerce. As online shopping has become more the norm than the exception, Quill has had a growing impact on state tax revenue. Consequently, numerous states have broadened their nexus laws to challenge the physical presence requirement upheld by Quill. In some respects, economic nexus policies are proving to be the most effective.

Economic nexus

Economic nexus laws vary by state but typically impose a tax collection obligation on sellers making a certain number of sales transactions or doing a certain amount of business in the state during a 12-month period. States that have adopted economic nexus policies include Alabama, Indiana, Maine, Mississippi, South Dakota, Tennessee, and Wyoming.

The constitutionality of these policies is being challenged in several states, and on January 12, 2018, the Supreme Court agreed to hear one such case that will cause it to reconsider the physical presence requirement in Quill: South Dakota v. Wayfair, Inc. The decision, expected in June of this year, could dramatically alter how states can tax remote sellers. States with economic nexus laws similar to South Dakota’s may be particularly affected, though there’s no way of knowing how or what the Supreme Court will decide.

As the Supreme Court examines South Dakota’s economic nexus law and Quill’s physical presence standard, the Hawaii Legislature is looking at implementing economic nexus in The Aloha State. Senate Bills 2508 and 2514, introduced January 19, would impose a tax obligation on companies that generate a certain amount of business or conduct a certain number of transactions in Hawaii. Read more about these bills here.

Use tax notice and reporting

Expanding nexus isn’t the only way states are looking to increase remote tax collections. Requiring non-collecting sellers to comply with specific use tax notice and reporting requirements is also proving effective. The Supreme Court has already weighed in on these policies: In December 2016, it let Colorado’s use tax notice and reporting requirements stand. Since then, several other states have adopted similar policies, including Louisiana, Pennsylvania, Washington, and Vermont.

In January 2018, Amazon and Etsy started complying with the Washington law. Rather than adhere to onerous use tax notice and reporting requirements, both large marketplace facilitators decided to collect and remit Washington tax on behalf of their third-party sellers.

Perhaps noting the success of the Washington law, Hawaii lawmakers introduced House Bill 2234 and its companion Senate Bill 2871 in January 2018. Like their counterparts in other states, these would give a choice to remote sellers, referrers, and marketplace facilitators with no physical presence in Hawaii, or who make sales on behalf of out-of-state sellers: Either collect and remit Hawaii general excise tax, or adhere to use tax notice and reporting requirements.

Notice requirements

The measures would require non-collecting remote sellers and marketplace facilitators to post a conspicuous notice on their marketplaces, platforms, websites, catalogs, etc., informing Hawaii purchasers that a) GET is due on certain purchases, b) Hawaii requires the purchaser to file a GET return if GET isn’t collected at the time of sale, and c) the notice is required by law.

In addition, such sellers would be required to inform each consumer at the time of sale that GET is not being collected or remitted and the consumer may be required to remit GET directly to the Department of Taxation. Instructions for obtaining additional information from the department must also be provided.

Non-collecting businesses may also be required to inform consumers that if they don’t remit GET to the state, “the seller may be required to provide information to the purchaser and the department of taxation about the purchaser’s potential GET liability.”

Specific requirements would apply to referrers, defined a person “who contracts or otherwise agrees with a seller to list or advertise for sale one or more items in any medium, including a website or catalog; receives a commission, fee, or other consideration from the seller for the listing or advertisement; transfers … a purchaser to a seller or an affiliated person to complete the sale; and does not collect receipts from the purchasers for the transaction.”

Reporting requirements

The measures would also impose information reporting requirements on non-collecting marketplace facilitators, referrers, and sellers.

Marketplace facilitators and sellers would be required to provide a report to consumers, no later than February 28 of each year, that includes:

• A statement that the seller didn’t collect GET and that the consumer may be required to remit it directly to the Department of Taxation
• A list, by date, of the type of product purchased or leased by the consumer from the seller during the immediately preceding calendar year     
• Instructions for obtaining additional information     
• A statement that the seller is required to submit a report to the Department of Taxation stating the total dollar amount of the consumer’s purchase

Similar reporting requirements would be imposed on referrers.

Non-collecting marketplace facilitators and sellers would also be required to file a report of consumer purchase activity with the Department of Taxation by February 28 of each year. Such reports must include:

• The consumer’s name, billing address, and the last known mailing address (if different)
• The shipping address for each product sold or leased to the consumer for delivery into Hawaii during the immediately preceding calendar year       
• The total dollar amount of all such purchases by the consumer

Referrers, on the other hand, would have to provide the department with a list of sellers who received the referrer’s notice. For additional details, follow the links above to the text of the bills.

2018: New year, new tax policies?

The Hawaii Legislature considered several ways to increase tax collections from remote sellers in 2017, but all measures died. Since then, the Supreme Court has accepted a challenge to Quill and the nation’s largest marketplace provider is collecting and remitting tax on third-party sales in Washington. It will be interesting to see if these events influence the Hawaii Legislature this session.

Yet no matter what happens this year in Hawaii, it and other states are unlikely to give up on taxing remote sales. Learn more about their efforts at Sales Tax 360.