Hawaii taxes out-of-state sellers as of July 1, 2018

Update 7.16.2018: Hawaii has amended and superceded Announcement No. 2018-10, issued June 27, 2018. The state will no longer seek to retroactively administer Act 41 as explained in the post below.

The amended notice reads: "To avoid any constitutional concerns, the Department will not retroactively administer Act 41. Accordingly, taxpayers who lacked physical presence in Hawaii prior to July 1, 2018, but who met the $100,000 or 200-transaction threshold in 2017 or 2018, will not be required to remit GET for the period from January 1, 2018 to June 30, 2018."

Taxpayers who lack physical presence in Hawaii and meet the $100,000 or 200-transaction threshold for 2017 or 2018 are subject to GET as of July 1, 2018.

Shortly before the Supreme Court of the United States (SCOTUS) ruled physical presence is no longer a requirement for sales tax collection, Hawaii enacted Senate Bill 2514 (Act 41), an economic nexus measure taxing businesses with a certain amount of economic activity — but no physical presence — in Hawaii. The Hawaii Department of Taxation recently confirmed the law took effect July 1, 2018, and applies to taxable years beginning after December 31, 2017.

Hawaii levies a general excise tax (GET) on “all businesses and other activities ‘in the State’” (Haw. Rev. Stat § 237-13). Prior to the enactment of SB 2514, says the department, “the law was … unclear as to the circumstances under which a business that lacks a physical presence in Hawaii would satisfy the ‘in the State’ requirement.”

The department claims Act 41 removes the ambiguity. The measure holds that a retailer is engaging in business in the state if in the current or preceding calendar year that retailer:

• Has gross income of $100,000 or more from the sale of tangible personal property delivered in the State, services used or consumed in the State, or intangible property used in the State; or
• Has entered into 200 or more separate transactions involving tangible personal property delivered in the State, services used or consumed in the State, or intangible property used in the State

This may have removed ambiguity in the eyes of the Hawaii Department of Taxation, but at the time of enactment, Act 41 was at odds with the long-standing physical presence precedent.

SCOTUS held in Quill Corp. v. North Dakota (1992) that North Dakota was placing “an unconstitutional burden on interstate commerce” by taxing Quill, an out-of-state mail order house with no physical presence in North Dakota. Although states have been pushing against the physical presence limitation for years, the Quill ruling stood until June 21, 2018, when SCOTUS ruled in South Dakota v. Wayfair, Inc. that “the physical presence rule of Quill is unsound and incorrect.”

Retroactive application of the law

Like Hawaii Act 41, the South Dakota law (SB 106) examined by SCOTUS has a threshold of $100,000 in gross revenue or at least 200 in separate transactions. However, there is a notable difference between the economic nexus laws of Hawaii and South Dakota: SB 106 prohibits retroactive application of the law. Hawaii’s law applies to taxable years beginning after December 31, 2017.

During oral arguments for South Dakota v. Wayfair, Inc., the justices asked several questions about retroactivity. The final opinion of the court notes: “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce,” one of which is that “the Act ensures that no obligation to remit the sales tax may be applied retroactively.”

Hawaii’s law has no such clause. Because the law applies to taxable years beginning after December 31, 2017, the department explains, “certain taxpayers may not have filed periodic returns between January 2018 and June 2018, but owe GET for part or all of that time period.”

The Department of Taxation says it will allow “‘qualifying taxpayers,’ to report and pay GET on ‘catchup income’ (income recognized before July 1, 2018 for the tax year beginning between January 1, 2018 and June 30, 2018), without penalty or interest.” It remains to be seen whether that’s enough to prevent a legal challenge.

Additional information, including FAQs, is available in Announcement No. 2018-10. Update 7.16.2018: See updated announcement here.

Learn more about South Dakota v. Wayfair, Inc., and its potential impact on businesses here.