Hawaii lawmakers push to increase remote sales tax collections
- Feb 10, 2017 | Gail Cole
Update, 3.9.2017: The Senate passed SB 620, as amended; it is now under consideration in the House, where a committee has recommended deferring its companion, HB 345. The reporting requirement set forth in HB 398 is being favorably received in the House. The Simplified Sellers Use Tax Remittance Act (HB 1413) has support in the House, but there has been no action on it in a month.
Many Hawaii lawmakers are frustrated by the state’s inability to tax sales made by out-of-state retailers. Although the exact figure is unknown, legislators on both sides of the aisle agree that millions in tax revenue are currently lost to untaxed remote sales. It is time, some say, for the state to go after that revenue. To that end, four bills have been introduced in the Legislature this session.
Use tax notification requirement
Hawaii House Bill 398 would impose a use tax notification requirement on all noncollecting out-of-state sellers making sales of tangible personal property in Hawaii. Under it, purchasers must be informed annually (by January 31) that the state “requires a use tax return to be filed and use tax paid on certain purchases made by a purchaser in the State from the out-of-state retailer or vendor.” Sellers must also provide, if available, the dates and amounts of each purchase, the category of the purchase, and whether the purchase is exempt or taxable in Hawaii (if known). Additional requirements are outlined in the text of the bill.
Hawaii residents are supposed to voluntarily remit use tax to the state when tax wasn’t collected at the time of sale, but as in most states, few do.
House Bill 345 and its companion measure Senate Bill 620 seek to expand the state’s definition of nexus — the substantial connection between a state and business that enables the state to impose a tax collection obligation on the business. Under both bills, an out-of-state company must collect and remit Hawaii tax if it engages in activities with the object of gain or economic benefit (direct or indirect), without regard to having a physical presence in the state, and made at least $100,000 in sales in Hawaii during the prior calendar year.
Casual sales and certain other activities outlined in the bills are excluded from taxation.
Simplified sellers use tax remittance
House Bill 1413 would create the Simplified Sellers Use Tax Remittance Act to encourage voluntary collection by noncollecting remote retailers. Like Alabama’s Simplified Seller Use Tax Act, on which Hawaii’s bill is modeled, it is a voluntary program that would allow eligible sellers to collect, report, and remit a simplified sellers use tax at a rate of 4 percent, instead of the general excise tax (GET) or use taxes otherwise due.
Collection of the simplified sellers use tax would relieve the seller of any additional GET or use tax liability on the transaction. As further enticement, a discount of 2 percent on the properly collected tax would be offered to businesses that collect and remit the tax due in a proper and timely manner. Additional details are explained in the legislation.
State vs. federal solutions
For years, members of the Hawaii Legislature who favor taxing certain out-of-state sellers have been hoping for a federal solution: Either Congress could grant states the authority to tax remote sales, or the Supreme Court of the United States could overturn its ruling in Quill Corp. v. North Dakota, the pivotal 1992 decision holding that a business must have a substantial (physical) connection with a state for a state to impose a tax obligation on it.
But Congress hasn’t acted, and the Supreme Court has not reviewed Quill (the right case may not have presented itself). Many states are therefore pushing the boundaries of their taxing authority by broadening the definition of nexus. Under affiliate nexus, ties with in-state affiliates create a connection substantial enough to merit taxation. Under click-through nexus policies, a substantial connection is created when a certain amount of business is generated by referrals from in-state websites. And under economic nexus, a state’s right to tax a company is based on the amount of business it conducts in a year (e.g., making 200 separate sales transactions or $100,000 in sales).
These state policies can be challenged, and they often are. For this and other reasons, some Hawaii lawmakers are hesitant to move forward on this issue (others simply oppose taxing remote sales). However, there may be new motivation for Hawaii to enact some sort of online sales tax or use tax notification policy this year: Amazon.
As House Representative Choy has noted, the ecommerce giant has “struck deals with states that had passed laws to try to collect online taxes, even if those laws were later overturned by the courts.” Come March, Amazon will collect tax in 36 states (as of this writing). Hawaii isn’t one of them. Would it be, could it be, if Hawaii enacted one of the bills currently under consideration? Perhaps. Perhaps not.
Tax automation software can’t predict where Amazon will next voluntarily collect tax. It can help businesses of all sizes in all states manage sales and use tax compliance. Learn more.