Hawaii House encourages further discussion about online sales tax

In early March, the Hawaii Senate overwhelmingly approved two measures that would extend the state’s general excise tax (GET) to many online sales. The House also approved the bills, but with a caveat: It pushed back their effective dates to July 1, 2130, “to encourage further discussion.”

Economic nexus

Both bills have provisions whereby a remote business can develop a tax obligation through its economic activity in the state (economic nexus). This breaks with precedent, which holds that a state can only tax a business that has physical presence in it.

Yet Hawaii is just one of many states pushing against this physical presence limitation. South Dakota has taken its challenge all the way to the Supreme Court of the United States, which will hear arguments in South Dakota v. Wayfair, Inc. on April 17, 2018. If it ultimately loosens the physical presence limitation, states with economic nexus provisions on the books could be in a strong position to collect sales tax from out-of-state sellers.

Indeed, the Tax Foundation of Hawaii wrote in commenting on one of the bills, “Nothing the legislature enacts will change the U.S. Constitution, and the bill may face constitutional challenges if enacted. Even so, the Multistate Tax Foundation has recommended, and many states have enacted, ‘factor presence nexus’ standards saying that nexus should be found when a taxpayer has a significant dollar amount of sales activity in the state, and these standards have motivated some of the larger remote sellers to agree to collect and remit sales and use taxes on that activity” (Testimony SB 2514).

Nonetheless, the Attorney General of Hawaii is concerned that if either bill is enacted, “a taxpayer may cite to the United States Supreme Court decisions of Quill and Bellas Hess to challenge the State that the application of the general excise tax to a taxpayer with no physical presence in Hawaii violates the Commerce Clause of the United States Constitution” (Testimony SB 2890 and Testimony SB 2514).

The bills

Senate Bill 2890 provides that a business with no physical presence in Hawaii is engaged in business in the state and liable for GET if it has gross receipts on Hawaii transactions totaling $100,000 or more in the current or immediately preceding calendar year. It also clarifies that a marketplace provider — a person who sells or assists in the sale of tangible personal property in Hawaii and who provides customer service, processes payments, and controls fulfillment — is the seller of the property responsible for collecting and remitting the GET.

As introduced, the measure would take effect July 1, 2018. As amended by the House Committee on Finance, it wouldn’t take effect until July 1, 2030.

Senate Bill 2514 provides that a business is engaging in business in Hawaii for the purpose of the GET law if, in the current or immediately preceding calendar year, it has $100,000 or more in gross income, or 200 separate transactions, from the sale of tangible personal property delivered in Hawaii, services used or consumed in the state, or intangible property used in the state (in the first version of the bill, the threshold was $5,000). It doesn’t include a provision on marketplace providers.

The bill approved by the Senate would “apply to taxable years beginning after December 31, 2017.” However, as with SB 2890, the House Committee on Finance pushed the effective date back to July 1, 2030.

The Retail Merchants of Hawaii supported both measures, as similar groups have supported similar measures in other states.

No group spoke out against SB 2514, but Amazon, Internet Association, Internet Coalition, NetChoice, and TechNet oppose SB 2890, which would impose a tax on marketplace providers.

For both bills, the Hawaii Senate disagrees with the changes made by the House. What happens next is anyone’s guess. It could be the Legislature will wait to see how the Supreme Court acts.

Check out this infographic to learn more about South Dakota v. Wayfair, Inc. and its possible implications.