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The Honolulu Advertiser
Posted on: Thursday, February 13, 2003

Online sales tax collection catching up gradually

By Sean Hao
Advertiser Staff Writer

Efforts to charge consumers taxes for online purchases are gaining momentum.

Potential revenue for Hawai‘i

The amount Hawai‘i has lost (and is estimated to lose) in tax revenue from Internet sales.

2001 $105.1 million
2006 $359.2 million
2011 $438.3 million

Source: Center for Business and Economic Research, University of Tennessee.

Several major online retailers started charging taxes on sales to Hawai'i customers this month. Measures are also breezing through both chambers of the Legislature to include Hawai'i in a coalition of states developing a unified sales tax system, one that would make it easier to collect levies on Internet sales.

The myriad taxes applied to sales on the Internet have been a key complaint among online retailers who have avoided collecting most state taxes.

This month, however, a group of retailers including Wal-Mart, Toys "R" Us and Target began charging customers local sales taxes where the retailers have brick-and-mortar operations. Target, which does not have a Hawai'i store, is not charging local customers state taxes on Web purchases.

The large retailers said the move to charge the sales taxes helps them integrate their online and store operations by making product returns and exchanges seamless, among other factors. "For us to do that, where we have a physical presence, we are charging the sales tax in that area," said Susan McLaughlin, a spokeswoman for Toys "R" Us.

The move was coordinated by eight to 10 retailers under an agreement signed with 37 states and the District of Columbia last year. In exchange, participating stores will not be liable for previously uncollected taxes.

Under current laws, catalog companies and pure online retailers need to charge sales taxes only in states where they have operations, such as warehouses and distribution facilities. Retailers with nationwide store networks, contending that such provisions put them at a disadvantage, hope to persuade states to level the playing field for all retailers selling online.

Just how much in taxes the states can expect from these large retailers is unclear. But overall online sales are estimated at $79 billion, or 3 percent of all retail sales, according to Forrester Research.

According to a study by the University of Tennessee, states lost $13.3 billion in tax revenues in 2001 because of e-commerce. Hawai'i's share was estimated at $105.1 million.

Many cash-strapped states are taking the initiative to capture online sales revenues through what is called the Streamlined Sales Tax Agreement. In Hawai'i, bills to join that effort have met with little opposition in the House or Senate.

The legislation would allow the state Tax Department to negotiate with other states to devise a standard sales tax rate. The standard rate would make it easier for online retailers to collect taxes and distribute them to the states. The agreement would take effect once 10 states adopt a common sales tax, although none have done so yet.

Brian Schatz, D-25th (Makiki, Tantalus), said the goal is to design a tax system that's more closely aligned with other states.

As for taxing Internet sales, "Our preference is to let the marketplace work those issues out," he said. "This is not an area where Hawai'i should take the lead."

So far Congress has declined to establish an Internet sales tax because of concerns that it would stifle the emerging online industry. But according to a survey released last week, online sales taxes would have little effect on online sales growth if applied universally.

That's because only 9 percent of online shoppers surveyed based their Internet purchasing decisions on whether a retailer charged sales taxes, said Ken Cassar, senior analyst with Jupiter Research, which issued the report.

He said Congress and state legislators are under increasing pressure to tap the Internet for tax revenues.

"The collection of taxes is no longer an if, but a when," he said. "As (lawmakers) are faced with the decision of raising income taxes or finding ways to raise money from existing taxes, they're going after ways of raising money from existing taxes."

The Associated Press contributed to this report.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.