Posted on: Friday, July 4, 2003
State may take buying online
By Sean Hao
Advertiser Staff Writer
State officials said this week they hope to award a contract soon to allow agencies to buy needed goods and services via the Internet, to save time and money in a tight budget.
The electronic procurement system could be up and running by next year and have profound repercussions on local businesses that sell to the state by adding competition from Mainland vendors.
Several local companies have expressed concerns about lost business since the University of Hawai'i adopted a similar system last year.
"We don't have producers. We don't have manufacturers," said Larry Nelson, director of client services at the Hawai'i Government Marketing Center, which lobbies for small businesses seeking government work. "We're a state of middlemen."
If the state proceeds, Nelson said, "That will deal a blow to small business."
At issue is whether the state's priority should be getting products and services at the lowest cost, or paying more to support Hawai'i businesses that employ local residents and pay state taxes.
That is a policy issue for the Legislature to decide, said Aaron Fujioka, state procurement office administrator. As it stands, it is the responsibility of state agencies to find ways to save money while improving the transparency of purchases — goals the Internet encourages, he said.
The state planned to have a vendor chosen for the new Internet-purchasing system, but the decision was delayed by the large number of companies competing for the contract, Fujioka said. He said a decision should come within a few months.
State government procurement practices, like federal ones, can have a powerful impact on the economy. The State Procurement Office estimates that an online bid system covering contracts of up to $100,000 would award 48 percent of all state contracts. But these represent only 5 percent of state money spent, so automating the process would save significantly on labor, Fujioka said. Many smaller contracts are awarded after manually soliciting bids by phone or fax.
UH last year started using an online request-for-quote system called SuperQUOTE to handle purchases of up to $25,000. The system, developed by New York-based CommercePoint Inc. (which was founded in Hawai'i), also is being used by the state Department of Education, TheBus and the state Judiciary.
CommercePoint says using SuperQUOTE results in savings of 11 percent to 20 percent on purchases, and generates an average of 4.2 quotes per request.
But if local businesses cannot compete with Mainland bidders, those savings could be offset by lost jobs and tax revenue, said Wayne Christiansen, president for Isys Corp. in Honolulu, a provider of computer and video equipment and services to the state.
"This is not the easiest place to do business," Christiansen said. "The bigger companies on the Mainland can, with little effort, put a bid in there, and that's it.
"They may be saving money, but I think it may hurt the economy. My concern is that these things aren't being included in the equation," he said.
Tax disadvantage
In addition to relatively high costs for labor, shipping, health insurance and other overhead, local businesses also must pay Hawai'i's general excise tax. Catalog and other companies that sell online pay Hawai'i taxes only if they have operations in the state, such as warehouses and distribution facilities.
It isn't easy to gauge whether a particular Internet vendor should be paying local taxes, and allowing state agencies to buy more goods online could exacerbate the problem.
On the other hand, Fujioka said state officials are exploring ways to use the planned Internet-based system to better track vendors who do business with the state, which could improve tax collections.
To help level the playing field for local companies, legislators passed a law in 1999 that requires adding 4 percent to bids from Mainland businesses not subject to Hawai'i taxes i but only for state contracts valued at $25,000 or more, Fujioka said.
Another suggestion to help local businesses bidding on state contracts has been to exempt them from the general sales tax, but that could lead to lower tax collections and worsen the state's $152 million budget shortfall.
"It seems unfair to me that local companies have to submit a bid that includes a tax that Mainland companies don't have to pay, said Rep. Brian Schatz, D-25th (Makiki, Tantalus). Schatz said the system discourages businesses that want to bid on state contracts from having operations in Hawai'i.
"It's something we need to try and fix," said Schatz, chairman of the committee on economic and business concerns. "The objective is to level the playing field."
Others already online
UH, which started using SuperQUOTE early last year, is not subject to state procurement law.
The university's goal, said UH controller Russell Miyake, is an automated, paperless bid solicitation process that saves on labor, results in lower prices and creates a more open, competitive bidding process.
With SuperQUOTE, buyers can solicit bids for goods and services on the Web. An e-mail is sent to registered vendors notifying them of the bid request, based on the category of the item sought. If a bid is accepted, the winner pays a fee to CommercePoint of 0.5 percent of the contract value.
Both the DOE and Judiciary are using SuperQUOTE on a trial basis. Fujioka said he urged both agencies to use the system with caution, because the service was selected by UH through a noncompetitive bid.
"It's the quickest and most efficient way we know to solicit quotes from the most vendors," said Jonathan Wong, purchasing and specifications specialist for the state Judiciary. "For the few items we obtain through the system, it looks like prices are equal or lower than traditional fax or telephone inquiries to three vendors."
The Judiciary said it might take the 4 percent tax on state companies into consideration when awarding bids. The university said it considered and rejected the idea of offering local venders a bidding preference to offset taxes because it would violate federal law and not result in the best value for its limited resources.
According to CommercePoint, factoring in the 4 percent general excise tax would have led to contracts awarded to only 57 additional local companies, out of a total 2,649 bid awards conducted through SuperQUOTE.
The fact that tax liability paid by local vendors does not weigh significantly on their ability to compete with Mainland vendors could offer "hard evidence that it's more costly to do business here than in Muncie, Ind.," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.
Gov. Linda Lingle "needs to come forward with a plan for the next legislative session that begins to erode the higher cost of doing business," Kalapa said.
"That's one of the elements that they need to address in improving the business climate."
Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.
