Tax from Net sales sought
By Sean Hao
Advertiser Staff Writer
Faced with a $152 million budget shortfall, state officials are looking to clamp down on taxes lost on Internet sales to Mainland companies.
Last week Hawai'i officially joined a coalition of states developing a unified sales tax system, which would make it easier to collect levies on Internet sales. Gov. Linda Lingle signed the bill last month allowing the state to participate in what's called the streamlined sales tax initiative, though it could take years before a common tax code is in place.
In a more immediate effort to address the issue of taxes lost because of the Internet, the Department of Accounting and General Services and the Department of Taxation said it's exploring ways to better coordinate so that companies that do business with the state pay their fair share of taxes. It also wants to put more pressure on Mainland companies to voluntarily pay Hawai'i's general excise tax.
It's an acute issue now because of the state's weak economic position — Gov. Linda Lingle recently instructed all state departments to cut nonfixed costs by 20 percent in the July-September period.
"Revenue is the fuel of the engine of state government," said Kurt Kawafuchi, director for the state Department of Taxation.
The moves also are motivated in large part by the prospect of lower tax collections in the future as more sales increasingly migrate to the Internet. According to a study by the University of Tennessee, the problem for states is not small, with losses to e-commerce totaling $13.3 billion in tax revenues in 2001. Hawai'i's share was estimated at $105.1 million — a figure forecast to grow to $438.3 million in 2011.
Under law, catalog companies and pure online retailers need to charge sales taxes only in states where they have operations, such as warehouses and distribution facilities.
To counter that, Hawai'i has what's called a use tax, which requires that people pay a tax — about 4 percent — on items purchased from companies that don't collect general excise taxes. However, Internet retailers that sell goods to Hawai'i consumers aren't required to let the state know who buys its goods, so state officials have a difficult time enforcing the tax.
"It's tough to go after all the customers, or know who all the customers are because the Internet sellers are beyond the reach of the state," Kawafuchi said.
Congress has declined to establish an Internet sales tax that would help states tap into that revenue because of concerns that it would stifle the emerging online industry. However, cash-strapped states such as Hawai'i are looking to take matters into their own hands.
One option state officials are exploring would involve requiring businesses to volunteer to pay the general excise tax — which could be as much as 4.16 percent — as a condition for winning a state contract.
"The people who are going to be doing business in Hawai'i, we want to find a way to encourage them to pay the excise tax," said Russ Saito, state comptroller. "If someone voluntarily signs a contract saying, 'I'll pay the general excise tax,' they have a responsibility to pay the tax."
The legality of such a move has yet to be resolved.
"This is an issue we're definitely going to look at," Kawafuchi said. "It's a privilege to do business with the state and for that right, could we ask them to pay the tax?
"We want to seek the advice of the attorney general to see if we could proceed."
Kawafuchi said the tax department also is stepping up efforts to settle overdue tax payments with taxpayers and is targeting egregious tax avoidance cases to try and convince more people to stay current on their taxes.
The collection effort is significant because what the state is due stood at $303 million at the end of fiscal 2002. The amount is up significantly from $236 million at the end of fiscal 2001. Figures for fiscal 2003, which ended Monday, weren't available last week.
In the longer term, state officials hope negotiations with other states to devise a standard sales tax code will increase collections in the future. Standard tax rates would make it easier for online retailers to collect taxes and distribute them to the states.
The new code would eliminate complicated tax codes present nationwide, which, for example, might tax large marshmallows as food and small marshmallows as a snack in one area, while both could be taxed the same in another area. Such complexities are a prime reason why Internet sellers now aren't required to conform to each state's tax code.
Ultimately, Hawai'i would have to pass laws revising its tax code to conform with the streamlined sales tax initiative. However, that won't necessarily mean an end to Hawai'i's complicated general excise tax.
"By itself, it wouldn't necessitate a change away from the general excise tax," Kawafuchi said.
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
