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The Honolulu Advertiser
Posted on: Thursday, December 1, 2005

Tax-free Web deals forever? Don’t count on it

By Greg Wiles
Advertiser Staff Writer

GOT A QUESTION?

Got a question about financial matters? Contact Akamai Money columnist Greg Wiles at 525-8088 or gwiles @honoluluadvertiser.com.

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Q. I'm buying more of my holiday gifts on the Internet this year. I notice some retailers charge sales taxes and others don't. Why is this?

A. In most cases, you can count on paying sales taxes if the retailer has a physical presence such as a store or a warehouse here. In legal parlance, retailers that have a "nexus" locally need to collect and remit the tax to the state.

Therefore, expect to be presented with a tax bill for your purchases at department store Macys.com or bookseller Borders.com, both of which operate stores here. The same goes for Barnes & Noble.com, Nordstrom.com and Sears.com.

You won't be hit with a levy while buying a Michael Graves-designed tea kettle at Target Corp. or a Hawaiian-music CD from Web-only retailer Amazon.com. Besides Target, the second-largest U.S. discount retailer, national chains without stores in Hawai'i include Victoria's Secret, No. 1 offices supply retailer Staples, moderate-priced department store Kohl's, and housewares retailer Bed Bath & Beyond.

For example, if someone orders a 3-carat diamond brace-let from Seattle-based BlueNile.com, they only pay a sales tax if they live in Washington state. If they bought the same bracelet in Hawai'i from a company with Island presence, they would pay $114 on the $2,750 purchase, assuming they are charged 4.16 percent in general excise tax.

Many Hawai'i residents already realize they avoid sales taxes, given their years of ordering catalog items. No tally exists for how much Hawai'i residents spend on Web purchases, but nationally, it's estimated by Shop.org, an Internet trade group, that online sales accounted for 4.6 percent of retail sales.

If the same rate were applied to Hawai'i's figures — there was about $21.7 billion in sales last fiscal year at traditional retailers locally, according to state tax officials — there may have been about $1 billion in online purchases by Island residents. That equates to about $42 million in sales taxes.

What many local residents may not know is that they are supposed to pay a 4 percent use tax on purchases from out-of-state retailers that don't charge a sales tax.

In recent years, more states are trying to capture taxes from Web sales by collecting more in use taxes. California and New York are among states that have added lines for use tax on their income tax forms.

Hawai'i is looking into modifying its income tax form to include a use tax line, Kurt Kawafuchi, of the state Department of Taxation, said.

"It's on our radar screen," Kawafuchi said. "It's a very interesting idea."

For now, residents needing to pay the tax can either enter it on a general excise tax form (if the vendor has a general excise tax license) or send the tax along with a note to the department. The payment will be credited to their account, Kawafuchi said.

"Technically you are required to pay it," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i. "The reality is catching them. How do you know your neighbor ordered a sweater from Lands' End?"

He said the state tries to capture the use tax on large out-of-state purchases, such as cars and prefabricated homes.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.