Posted on: Tuesday, February 8, 2005

Online tax collection targeted

By Sean Hao
Advertiser Staff Writer

State lawmakers yesterday advanced a bill aimed at collecting an estimated $100 million or more in taxes on Internet purchases by Hawai'i residents each year.

State officials are concerned that they are missing out on a growing source of revenue as people increasingly shop online. Hawai'i residents already are required to pay a 4 percent use tax on out-of-state goods purchased via the Internet or catalogs, though many residents do not voluntarily comply.

Large online retailers such as Wal-Mart and Amazon.com have recently started collecting taxes from consumers in Hawai'i and other states, although the vast majority of Internet shops do not collect Hawai'i state taxes.

That places local retailers at a competitive disadvantage, according to the Retail Merchants of Hawaii, which supports the measure.

But collecting taxes on Internet transactions is a complicated proposition, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i. House Bill 817, which was passed by the Economic Development & Business Concerns Committee, directs state tax officials to draft changes to the Hawai'i tax code allowing the state to capture taxes on electronic commerce transactions. The Department of Taxation has taken no position on the bill.

Those recommendations are supposed to conform to the so- called Streamlined Sales Tax Project, a collaborative effort among states to devise a standard sales tax code. Standard tax rates would make it easier for online retailers to collect taxes and distribute them to the states.

However, that project faces several hurdles, including determining whether goods should be taxed at the tax rate of the state where they're purchased or at the tax rate of the state where they're used. Complicating matters is Hawai'i's general excise tax, which is far more encompassing than a sales tax.

"That's one of the big stumbling blocks for this thing," Kalapa said. "I don't think a resolution to the Streamlined Sales Tax Project will occur in the next 25 years — especially in Hawai'i, where we don't have a sales tax."

Catalog companies and pure online retailers are required to charge sales taxes only in states where they have operations, such as warehouses and distribution facilities.

To counter that, Hawai'i has 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 Hawai'i officials know who buys their goods, so state officials have a difficult time enforcing the tax.

In general use-tax compliance is better among businesses than consumers, said Kurt Kawafuchi, director of the state tax department. It's believed that many consumers nationwide don't bother to pay taxes on online transactions.

"I think a lot of states suspect that, and Hawai'i is no different," Kawafuchi said.

The new code aims to reconcile an array of tax codes in different states, 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 revise its tax code to conform with the streamlined sales tax initiative. Under House Bill 817, the tax department would recommend changes to Hawai'i tax laws before next year's legislative session.

More progress on a unified tax agreement between states and online retailers would be needed before such a proposal would be ready in time for next year, Kawafuchi said.

"It could move really fast, but there's a lot of disagreement at this point," he said.

Just how much tax revenue the state loses to electronic commerce is unclear.

One estimate, by the University of Tennessee Center for Business and Economic Research, places the figure at $112.6 million in unpaid taxes a year on online purchases of $2.8 billion.

Conventional retail transactions in the Islands amounted to about $20 billion in the 12 months ending June 30, 2004.

Tax officials concede the scope of the problem is difficult to assess because online retailers are not required to disclose sales figures state by state.

A survey by the Scarborough Group, for example, offered a much smaller estimate of the dollar volume of online transactions. The study estimated that Internet users in Hawai'i purchased just $122.8 million online in 2000. That would only generate about $5 million in taxes.

The bill now goes to the House Finance Committee. A companion Senate bill is scheduled for a hearing at 1:15 p.m. Thursday in Conference Room 225 at the Capitol.

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