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The Honolulu Advertiser
Posted on: Saturday, April 22, 2006

Few shoppers pay obscure 'use tax'

 • PDF: Use Tax Introduction
 • PDF: Use Tax Introduction and Form G-26

By Greg Wiles
Advertiser Staff Writer


  • You order from Web sites or catalogs that don't charge the general excise tax; or

  • You buy items on the Mainland or overseas that you bring back for use in Hawai'i.

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  • Keep a record of your out-of-state purchases each month.

  • Calculate the 4 percent tax.

  • File state tax Form G-26 or write the results in a letter.

  • Send it with a check to the state Tax Department.

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    Hawai'i's Internet and mail-order shoppers pay less than half of the taxes they owe on out-of-state purchases, according to a study released yesterday.

    Few Hawai'i residents know they owe a 4 percent "use tax" on most goods bought online or through catalogs.

    "I personally don't know anyone who's filed use taxes," said 'Ewa Beach resident Pam Smith, 52, who knows of the levy only because she once worked for a business that had to calculate it.

    Now a report by University of Tennessee professor William F. Fox, an authority on e-commerce taxation, details just how much use tax goes uncollected. Fox estimates that Hawai'i consumers will fail to pay $22.1 million in use taxes this year out of a total $41.9 million they will owe.

    The tax is basically run on an honor system. If you purchase an item out of state, you are supposed to report the transaction and write a check to the state a month after the item lands in Hawai'i.

    State Tax Department Director Kurt Kawafuchi acknowledged it's difficult to get people to do that.

    "All states have the challenge of a low compliance level," Kawafuchi said.

    The state is investigating ways to boost payments, including putting a use tax line on income tax forms, as is done in California and New York.

    Aside from that effort, Kawafuchi said he's focused on making sure the tax is paid on big-ticket items such as cars or boats, and on business services such as data processing outsourced to other countries or architectural services on the Mainland.

    Kawafuchi said business compliance with the tax is generally greater than households because many keep better records and can offset the use tax with other tax credits.

    Island businesses will likely pay $52.1 million in taxes this year out of a total of $81.7 million they will incur on out-of-state e-commerce purchases, according to Fox.

    The use tax makes up for the fact that many online retailers don't tack on the 4 percent general excise tax for Hawai'i customers.

    Until Congress or court rulings force these out-of-state retailers to charge Hawai'i customers the general excise tax, the state has to rely on retailers to voluntarily collect it or shoppers to pay the use tax.

    The report by Fox is part of an effort to get more retailers to comply with general excise tax collections.

    Hawai'i is debating whether to join a group of other states that are proposing to streamline their sales-tax structures for retailers agreeing to collect the levies. A decision on state Senate Bill 2222, which would have allowed Hawai'i to participate in the group, was deferred by House committees this year.

    Opponents to the bill included some local businesses who said collecting the taxes would add another layer of complexity to their businesses when selling to customers on the Mainland. Some local retailers supported the measure, saying it would level the playing field with online retailers, such as Amazon.com, who don't charge Hawai'i customers the general sales tax.

    Reach Greg Wiles at gwiles@honoluluadvertiser.com.