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Pursuing a Windfall of Dollars

posted in: Weekly Commentary 0
By Lowell L. Kalapa

In something akin to a child’s envy of the chocolate bunny in the Easter basket, some lawmakers are drooling over the prospect of finding a windfall of tax dollars as a result of a national project to require businesses to collect sales taxes on their sales to customers in other states.
Known as the Streamlined Sales Tax Project (SSTP), the Project is being undertaken by a number of states who believe that they are losing millions of dollars as a result of out-of-state purchases made by their residents through the INTERNET or through catalogue sales. This issue was raised more than forty-five years ago in a case known as National Bellas Hess and then again two decades later in a case known as Quill. In both cases the issue was taken all the way to the federal Supreme Court which ruled that states cannot force businesses not located in their state to collect that particular state’s sales taxes when the sale is made to a customer in that state.
The reasoning simply put is that because the complexity of determining exactly what sales tax rate would apply creates a severe hardship on the out-of-state business and that to do so would obstruct interstate commerce, a violation of the interstate commerce clause. While that argument may not make a lot of sense to us here in Hawaii where there is only one “sales” or general excise tax rate, that is certainly not the case on the mainland where states allow local governments to impose additional rates on top of the state sales tax. An additional rate could be imposed by a county and yet another rate could be imposed by a city within that county. Thus, the variety and permutations of tax rates could vary by the dozens across one state.
It is for this reason that the SSTP was put together to address the objections of the court that having to deal with a variety of sales tax rates in one state alone places an obstacle to interstate commerce. One of the first issues to be addressed by the Project participants was to agree on a simplified two-tier tax rate for each state. Two-tiered because the first rate would be the state sales tax rate and, if there were local option sales tax rates, to agree upon a common rate for the local jurisdictions in that state.
Another issue that needed to be resolved by participants in the Project was in which jurisdiction did the tax apply? Should the business be required to collect the sales tax at the rate where the business is located, that is at the sales tax rate of the state where the selling business is located, or at the sales tax rate of the state where the purchaser is located? The former is known as origin based while the latter is known as destination-based sourcing.
Of the states which have initially indicated that they are willing to “sign-on” to the Project, the agreement is that the Project should operate on a destination-based sourcing rule, that is, to collect the sales tax at the rate where the purchaser is located. Thus, a business would have to know what the sales tax rates are in the 45 states (and the District of Columbia) that impose a sales tax and if the county in which the purchaser receives the goods has a local sales tax rate. The business then would have to keep track of that money charged and collected from the purchaser and remit the money collected to the respective state.
Although advocates of the Project argue that much of this additional work will be handled by a new software program that can keep track of the sales and collections, the question is who is going to pay for the software? Advocates argue that the states will collectively pay for the software, but no mention is made about installation and maintenance in the computers of hundreds of thousands of businesses.
In Hawaii there is an even more curious twist to this project and that is the fact that Hawaii does not have a sales tax, but a tax on gross proceeds. Because it is a tax on gross proceeds including the amount passed on to customers as the 4% tax, local businesses pay a 4% tax on the amount passed on to the customer as the amount of the tax. This is the reason local consumers often see a tax rate of 4.166% on their register receipts. The other issue is that the general excise tax applies not only to goods or things, but also to services. Sales tax states generally do not tax services.
Because Hawaii does not fit the cookie cutter sales tax state mold, care should be exercised in jumping on this bandwagon. While lawmakers may drool over the possibility of collecting a windfall of taxes, that windfall may come at a high cost for local businesses.

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