By Lowell L. Kalapa
When we learned to swim our swim instructors always warned us not to dive into the water without first checking out how deep the water was and whether there were any rocks down there. In other words, look before you leap.
Well, that doesn’t appear to be the guidance for the legislature as they want to take the leap before checking out what is in store for the state when it comes to forcing businesses to collect the sales taxes of other states. While it does not appear that the bill will be approved this year, taxpayers should be aware that it would have re-structured Hawaii’s general excise tax so that it looks more like a sales tax found on the mainland by carving out those activities which have rates other than the 4% retail rate we, as consumers, pay.
This re-structuring of the general excise tax would be necessary in order for Hawaii to participate in the Streamlined Sales and Use Tax Project or SSTP for short. This is a project that has been undertaken by a group of states that believes that they are losing hundreds of millions of dollars as a result of goods being sold by a vendor in one state to a customer in another state. Forcing what is known as remote vendors to collect another state’s sales tax was ruled to be unconstitutional as the complexity and difficulty of figuring out how much to collect hindered interstate commerce and therefore is a violation of that provision of the constitution. This conclusion was reached in a case called National Bellas Hess in the 1950’s and reaffirmed once again in a case called Quill in the 1970’s.
The complexity of collecting another state’s sales tax is that on the mainland, not only do states levy a sales tax, but in many cases there may be a sales tax levied by the county and another levied by a city within that county. In some cases, sales taxes are levied by transit districts or authorities such as those found in San Francisco or Los Angeles. So a customer in, say for example, Orange County could be responsible for paying three or four different sales tax rates. And, of course, how is the business in that other state to know whether the customer’s address on La Mirada Boulevard is on the Orange County side of the county line or the Los Angeles side of the county line.
So you can imagine a business sitting in Connecticut with thousands of customers in California trying to figure out what tax rate to charge each one of those customers because they live all over California. This is one of the problems the SSTP tries to address by mandating that in order to participate in the project, each sales tax state can have no more than two rates for the purpose of having remote vendors collect their sales taxes.
Again, this would apply only to those businesses that do not have a presence or “nexus” in the state where the customer is located. So, for example, even if you purchase something from the Disney catalogue, because there is Disney Store in Honolulu it has presence in the state and is required to collect the 4% general excise tax from you as it has already gained the privilege of doing business in the state even if the goods are being purchased from the catalogue center located outside the state.
So why is there such enthusiasm on the part of the legislature to participate in the SSTP? Lawmakers have been promised hundreds of millions of dollars that could be had if the state would just participate in the project. The suggestion came to the last Tax Review Commission on the recommendation of their consultant who was already an advocate of the project. Of course, no thought was given as to how this would affect Hawaii businesses and what additional costs there will be.
The measure under consideration was drafted by a couple of tax professionals who had very little input from the business community that would be required to collect the taxes of other states should Hawaii join the SSTP project. In fact, the state Chamber of Commerce didn’t even know about the legislation until it was told about it, so they didn’t even show up to testify on the measure.
Actually the few people who testified in support of the bill were a mixed bag. As expected, the HGEA testified in favor knowing that it will mean additional money for pay raises, but the measure was also supported by the Hawaii Association of Realtors and the Retail Merchants of Hawaii (whose national organization has already gone on record in support of the project.)
Not only will this change mean additional costs for Hawaii businesses, but depending on where the sale occurs, Hawaii residents could be paying the Illinois or California sales tax.