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No Need For Sales Tax Project At This Time

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By Lowell L. Kalapa

(Released on 02/18/07)

Last week it was pointed out that apparently elected officials like to waste money on a regular basis, in this case not listening to the Tax Review Commission as it evaluated the state’s tax system using standards such as equity and efficiency to determine whether or not improvements could be made.

This week let’s look at a specific example of where lawmakers and administration officials are ignoring the findings of the Commission. This involves a national project to get businesses in each state to collect the “sales taxes” of other states when residents of those states make purchases from those businesses. This is called the Streamlined Sales Tax Project.

The impetus for this national project is the growing fear that increased sales across state lines driven largely by the internet will erode the collection of sales taxes. However, the Supreme Court decided a few years ago that forcing businesses to collect sales tax for states in which they have no physical presence was a violation of the interstate commerce clause of the constitution. This is because it created hardships for the businesses that had to determine how much to collect as many states have a plethora of rates.

So about ten years ago, a group of representatives from a number of sales tax states got together and devised a proposal that would basically require businesses in participating states to collect the sales taxes of other states who were members of the project. To address the issues raised by the courts about the difficulty of determining what rates applied to a sale or whether or not certain goods were taxable or exempt, the participants of the project agreed to establish only two rates per state and would agree to a common set of definitions as to what would be taxable and what would not.

All the participants realized that in order to make the project truly work, they would have to convince Congress to pass a law that would eventually force all states to require their businesses to collect the sales taxes of other states when those businesses sold their products to customers across state lines. But to convince Congress that it should pass a law, the states participating in the streamline sales tax project had to convince federal lawmakers that their proposal could work.

For a while there, it seemed that the project just might work as member states came to some agreement. Well, that agreement began to break down before the ink even dried. Larger states thought they would lose more money if the sales tax was destination based, that is, the tax collected would be at the rate of the customer’s state as opposed to being origin based where the larger states would collect their sales tax on the goods that were shipped to a customer in another state.

As a result, states began to either drop out of the agreement or demand that concessions be made to accommodate their concerns. Thus, there is no clear picture at the moment what the agreement will look like once the collection of sales taxes is put into motion.

Last year a bill that would adopt the streamline sales tax agreement was introduced and nearly passed the legislature but for a small glitch in the closing moments of the session. This, despite the fact that the State Auditor had a consultant assess the revenue potential of participating in the project. Instead of the hundreds of millions of dollars the promoters of the project had promised, the consultant estimated that Hawaii would benefit at the very least about $10 million and at the most $50 million.

At the same time, when the department of taxation was asked what it estimated it would cost the department to implement the project for Hawaii, the price tag was set at $15 million. Thus, it came as no surprise that when the Tax Review Commission looked at the issue, the decision was a no brainer, Hawaii would stand to gain about $10 million in revenue, but it would cost the state $15 million to implement. And that doesn’t include the cost to businesses in Hawaii that would be required to collect the sales taxes of other states.

So the Commission’s advice to the legislature and administration was to wait. In its recommendation it was noted that “the largest states (by economic size) have failed to sign on to the project, jeopardizing the chances of becoming an effective vehicle for collecting the Use Tax. Until the Project shows greater promise of producing results, it is premature for Hawaii to incur the expense to join it.”

Despite that advice, there are some lawmakers who still want to ram this project down the throats of business in Hawaii. Ignoring advice for which taxpayers paid good money seems to be such a waste.

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