By Lowell L. Kalapa
(Released on 4/19/09)
Lawmakers are again being asked to change the state’s productive general excise tax to look more like a retail sales tax so they can collect taxes on purchases made from out-of-state vendors.
The Streamlined Sales Tax Project’s Model Agreement and Act (SSTP) is a project undertaken with other states that is intended to simplify sales and use tax administration as it relates to multiple sales and use tax rates, definitions, and taxing jurisdictions. Goals of the project include the establishment of a single sales tax rate, uniform definitions of sales and use tax terms, requiring states to administer any sales and use taxes, and a central electronic registration system to allow a seller to register to collect and remit sales and use taxes for all states.
However, at the national level there appears to be a number of difficulties in the negotiations and unanimous agreement is far from reality. Before jumping on the bandwagon, lawmakers should exercise care, as it should be remembered that Hawaii does not have a sales tax as found in other states. To the contrary, the general excise tax, while viewed as a sales tax, is a far cry from the retail sales tax structures found on the mainland.
What is not evident in the proposal under consideration is that by participating in the consortium known as the SSTP, Hawaii businesses will be required to collect the sales taxes of other states when purchases are made by residents of that state. The cost of collecting, accounting, and remitting those taxes will add even more overhead costs to operating a business in Hawaii. 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 2001-2003 Tax Review Commission on the recommendation of their consultant who was already an advocate of the project.
Of course, no thought was given to how this would affect Hawaii businesses and what additional costs there would be. Given the fact that Hawaii businesses will now have to operate in a different mode insofar as the general excise/SSTP sales tax, will lawmakers compensate businesses for undertaking the collection of other states’ retail sales taxes? Indeed, the law being proposed in this measure is a hybrid of the current general excise tax law and a retail sales tax. It retains the two-tiered wholesale/retail system and keeps the tax imposed on services as well as on business-to-business transactions. So the measure attempts to have the best of both worlds – to force other states to collect our general excise tax while retaining the pyramiding features of the general excise tax. This is a major change in the state’s largest source of general fund revenues. The changes that the SSTP would require would alter not only the past interpretation of the general excise tax, but it may also have a major impact on the revenue producing capacity of the tax.
One of the key issues still under discussion amongst the members who have already signed on is “where” does the sale occur. For a number of the larger states like California, Illinois, and Texas which have much at stake since they are states that manufacture goods shipped to other states, the sourcing rules they adopted use “origin” based rules, that is the tax that is imposed at the place from which the goods are shipped and not where the purchaser takes possession.
The proposal is ambiguous at best as in some cases being origin based as long as the purchaser takes possession of the goods at the place of the business, but provides, on the other hand, for the taxation at the address to which the goods are delivered. It is this destination rule that causes the most problems for businesses, as they must now deal with a plethora of rates depending on the number of states from which they receive orders for their goods. While some states may elect destination, there is no doubt that the larger states will elect origin sourcing as they are probably net exporters of goods. That being the case, Hawaii residents could end up paying the Illinois or California sales tax on their purchases from out-of-state vendors and in the long run, the purported windfall will turn into a disaster for Hawaii.
Under current law the Hawaii use tax would have been due on those purchases. While difficult to enforce, the mechanism to collect on those purchases already exists. So why hang another cost on business?