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Forget Trying To Change The General Excise Tax Into A Sales Tax

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By Lowell L. Kalapa
(Released on 8/22/10)

As a result of a handful of lawmakers, the legislature has had to go through an annual ritual for the last five years in an attempt to restructure the state’s general excise tax to make it look like a retail sales tax.

As has been noted previously, Hawaii’s general excise tax, unlike a retail sales tax, applies to transactions of both goods and services. As a result, the tax base – that is the number and types of transactions against which the rate is applied – is much broader, if not all encompassing. This allows the general excise tax to remain relatively low yet produce a lot more money than a retail sales tax that might have the same nominal rate.

So why would some lawmakers want to change the general excise tax to look like the retail sales tax found on the mainland? These efforts can all be traced back to a handful of lawmakers who think that joining in with other states that levy a retail sales tax will allow Hawaii to collect Hawaii’s “sales tax” on purchases made by Hawaii residents from vendors located outside the state.

This is because the courts have ruled that out-of-state vendors who have no physical presence in the state of the customer do not have to collect the sales tax of the customer’s state. As a result, many states believe that they are losing sales tax revenues as it becomes easier to shop across state lines with the advent of the internet. Even the Retail Merchants, both nationally and locally, support this effort to collect sales taxes from what is known as remote vendors which they see as direct competitors.

Although that may be a good argument if one believes that customers should be paying their respective sales taxes on such purchases, it does not justify changing Hawaii’s general excise tax to make it look like a retail sales tax. Yet this is what this joint project being undertaken by several states is trying to do, to develop a uniform sales tax structure so that states can force vendors to collect their state sales taxes. However, in order to have the clout to make vendors collect sales taxes on purchases made by customers in other states, a federal law will have to be passed requiring the collection.

It is doubtful that a federal law will be adopted if there isn’t some sort of uniformity in the sales tax structure to obviate difficulties the courts have pointed out about forcing remote sellers to collect another state’s sales tax. Those difficulties became the underlying reason for the courts judgment that to do so violated the Interstate Commerce clause of the Constitution. This is why the decade-long project to simplify the sales tax still has less than half of the states which have a retail sales tax. The various states cannot come to an agreement on a uniform standard.

Of the 44 states that have a retail sales tax including Hawaii’s general excise tax, only 20 have signed on to what is known as the Streamlined Sales and Use Tax Agreement. Of the ten most populous states – Florida, Georgia, Texas and California – which account for one-third of the nation’s population, none have signed on to this project, yet Hawaii lawmakers continually attempt to pass legislation that would conform with the model statute.

Of even greater concern to vendors in the various states is the complexity of complying with the payment requirement and the cost that will be incurred in trying to comply with the project’s parameters. For example, there are 26 sales tax states that compensate retailers for collecting their state sales tax. This is done to compensate the business for the additional work required to collect, account for and remit the sales tax to the state. And there is no doubt that if remote vendors will be required to collect another state’s sales tax, they will want to be compensated for the complexity of doing so.

But what happens to a state that does not currently compensate their in-state retailers, like Hawaii? If the agreement will require states to compensate remote vendors for collecting another state’s sales tax, one would think that in-state vendors will cry foul if they aren’t compensated for collecting their own state’s sales tax.

Finally, while advocates of the Streamlined Sales and Use Tax Agreement claim that many of these costs will be alleviated by technological advances, that technology has yet to be developed. Even if software and other computer enhancements are developed, that cost would, no doubt, impose a heavier burden on smaller businesses than larger big box retailers that already have the resources to acquire and implement those advances.

Thus, it is curious why Hawaii lawmakers would be so eager to buy into the Streamlined Sales and Use Tax Agreement where the majority of all businesses in Hawaii are considered small businesses.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.


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