(Released on 4/13/14)
The topic of the Streamlined Sales Tax Project has come up every year for some time now, and from the discussions I see that the issues are not fully understood.
The problem is this. Hawaii consumers needing a certain product can buy it in a local store, where that sale is subject to our general excise tax, or they can buy it online, where many of the retailers aren’t subject to tax either here (because the retailer has no physical presence in Hawaii) or in the state they are selling from (because most states, including ours, have an exemption for export sales). In theory, the law requires the Hawaii consumer to pay the tax directly to the state if that happens. But in reality most people don’t do that, especially when the purchases are small. As a result, government misses out on tax revenue, and the local businesses are hurt because they face competition from stores that legally aren’t paying our tax.
This problem could be solved if Congress steps in. It needs to be Congress doing this because only they have the power to regulate interstate commerce, which this is. But they aren’t about to force all businesses to collect all taxes imposed by every state, municipality, transportation district, port authority, mosquito abatement district, and any other taxing jurisdiction throughout the country. That would be way too complicated. (Obviously the folks who are writing our federal tax laws weren’t in the room, because they are no strangers to complicated ideas). So a bunch of states got together and said, “Hey! What if we simplify our sales tax systems so there is just one rate per state, there are some uniform definitions for taxable and exempt items across the land, and there would be a multistate governing board that would watch over this uniformity effort? Wouldn’t that be simple enough of a system so that Congress can, with good conscience, impose it on the online sellers to collect tax for the states?” So far 23 states have signed on to be full member states in the project, but none of the big economy states (CA, FL, IL, NY, and TX) are in. In Congress, the U.S. Senate passed the Marketplace Fairness Act (S. 743) on May 7, 2013, but it doesn’t appear to be moving in the U.S. House. From this we can see that there are no guarantees that either (a) all states will sign on to this system, or even states representing most of our country’s economy; or (b) Congress will be on board even if all states do sign on.
So what are the issues for Hawaii? Hawaii’s general excise tax isn’t a sales tax, and there are three rates (retail, wholesale, insurance commissions), not one. Thus, major surgery on our tax laws will be needed to come up with a law that meets Streamlined Sales requirements. There is a bill in the legislature to do this surgery, and it’s pretty thick (H.B. 2135, House Draft 1, is 159 pages long). In 2007, the Hawaii Tax Review Commission (TRC) looked into the topic extensively. The Department of Taxation told the TRC that the start-up costs for Hawaii to re-tool its systems, forms, instructions, and so forth to comply with the bill would be about $15 million, with the ongoing annual cost to administer it about $4 million. A noted expert on the topic told our TRC that the additional revenue to the state would be about $10 million a year. The TRC’s recommendation at that time was this: “Until the Project shows greater promise of producing results, it is premature for Hawaii to incur the expense to join it.” So what do you think? Plunge in? Or sit on the sidelines for now?
Tom Yamachika is the Interim President of the Tax Foundation of Hawaii. Mr. Yamachika’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.