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Solving the Online Tax Dodge with Cookies?

By Tom Yamachika, President

Every year, lawmakers seeking to fund their favorite programs or services inevitably ask themselves whether there might be a way to squeeze more money out of the tax system without adding more burdens to those of us who already pay taxes.  Are there folks out there who should be paying taxes but aren’t?

For years, lots of attention was focused around online businesses and e‑commerce.  Online travel companies recently concluded a long and bitter fight with the State over how much in GET and transient accommodations tax they owed, with the State recovering $75 million or so in the process.

Online retail continues to be a sore spot, because current interpretations of the U.S. Constitution say that unless the Congress says otherwise, online retailers aren’t required to pay local taxes unless they have some type of local presence.  So retailers with brick-and-mortar stores have to pay taxes like our GET, and they chafe because their online competitors don’t.  To put it another way, retailers who collect taxes on sales to support government and public works, and who keep local residents employed, are losing ground to online retailers who do neither.  A January 2016 study by Civic Economics and the American Booksellers Association, titled “Amazon and Empty Storefronts,” looked at the impact of just one online retailer, and estimated that for Hawaii, in 2014 it sold $201.9 million worth of retail goods statewide, avoiding $8.8 million in GET and causing a net loss of 1,236 retail jobs in Hawaii.

The Legislature has explored ways to get online retailers to collect taxes on sales to Hawaii residents.  In 2013, New York’s highest court ruled that the State could define an online retailer’s “physical presence” to include affiliates who direct sales to the online retailer in exchange for a commission; the U.S. Supreme Court later let this ruling stand.  Our legislature passed a bill to adopt that technique in 2009, but when the online retailers threatened to cut off all of their local affiliates if it became law, Gov. Lingle vetoed it.

Recently, the State of Ohio tried a more interesting argument, focusing on cookies.  Cookies are little files left on your Internet browser when you visit online sites that save information between pages that you view.  Online sellers need these to conduct e-commerce.  The latest U.S. Supreme Court case on “substantial nexus,” which is what is needed before a State can force an online seller to pay local taxes, held that some kind of physical presence within the State is necessary, and “a few floppy disks” aren’t enough.  Ohio, however, argued that the cookies left by an online retailer’s system should be enough physical presence.  If you conduct hundreds of millions of dollars in local sales, your system must have left LOTS of cookies on local computers.  No word yet on whether the Ohio courts have bought in to the argument, but it’s certainly an interesting point to ponder.

Even so, the writing is on the wall. Amazon already collects sales taxes in 28 states, with 84% of the U.S. population.  Congress could settle the skirmishes now being fought state by state and bring some certainty to retailers, wherever located, by giving states the authority to require online retailers to collect taxes on purchases. The U.S. Senate approved a bill to do this, but the bill stalled in the House of Representatives.  Given dim prospects for Congressional action in Washington, D.C., what can the State of Hawaii do to level the playing field, give our local retailers a chance to compete, and support our local economy?

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