Hawaii State Tax Bill on Internet-Based Merchants Passes Senate, Is Transmitted to the Governor for Approval

Hawaii is the latest state to try securing tax revenues from online sales.  The State Senate on May 7, 2009 approved H.B. 1405, H.D.2, S.D. 1, a nexus-based legislation that seeks to level the playing field for in-state businesses that must comply with Hawaii’s state and local tax regimes.  The State Legislature transmitted the legislation on May 11, 2009 to the Governor for signing.

According to the State Department of Taxation (“Department”), one of the strongest proponents of the bill,  without this legislation, it is possible for an out-of-state business to receive a favorable advantage over an in-state business selling the same items. “This legislation would make the taxation for in-state and out-of-state businesses more fair,” the Department stated.

The bill seeks to clarify the business activities of persons from out-of-state who utilize in-state persons as a means of attracting customers. The Department explained that under current constitutional authority, the use of an agent in-state for purposes of maintaining a market for an out-of-state business is sufficient nexus to tax the person’s business activities in the State.

According to a report (date of report unknown) submitted by Chairman Carol Fukunaga of the Committee on Economic Development and Technology, the purpose of this measure “is to maximize the State’s ability to capture taxes owed by out-of-state taxpayers by adopting statutory changes that will allow Hawaii to participate in the Streamlined Sales and Use Tax Agreement.”

The report added that, “(s)pecifically, this measure clarifies that the term ‘engaging,’ as used in reference to practicing a business, includes the sale of tangible personal property by a person soliciting business through an independent contractor or other representative, provided that the cumulative gross receipts from sales by the person to customers in the State of Hawaii who are referred to the person is at least $10,000 in the 12-month period ending on the last day of the most recent calendar quarter before the calendar quarter in which the sale is made.”

Like other online sales and tax use bills going through or that have gone through legislatures in other states, this legislation did not go unopposed, especially from internet-based companies.

Emily Hackett, executive director of the Internet Alliance (“IA”), the leading national Internet trade association operating in the states, comprising well-known companies like Amazon.com, AOL,  AT&T,eHarmony, Expedia, Experian, Comcast, lAC, Match.com, TRUSTe, United Online, Overtstock.com, and Yahoo!, said: “Not only is this attempt to redefine nexus poor tax policy, but it is clearly unconstitutional. The U.S. Supreme Court (see Quill Corp. v. North Dakota, 504 U.S. 298 (1992)) has made plain that physical presence is necessary for states to compel companies to serve as tax collectors. This legislation would impermissibly attempt to require remote sellers with no physical presence in the state to collect .and remit tax based on advertising dollars spent in Hawaii. A mere advertising relationship at making sales into the state - the basis of these proposals - does not constitute physical presence.”

The IA added: “It will harm local businesses. This proposal strikes at the very heart of e-commerce. While it may not be intended, the nexus provisions contained in this bill will only discourage remote sellers from compensating a range of organizations. businesses and individuals for hosting advertisements in Hawaii. Inevitably it will be these entities that lose out as remote sellers move their marketing dollars elsewhere leaving the State without arty additional revenue. Additionally, the technology sector in Hawaii would be negatively affected as remote sellers would reconsider using websites hosting services in Hawaii.”

In a letter dated March 19, 2009 and addressed to the State Senate, Amazon.com said, ”The U.S. Supreme Court’s Quill decision prohibits a state from requiring sales tax collection by sellers that lack physical presence in the state. HB 1405 is unconstitutional because it ultimately would require sellers with no physical presence in Hawaii to collect general excise tax merely on the basis of contracts with Hawaiian advertisers.”

Amazon.com in the same letter threatened to leave the State if the bill is enacted: ”If HB 1405 were enacted, Amazon would have little choice but to end its advertising relationships with Hawaii-based participants in the Amazon “Associates Program.” (Participants in the Associates Program place Amazon advertisements on their websites, and then are compensated by Amazon for purchases made by visitors whom they refer to Amazon’s website.)”

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