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Taxing Internet purchases only fair


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POSTED: Tuesday, May 12, 2009

Legislators have approved a bill that would join Hawaii with other states that have formulated a logical method to collect sales tax on remote transactions over the Internet. Gov. Linda Lingle is expected to veto the measure, as she killed a similar proposal four years ago, this time because of the idea of imposing what may be considered new taxes in the middle of a recession. She instead should sign it into law with the realization that it probably won't take effect until after the economy has recovered.

The states began a coalition called the Streamlined Sales Tax Project in 2000, eight years after the U.S. Supreme Court ruled that requiring companies to pay sales taxes on merchandise purchased over the Internet in other states would be too cumbersome. Under the project, participating companies agree to pay taxes to the state at the purchasers' end of transactions. However, federal legislation is needed to allow states to require the interstate payment of sales taxes. That is unlikely anytime soon, and the Hawaii legislation is written to take effect only after it happens.

The practice of consumers using stores as showrooms for items to buy later on the Internet to avoid sales taxes—or, in Hawaii, general excise taxes—has become commonplace, and local businesses suffer as a result. Despite the nation's economic downturn, Forrest Research expects online sales to rise this year by 11 percent to $156 billion and make up 7 percent of retail revenue, up from 6 percent last year.

The project of the 24 states that have signed on is aimed at reducing the burden on businesses, thus addressing the high court's concern. One method is to apply uniformity to the system. For example, it defines 69 different administrative terms and products that states may either tax or exempt. Improved software also should reduce the complexity. Hawaii's legislation would bring the state's multilevel excise tax, imposed at every wholesale step on local items, into compliance by applying the 4 percent tax imposed on goods solely at the retail price charged over the Internet.

Under the present voluntary system, 1,156 businesses have collected more than $300 million in sales taxes from the participating states. By some estimates, states across the country lose as much as $15 billion a year in uncollected sales tax.

Opposing the Hawaii bill, state Tax Director Kurt Kawafuchi pointed to the “;well-settled principle of economics that when an economy is slowing, increasing taxes is strongly discouraged because people are already struggling to make ends meet.”;

But congressional action and the subsequent implementation of the Hawaii legislation would simply be an equalizer, requiring online retailers to pay the same taxes as those thrust upon local stores. That is only fair.