Internet tax would bring in dollars


POSTED: Thursday, June 25, 2009

Hawaii loses millions of dollars in general excise tax revenue from items purchased on the Internet from mainland-based companies, and Gov. Linda Lingle has been offered two ways to capture those dollars. The one that would do least harm to Hawaii businesses would be to join other states that seek a uniform system to collect the taxes across state lines.

The alternative method would allow the state to partially collect general excise taxes from mainland companies on sales in Hawaii through Hawaii-based sales affiliates that are paid commissions for linking to the retailer. The method is modeled after a New York state law that is being challenged in court by Amazon.com and Overstock.com, which are appealing a lower-court ruling in favor of the state.

Amazon, based in Seattle, has sent letters to the governors of Hawaii, California and North Carolina, threatening to end its relationship with affiliates in those states if they implement the tax-collection method of New York.

In a letter to California Gov. Arnold Schwarzenegger, Amazon claimed it would be unconstitutional “;to collect sales tax merely on the basis of contracts with California advertisers,”; according to The Wall Street Journal. In 1992, the U.S. Supreme Court ruled that a catalog mail-order company was exempt from paying sales taxes in states where it had no physical presence.

The ruling has been applied to Internet retailers, but the constitutional question still looms. The Supreme Court may eventually deal with the issue after the appeal of the New York case is completed through state court.

Meanwhile, Hawaii should join 24 other states taking part in the Streamlined Sales Tax Project, with participating states agreeing to pay taxes under uniform rules to the state where the purchase order was made. They eventually will need Congress to allow states to require the interstate payment of sales taxes.

The stakes are large. A study completed by researchers at the University of Tennessee in April estimated that state and local sales tax losses totaled more than $7.7 billion nationally last year and, after dipping this year because of the recession, were forecast to near $11.4 billion in 2012. Hawaii's general-excise-tax losses exceeded $40 million last year and were expected to reach $60 million in 2012.

Amazon has complained in the past that extending sales tax across the country to online retailers would be “;horrendously complicated,”; but the Tennessee researchers point out that software improvements have made it much easier. Indeed, they note, Amazon's management of Target's online business nationally includes collection of sales taxes.

Meanwhile, Hawaii's brick-and-mortar bookstores will have to continue watching readers browse the racks in order to decide what books to order on the Internet.