Buying tax-free music, books and electronics over the Internet would be a thing of the past under legislation pending before Hawaii lawmakers.

The measure being pushed by Senate Democrats is meant to force online shoppers at stores like Amazon and eBay to pay the state's 4 percent general excise tax, just like customers who buy the same items in brick-and-mortar stores.

Taxes have always been required on all purchases - whether they're made inside Hawaii or not - but courts have ruled that only online businesses with physical operations in a state must collect the taxes, and residents seldom report them.

Some estimates predict taxing all Internet goods could have produced as much as $166 million for Hawaii this fiscal year as the state government is facing severe budget deficits.

“;If we were ever looking for a time to collect taxes that aren't being paid, this would be the year,”; said Sen. Carol Fukunaga (D, Lower Makiki-Punchbowl). “;We are much more vulnerable to people buying out-of-state when economic times get tough.”;

The legislation would standardize parts of Hawaii's tax code so that it could participate in the Streamlined Sales Tax Project, an effort to simplify tax rates nationwide. In exchange, some retailers will collect online sales taxes in those states even if the companies have no operations located there.

More than 1,100 retailers have registered with the streamlining group and are voluntarily collecting sales taxes on items shipped to the 22 participating states. Internet tax collection won't be mandatory unless Congress passes a law requiring it.

Without these laws, online retailers have an unfair competitive advantage, said Peter Fritz, a tax lawyer who was once an administrative rules specialist for the state Tax Department.

For example, residents who buy a book on Borders.com already pay taxes because Borders has stores in Hawaii, but Amazon items aren't taxed because it doesn't have a physical presence in the islands.

“;We need fairness to all businesses in Hawaii because it puts everyone on a level playing field,”; Fritz said. “;The tax that is going to be collected is a tax that you should have been paying all along.”;

Hawaii loses more tax money due to Internet commerce than all but a handful of states because of its heavy reliance on the general excise tax, Fukunaga said.

“;I can't think of a state that would really need this more than Hawaii does,”; said Scott Peterson, executive director of the Streamlined Sales Tax Governing Board. “;Hawaii imports everything.”;

After being approved by a Senate committee last week, the bill is heading for a vote in the full Senate. But it faces a difficult road ahead with the Democrat-controlled House and Republican Gov. Linda Lingle.

Separate legislation pending in the House would take a different approach to collecting taxes from businesses located outside of Hawaii. That bill attempts to copy an effort in New York state requiring out-of-state companies to collect taxes themselves. The New York law is being challenged in court by Amazon.

Tax Director Kurt Kawafuchi objected to the Streamlined Sales Tax Project, in part because its startup cost would be several million dollars, while its immediate payoff would only be between $1 million and $5 million. He estimates if Congress passed a law making Internet tax collections mandatory for states participating in the project, tax revenues could rise by $25 million annually - a far smaller estimate compared to the $166 million cited by Senate Democrats.

“;This bill will have little revenue impact, unless Congress enacts required legislation,”; Kawafuchi said in written testimony.