Supreme Court opens door to e-commerce tax equity
States can now require on-line and mail-order sellers to collect and remit taxes on sales to their state residents, according to the long-awaited Supreme Court of the United States (SCOTUS) verdict on South Dakota v Wayfair, Inc. (June 21, 2018). Here in Hawaiʻi, our Tax Review Commission has been highlighting the need for legal authority to recoup taxes on e-commerce since 2001, but we (and all other states) were stymied by two earlier SCOTUS decisions that restricted taxing authority over sellers with no in-state physical presence.
The economic and tax implications are significant. Over the past 20 years, e-commerce has boomed, giving consumers abundant choices, more price options, and sometimes—even in Hawaiʻi—free delivery. The resulting buyers’ stampede not only up-ended traditional stores and shopping (SCOTUS reported that e-commerce now makes up 9 percent of all retail sales) but put a considerable damper on state sales tax collections.
Since requiring out-of-state sellers to collect and remit sales taxes was put out of bounds, Hawaiʻi law mandates that consumers report and pay “use” taxes for online purchases from companies that have no “nexus” in the state. It is unlikely that Hawaiʻi consumers are highly compliant with that law, assuming they even know about it.
In 2012, economist Dr. William F. Fox estimated that Hawaiʻi would lose 1 million in e-commerce-related taxes annually by 2015 while a U.S. Government Accountability Office (GAO) study estimates potential tax gains from expanded tax collection authority of up to $51 million for Hawaiʻi in 2017. (Estimates differ widely. The GAO’s assessment of possible tax gain for the whole country is $13.3 billion while SCOTUS cites studies with estimates ranging from $8 billion to $33 billion.)
In order to take advantage of the SCOTUS ruling, Hawaiʻi needs to review compliance burdens and ensure that they are reasonable for online sellers. SCOTUS gave a nod to South Dakota law that imposes tax collection duties only on companies that make a total of either $100,000 on in-state sales or at least 200 separate sales. It bars imposing the requirement retroactively, and it has signed on to the multi-state Streamlined Sales and Use Tax Agreement.
Hawaiʻi recently passed legislation (Act 41/SB2514) that aligns with the $100,000/200 sales threshold but would make collection retroactive to January 2018. Moreover, Hawaiʻi is not a signatory to the Streamlined Sales and Use Tax Agreement. Local tax experts raise concerns about whether Hawaiʻi’s multi-layered general excise tax (GET) can conform to the single sales tax process as standardized in the Agreement. Questions also remain for all states about marketplace sellers like eBay and Etsy that support e-commerce for individual or small sellers.
We predict that Hawaiʻi’s 2019 legislature will be revisiting this issue and seeking greater conformity to the model sanctioned in South Dakota. It’s worth the effort: $51 million is a pretty substantial amount of money leaking out of our economy every year, especially in the face of housing, infrastructure, education, and other urgent public needs.
