Lagging tax revenue in Hawaii could trigger simplified seller use tax reporting

Lower than expected tax revenue is renewing Hawaii’s interest in taxing remote retailers such as Amazon.com. The Simplified Seller Use Tax Remittance Act, introduced to the Hawaii Legislature on January 25, 2017, seeks to establish a voluntary program that would allow out-of-state vendors to collect, report, and remit a simplified seller use tax on their Hawaii sales.

Generally, a state cannot compel a business to collect and remit sales and use tax (or, in Hawaii’s case, general excise tax) unless the business has a substantial connection, or nexus, with the state. Under a precedent upheld by several Supreme Court rulings, notably Quill Corp. v. North Dakota (1992), the connection needs to be physical to be considered substantial. Although a growing number of states have broadened their definitions of substantial nexus to include links on in-state websites that generate a certain amount of business for the remote vendor (click-through nexus), ties to affiliates (affiliate nexus), or even economic ties to the state (economic nexus), it remains difficult for states to compel out-of-state businesses to comply.

Buyers owe consumer use tax

Consumers are supposed to remit use tax to the state if tax wasn’t collected by the retailer at the time of sale. However, use tax compliance is low and it’s extremely difficult for states to enforce. Damien A. Elefante of the Hawaii State Tax Department explains: “We haven’t gone out to ask every (person) how much you’ve bought. …   We haven’t done that because there’s no information for us to look at readily, so with respect to the use tax on Amazon sales or sales online, we haven’t looked at it.” And with the average Hawaiian spending approximately $940 on online shopping sites annually, actual tax collections during the first six months of the fiscal year have grown by 0.6 percent rather than the projected 5.5 percent (this discrepancy can’t be entirely attributed to untaxed remote sales, but they are a contributing factor).

Perks of voluntary collection for out-of-state sellers

Some states provide incentives to encourage out-of-state companies to voluntarily collect and remit tax. For example, under Alabama’s Simplified Seller Use Tax Remittance Act, participating businesses collect and remit a flat 8 percent use tax on all sales made into Alabama, rather than the varying combined rates that are actually in effect. This single statewide rate greatly facilitates sales and use tax compliance, and in the event existing restrictions on taxing remote vendors are lifted, companies that already participate in the program can continue to report the flat 8 percent rate. More than 70 companies participate in Alabama's program, which is expected to generate $50 million in tax revenue this year (ADOR).

Last week, Hawaii Representative Sylvia Luck introduced House Bill 1413, the Simplified Seller Use Tax Remittance Act. If enacted, participating sellers would:

• Collect and remit a flat 4% tax on sales of tangible personal property sold or delivered into Hawaii (not the actual combined general excise tax rate, which is higher in some parts of the state)
• Report (monthly) only the statewide totals of the simplified sellers use taxes collected and remitted
• Provide the Hawaii State Tax Department with information related to sales to Hawaii customers

Eligible participants would also be entitled to deduct and retain a discount equal to 2 percent of the simplified seller use tax, for taxes timely reported. In addition, participants could be granted amnesty for “any uncollected remote use tax that may have been due on sales made to purchasers in the State for the twelve-month period preceding the effective date of the eligible seller’s participation in the program.”

In the event of a federal solution

Should Congress enact legislation authorizing states to require a seller to collect and remit taxes on sales of goods to in-state purchasers “without regard to the location of the seller”:

• “This chapter shall be inapplicable as to any eligible seller who is not registered with the department as a participant in the program at least six months prior to the effective date of the federal legislation; and
• This chapter shall continue to apply to any eligible seller who has been approved by the department as a participant in the program at least six months prior to the effective date of the federal legislation and to any taxpayer who has paid or pays the simplified sellers use tax authorized under this chapter; provided that the eligible seller continues to collect, report, and remit the simplified sellers use tax and otherwise complies with all procedures and requirements of the program.”

Hawaii’s general excise tax is the largest source of tax revenue for the state. The state therefore has a compelling reason to go after remote tax revenue. While Hawaii’s House considers the Simplified Seller Use Tax Remittance Act, the Senate is considering a use tax remittance bill (Senate Bill 1301), which would compel consumers to remit use tax to the state tax department (on either a monthly or annual basis) if tax wasn’t collected by the retailer at the time of sale.

Will Amazon be the first remote retailer to voluntarily collect Hawaii tax?

Since the beginning of the year, ecommerce giant Amazon has announced its intention to voluntarily tax sales in six states: Mississippi, Missouri, Rhode Island, South Dakota, Vermont, and Wyoming. Will Hawaii be next?

Tax automation software can’t predict which states will enact new remote sales and use tax requirements. It can, however, simplify tax compliance for businesses that report in multiple states. Learn more.