Internet Sales Tax again? SB2884

Replies to This Discussion

Permalink Reply by Jared I. Kuroiwa on January 28, 2012 at 7:43pm

Actually, SB2884 is just clarifying that digital goods fall under the GET like tangible goods. (the link in your post isn't going to the right place... http://www.capitol.hawaii.gov/measure_indiv.aspx?billtype=SB&bi...). The funny thing is that it actually appears to be a loophole in the law (What? I didn't have to pay GET?!).

The problem is that our current GET law, HRS 237 specifically states the sale of "tangible goods" (http://www6.hawaii.gov/tax/hrs/hrs_237.pdf). So any digital products we are building and selling wouldn't fall under it... I believe most of us (including me) have been paying GET as a contractor. SB2884 is clarifying that the sale of digital goods is the same as physical ones.

As for an "Internet Sales Tax", right now it would be against federal law. However, there have been moves to change that by a simplification of state tax laws (California is pushing it and Amazon has publicly supported it). It's called the "national streamlined sales and use tax agreement" and Hawaii is trying to fit into that framework... That takes us to SB2226.

SB2226 moves Hawaii into a simplified tax code to enable Internet tax collection (http://www.capitol.hawaii.gov/measure_indiv.aspx?billtype=SB&bi...). What that will do is remove the "physical presence" piece of state tax collection (Quill Corp. v. North Dakota, 504 U.S. 298 (1992)). What is interesting to me is that these tax changes would pull the GET from out of state commerce and give us a sales tax (they are quite different).

Permalink Reply by Paul Graydon on January 28, 2012 at 8:23pm

Streamline certainly seems interesting.  The text on wikipedia suggests it was initiated by congress to avoid an internet sales tax.  Not sure how that can be true given it does everything to make it easier to happen.

I'm not sure I quite follow what the ultimate import of the bill would be then, haven't quite got my head around how the Tax system works here :D (i'm a dirty foreigner).  A tax on every sale of Hawaii produced digital media?

Permalink Reply by Jared I. Kuroiwa on January 28, 2012 at 8:46pm

SB2884 is just clarification of the GET. If you buy something, whether physical or digital, in Hawaii or from a business with a presence in Hawaii you need to pay the GET. I really don't think anyone was dodging this one as I know Apple charges GET for iTunes downloads. The current law just doesn't say digital and just says tangible so they're adding it for clarification.

Here's a little PDF from the state that tries to explain the difference between a sales tax and GET (http://www6.hawaii.gov/tax/taxfacts/tf96-01.pdf). Simply put, a sales tax is levied on the consumer... the GET on the business and that means ALL business. It actually is pretty complicated if you try to understand the nuances and some estimates would say the GET is higher than every other state's sales tax (don't be fooled by 4% looking so low). The GET is also considered a regressive tax as it is levied on all goods/commerce including food, drugs, etc. If you don't believe it... how do you think the state runs on the GET?

Now SB2226 is moving to an Internet sales tax along with many states. Not sure what Wikipedia article you're reading, but one of the roadblocks in collecting an Internet sales tax is that every state has different laws. So states have banded together to simplify their tax codes to reduce the burden of collecting a state Internet sales tax (note, this would work for any company now doing business through catalogs and phone orders). So if you're against an Internet sales tax, SB2226 is the one you should be following.

Permalink Reply by Daniel Leuck on January 29, 2012 at 1:01am

In general, the concept of a GET is an extremely bad idea. It is an insidious regressive tax that compounds at each point in the supply chain and perverts the operation of services businesses. We should oppose this expansion (i.e. the explicit inclusion of digital goods) as well as SB 2226.

Permalink Reply by Jared I. Kuroiwa on January 29, 2012 at 12:06pm

It's fine to be against the bills. However I think you need to flesh out why without just saying it's bad for business as the people that are introducing the bills have just as many people saying it's good for the state. And it's hard to argue that it wouldn't bring more collections into state coffers. Because it will.

I really don't see the point of attack for SB2884 as it is just clarification and most of us have been paying it anyway. Saying the GET is bad won't get much traction as that's been discussed for decades and has never moved past step one. The Tax Foundation of Hawaii has been trying to educate people on the GET and it looks like they've faded into the clouds (http://www.tfhawaii.org/). A fight to have an industry excluded from a tax is not a fight I've often seen won.

Now SB2226 is a different beast as the Internet sales tax is something new and still hasn't really started. California is initiating collections in Sept. 2012. However, Hawaii is going through the Streamlined Sales and Use Tax Agreement (http://www.streamlinedsalestax.org/) that needs to pass through Congress and probably won't get pass the House as it is controlled by the Republicans (and they hate new taxes and none of them have come out in support of it). Most large online businesses are supporting it... then again, some of them already have a physical presence in most states and they have the resources to take on the extra expense. It's the small businesses that will be hit... and as we know, most business in Hawaii is small business. However, even if the streamlined tax doesn't pass Congress this year that doesn't say it won't pass in 2013 as the House will look different.

But here's the rub:

1. All companies in Hawaii already pay the GET as we have a physical presence. The companies that would be affected by HB2226 would be the ones that are out of state.

2. Twenty-four (24) states are already on board with the streamlined tax agreement with nine (9) more on the way. Why would we exclude Hawaii from a tax that most states will be collecting? Especially one that would only reduce the burden for online companies out of state?

Again, I understand being against something in concept. But when you try to explain your position to law makers, especially ones that have already taken the first step (and this is not the first year an Internet sales tax has been introduced), you need to have a clear reason to combat the bill and get others to follow suit. And while I don't see it now... maybe someone else in TechHui does.

Permalink Reply by Daniel Leuck on January 29, 2012 at 8:45pm

@Jared You've obviously done your research and you raise excellent points. I'm sure you are correct in asserting that getting rid of the GET or converting it to a common sales tax in the near term isn't likely. I agree that most businesses pay it on virtual goods anyway. My point is that I'd rather see bills that narrow it, especially in areas where its currently ambiguous. In other words, I want the opposite of SB2884 - a bill to specify that digital goods are not subject to GET.

I strongly oppose the Streamlined Sales and Use Tax Agreement for the reasons you specified. It hurts small businesses in the virtual space most. Its unfortunate 24 states are heading the wrong direction with this. I'd rather lead in the other direction than jump on the bandwagon.

Jared I. Kuroiwa: It's fine to be against the bills. However I think you need to flesh out why without just saying it's bad for business as the people that are introducing the bills have just as many people saying it's good for the state. And it's hard to argue that it wouldn't bring more collections into state coffers. Because it will.

I'm not convinced of that. They said the same thing about HB 1405 right up until Amazon said they would stop doing business with Hawaii. Raising taxes X% doesn't mean tax revenue increases proportionally.

Permalink Reply by Jared I. Kuroiwa on January 29, 2012 at 11:56pm

I'd doubt anything would be exempt from the GET as even fundraising for 501c3s pay GET on their efforts (strange, but true). If the state moved to a sales tax, we may see some industries being teased out, i.e. food and drugs. But as we've already discussed, that's highly unlikely in the near future.

HB1405 was a totally different beast as it tried to get around the "physical presence" rule by establishing affiliates as an extension of the company. That would make only Internet companies that have affiliates in the state have to collect taxes while their competitors without affiliate arms would remain exempt. Amazon took the correct stance to close down affiliates as they would still be able to do business in the state without them. This would have made HB1405 moot as any company with affiliates would just drop them. The Internet sales tax now being looked at would be levied across the board to all commerce done from residence in Hawaii.

It is a good point that an increase in taxes does not mean an increase in tax revenue (though Amazon has pledged support for the Internet sales tax already). Right now there are no state taxes coming into Hawaii from online vendors outside of the state (well, except for companies that pay the use tax like they're supposed to... but many individuals and small businesses do not). I just don't see companies refusing to pay the tax when they are already paying for it in 24+9 states (at this time). And if they do, there would be local companies (or online competitors) that would come into the market to fill the void.

You are right that the small online businesses will be impacted most by the Internet sales tax and it may close some of them down as the taxes may make their businesses unsustainable. However, I don't see that as necessarily bad as if the company is staying afloat by the lack of having to pay taxes then they shouldn't have started up in the first place.

But I did leave one point out and that is the burden on the Internet sales tax will fall on the in-state consumer as those transactions would be the only ones that would initiate a Internet sales tax collection and payment. While that may sound bad, it is commerce happening in the state and would place online and brick and mortar on a level playing field. In fact, it will help local businesses in keeping commerce here. The only companies benefiting from not having an Internet sales tax are those that have no presence in Hawaii. Is that good? I tend to think I'd rather support local businesses as they are the backbone of our economy.

To support tech businesses in Hawaii, I would push more for tax credits like Act 221 (with better focus and teasing out the film industry), increasing funding opportunities and infrastructure (Even if I'm totally against HB2267 as it gives all of the bond revenue, $100M, to one company. Fundamentally wrong http://www.capitol.hawaii.gov/measure_indiv.aspx?billtype=HB&bi...). A goal that we should have is to incentivize investments in local companies from the organizations that have the money, i.e. KSBE and the Hawaii Targeted Investment Program (HiTIP) from the state's ERS.

Great discussion! And it's good to see that more people are becoming active in what is happening in the legislature as it does affect all of us.