In Hawaii, Political Discontent Rising

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Photo: Emily Metcalf

BY LOWELL L. KALAPA – For the past few years as the economy took a dive both nationally and here in Hawaii, state and local governments have been struggling to address budget shortfalls.  In some cases, administrators and policymakers have slashed and burned their spending plans while others have adopted across-the-board tax rate increases or, in the case of Hawaii, subtlety targeted those tax increases at very select segments of the population.

In fact, taxpayers are quickly reaching that point where enough is enough and lawmakers and administrators are sensing the political discontent rising.  To a large degree, that’s why there is a plethora of measures in this year’s legislative hopper that turns again to user fees to fund many programs.


But what lawmakers don’t realize is that there is a way to collect more revenues without raising a single tax rate or adopting an increase in user fees.  It merely involves collecting the taxes that are already due under current law.  It involves collecting the taxes on purchases made by Hawaii residents on sales through catalogues, over the phone or via the internet.  Those purchases made by Hawaii residents from out-of-state vendors are already subject to the use tax which is imposed on consumer purchases from unlicensed sellers because they are not licensed to do business in the state.  It is levied to level the playing field between these out-of-state vendors and local businesses that must be licensed under the state’s general excise tax and charge the customers the tax at the 4% rate.

Concerned that they were subject to unfair competition by these cross-state vendors, the local “Main Street” retailers partnered with lawmakers across the nation to come up with a strategy that would insure that local sales taxes were levied and collected on such sales and remitted to the states of the purchasing customer.  Out of this coalition was born the “Streamlined Sales Tax Project” which would force cross-state vendors to collect the sales taxes that would be due on their sales to customers in other states.  Because sales tax laws differ among the various states, the Project negotiated compromises so that the rules would be the same.  For example, vendors would have to deal with only two rates for each state.  Inasmuch as many states allow their local governments to levy a sales tax at a variety of rates, the multiple rates would have created a nightmare for out-of-state vendors, a reason why the courts found that collecting the sales tax on cross-state sales inhibits interstate commerce.

Another problem was the slew of exemptions that each sales tax state grants.  Thus, the definition of what is taxable and what is not posed another challenge for the Project.  Finally, because the courts ruled collection of state sales taxes infringed on the interstate commerce clause, the Project needs an override of the clause.  And while measures have been introduced in Congress, it does not appear likely that it will pass any sort of legislation in the near future.

For Hawaii, there is a much more difficult problem and that is the general excise tax is NOT a retail sales tax.  As noted before, the general excise tax is a tax on the gross income of a business licensed to do business in Hawaii.  It is imposed not only at retail, but also at the wholesale stage.  More importantly, it is imposed not only on goods or things, but also on services.  In fact, Hawaii’s general excise tax is the envy of every other retail sales tax state.  Because of its broad base, Hawaii’s general excise tax produces a tsunami of tax revenues with its relatively low rate of 4%.

Thus, when legislation to adopt the model legislation of the Simplified Sales Tax Project was introduced several years ago, lawmakers took a very skeptical view of the measure as the model legislation basically attempts to turn Hawaii’s general excise tax into a retail sales tax for the purpose of collecting the tax on sales from out-of-state vendors.  It was very obvious that the sponsors of the legislation truly did not understand the uniqueness of Hawaii’s general excise tax.

Although a measure passed a couple of years ago, it merely set up a task force within the tax department to review the model legislation and recommend changes.  To date, none have been made.

But all is not lost in the pursuit of taxing interstate sales.  In recent years other states have grappled with the problem and it appears that a solution has been found.  That solution deserves serious consideration, if not adoption, by this year’s legislature.  Next week we will take a look at this solution and explain why it will probably be able collect the tax on sales by out-of-state vendors.