Hawaii Supreme Court finds state use tax constitutional

The Hawaii Supreme Court has determined the state’s use tax is constitutional. Hawaii can impose its use tax on purchases from out-of-state sellers.

While CompUSA is now defunct, the Texas-based computer retailer once operated two retail stores in Hawaii. Between 2006 and 2008, it imported all inventory from out-of-state vendors, both goods for sale and goods for its own use. In accordance with the state use tax law, the company remitted close to $386,000 in use tax payments to the Hawaii Department of Taxation for that 2006–2008 period.

Hawaii imposes a 0.5 percent general excise tax (GET) on the business of manufacturing and wholesaling in Hawaii, which vendors typically pass on to consumers. An equivalent use tax is levied on imports for resale.

In 2004, the use tax statute was amended to clarify that use tax applies to sellers that acquire goods out-of-state and import them for sale or resale in Hawaii. The amendment makes clear that use tax is owed even if “title to the property, or the risk of loss to the property, passes to the purchaser of the property at a location outside this State.” It also makes clear the use tax doesn’t apply to in-state unlicensed sellers.

CompUSA argued the 2004 amendment “rendered the statute unconstitutional” because it limits use tax to out-of-state sellers. This, the company said, puts it in violation of the United States Constitution Commerce Clause and Equal Protection Clause. After the Hawaii Department of Taxation denied CompUSA’s request for a refund for the use tax it had paid, a lawsuit ensued.

The case ended up at the Tax Appeal Court, which found in favor of the state. Upon appeal, the Supreme Court of Hawaii affirmed the Tax Appeal Court’s decision.

Discriminatory but valid

CompUSA argued that the post-amendment use tax law discriminated against out-of-state sellers, and both the Tax Appeal Court and the Supreme Court agreed.

However, both courts said the statute did not violate the Commerce Clause. The Supreme Court explains: “If a tax law is discriminatory on its face, it will nevertheless comport with the Commerce Clause if it ‘advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.’ One such legitimate local purpose is to ensure that those engaged in interstate commerce contribute their just share of state tax burdens by imposing a tax that complements an existing tax on intrastate commerce.”

Both courts also concluded that the use tax statute doesn’t violate the Equal Protection Clause. Making a distinction between in-state and out-of-state sellers “was not arbitrary, capricious, or unreasonable.” Rather, it “serves a legitimate local purpose of leveling the playing field between in-state and out-of-state sellers, because in-state sellers are subject to the general excise tax (GET), and out-of-state sellers are subject to the use tax.”

The case is CompUSA Stores, L.P. v. Hawaii Department of Taxation, Hawaii Supreme Court, No. SCAP-15-0000861.

Can states impose a tax on out-of-state sellers?

The Hawaii case dances around a question that’s been getting a great deal of attention of late: whether a state has the right to tax an out-of-state seller that has no physical presence in the state.

In 1992, the Supreme Court of the United States (SCOTUS) ruled in Quill Corp. v. North Dakota that a state could not tax a business unless it had a physical presence in the state. Recently, that ruling was challenged by South Dakota. South Dakota wants the court to abrogate the Quill decision so that it can tax out-of-state businesses that have significant economic activity in the state.

SCOTUS will issue its ruling in South Dakota v. Wayfair, Inc., any day now — it’s expected before the end of June. Learn more about South Dakota v. Wayfair and its possible impact on retailers here.