Hawaii to tax online sales, July 2018

Update 8.27.2018: The Hawaii Department of Taxation has stated it will not retroactively administer Act 41, as initially announced. Taxpayers lacking physical presence in Hawaii who meet the $100,000 or 200-transaction threshold for 2017 or 2018 are subject to GET beginning July 1, 2018. Additional information.

Hawaii has enacted an economic nexus law that taxes out-of-state retailers doing a certain amount of business in the state. The law is similar to South Dakota’s economic nexus law, which is currently under review by the Supreme Court of the United States.

The succinct Senate Bill 2514 (Act 41) states that a retailer is engaging in business in the state, “whether or not the person has a physical presence in the state,” if in the current or immediately preceding calendar year that retailer:

• Has gross income or gross proceeds of $100,000 or more from the sale of tangible personal property, intangible property, or services delivered or consumed in Hawaii; or
• Sold in 200 or more separate transactions of tangible personal property, intangible property, or services delivered or consumed in Hawaii.

That’s about it, aside from the effective date, July 1, 2018, and that it’s applicable to taxable years beginning after December 31, 2017.

Sales tax vs. general excise tax

Instead of a sales tax, Hawaii assesses a general excise tax (GET) on all business activities. According to the Hawaii Department of Taxation, “The GET is different from a sales tax because: A sales tax is a tax on customers whereas GET is a tax on businesses; and businesses are required to collect sales tax from their customers whereas businesses are not required to collect GET from their customers.”

Because the Aloha State taxes most activities, many different types of businesses could be impacted by its new economic nexus policy.

Economic nexus and the Supreme Court

A steady stream of states have adopted economic nexus in recent weeks and months: Connecticut, Georgia, Hawaii, Illinois, Iowa, Kentucky, and Louisiana. These states appear to want their laws on the books before the Supreme Court issues a decision in the case of South Dakota v. Wayfair, Inc.

Precedent holds that a state cannot impose a tax collection obligation on a business that doesn’t have a physical presence in the state. This was upheld by the Supreme Court in Quill Corp. v. North Dakota (1992). South Dakota has asked the court to abrogate Quill’s physical presence standard. Wayfair has asked the court to find South Dakota’s law unconstitutional.

The court is expected to issue an opinion in South Dakota v. Wayfair by the end of June. If it finds in favor of South Dakota, economic nexus could become a valid alternative to physical presence nexus. However, a lot would depend on how much guidance the ruling provides: It could completely reverse Quill, partially abrogate it, or take another position.

If the court finds in favor of Wayfair, it could reaffirm the physical presence rule and strike down South Dakota’s economic nexus law. Or, as Joseph Bishop-Henchman of the Tax Foundation notes, it could expressly put it in the hands of Congress. The court encouraged Congress to get involved the last time it took up the issue (in Quill) — “Congress remains free to disagree with our conclusions” — yet Congress has been unable to agree on a solution.

There are other possible outcomes. The court could reschedule the case for next term, or remand the case back to state court.

Whatever the court decides in South Dakota v. Wayfair, Inc., it’s likely to have an impact on the economic nexus laws Hawaii and other states have enacted. Learn more about the possible after effects of the Wayfair decision at Avalara Sales Tax 360.