BREAKING NEWS FROM THE TAX FOUNDATION OF HAWAII

News release from Tax Foundation Hawaii.

June 21, 2018:  The Supreme Court of the United States today decided Wayfair, Inc. v. South Dakota, and held that “physical presence” is not necessary before States can validly apply their taxing powers to businesses that have neither persons nor property in a State but nevertheless conduct substantial business in that State.

The South Dakota law challenged in the case provided that a business having $100,000 in annual gross sales in South Dakota, or conducting 200 business transactions in South Dakota, needed to collect South Dakota’s sales tax on those sales or transactions.  The South Dakota Supreme Court invalidated the law because Quill Corp. v. North Dakota, a 1992 case, had held that physical presence was necessary.  The Court in Wayfair overruled Quill as well as an earlier physical presence case, National Bellas Hess v. Department of Revenue of Illinois.

Nevertheless, the Court stopped short of giving its full blessing to the South Dakota law, stating that the taxpayers had made other challenges to the law and those need to be addressed by the state courts first.  The Court noted that the law had three features designed to prevent discrimination against or undue burdens upon interstate commerce:  it had a safe harbor for those transacting limited business in the State; it was not retroactive; and the State was a member of the Streamlined Sales and Use Tax Agreement, which has been adopted by more than 20 States to standardize taxes to reduce administrative and compliance costs.

In Hawaii, Governor Ige recently signed into law Act 41 (S.B. 2514), which provides that a seller is considered to be doing business in the State and subject to our General Excise Tax if the seller has $100,000 in sales or more than 200 transactions in the current or immediately preceding taxable year.  The Act takes effect on July 1, 2018 and applies to taxable years beginning after December 31, 2017.  Although Act 41 was patterned after the South Dakota law, there are differences that sellers could focus on to question the law’s validity.

First, the law is retroactive.  For calendar year taxpayers, for example, the tax paying obligation goes back six months, and could apply hundreds or thousands of dollars of liability to taxpayers with closed and completed transactions.  Those taxpayers would have no opportunity to renegotiate the economic deals it struck in the first six months of the year.

Second, Hawaii is not a member of the Streamlined Sales Tax Agreement and cannot be a member unless its laws are amended significantly.  The reason is that Hawaii’s General Excise Tax has three separate tax rates.  One is for retail sales, one is for wholesale sales, and one is for insurance commissions.  To be compliant with the Streamlined Sales Tax Agreement, a State must administer one tax rate.

In any event, today’s decision is a victory for bricks and mortar retailers who have built stores in Hawaii and have employed local residents.  Those retailers understandably have had concerns over the years when they faced increasingly intense competition from online sellers who, in some cases, boasted that purchases from their sites were not subject to the same taxes that would need to be added to the price of the same goods from a local store.

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Online tax law could open state to challenge

Star-Adv June 22, 2018 (excerpts)

…A U.S. Supreme Court ruling Thursday that online retailers can be required to collect sales taxes in states where they don’t have a physical presence appears to be a boon for Hawaii’s tax coffers under a bill Gov. David Ige signed into law last week stipulating that online businesses with significant sales are subject to Hawaii’s general excise tax.

But despite Hawaii’s new e-commerce law in anticipation of the court ruling, local tax attorneys caution the state could still face legal challenges in collecting those taxes because of its unique tax structure and what now look like flaws in signed legislation….

While Hawaii modeled its law, Senate Bill 2514, now Act 41, on South Dakota’s law, there are differences. Like South Dakota, Hawaii requires that a company have at least $100,000 in gross annual sales or conduct 200 business transactions a year. However, Hawaii did make the law retroactive — the law goes into effect on July 1 and applies to the beginning of this calendar year — and the state is not party to the streamlined sales tax agreement. This could be a problem if a company wants to challenge Hawaii’s law.

“This ruling clarified what the battle lines are going to be when there is challenge of the Hawaii law — and I say when there is a challenge, not if there is a challenge,” said Ron Heller, an attorney at Torkildson Katz Hetherington Harris & Knorek, who specializes in tax law and business disputes relating to accounting and financial issues.

Tom Yamachika, president of the Tax Foundation of Hawaii, agreed that Hawaii’s law could be problematic. Yamachika said that Hawaii would have to amend its tax laws significantly to join the streamlined tax agreement. That’s because Hawaii’s general excise tax has three separate tax rates — one for retail sales, one for wholesale sales and one for insurance commissions. To comply with the Streamlined Sales Tax Agreement, the state must administer only one tax rate, Yamachika said…. 

Star-Adv: Pursue taxes on online shopping

Big Q: Should Hawaii be collecting taxes on online purchases?

read … Legislative Screw-up

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Message to EBay users June 22, 2018

The U.S. Supreme Court has announced their decision on the S. Dakota v. Wayfair case, overturning the long-standing rule that states could not tax businesses or sellers outside of their borders. Now is the time for Congress to act on legislation that protects small businesses.

And we need your help.

Please consider signing our petition to show our country's political leaders that these new Internet tax burdens could permanently damage U.S. small businesses. The petition takes less than a minute to complete. We will soon deliver this petition to President Trump, key members of Congress, and select state governors, so we need you to participate now.

eBay has always supported tax policy that is fair to entrepreneurs, artisans, and small businesses. Rest assured that eBay will continue to fight this battle on behalf of all of our valued customers.

Sincerely,
eBay

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Supreme Court Cuts Path for States to Tax Online Retailers

by Tim Ryan, CourtHouseNews, June 21, 2018

WASHINGTON (CN) – Reversing decades of precedent, the Supreme Court on Thursday held states may force online retailers to collect and remit sales tax on transactions even if they do not have a traditional storefront in the state.

The 5-4 ruling reverses the high court’s holdings in the 1967 case National Bellas Hess v. Department of Revenue of Illinois, and the 1992 case Quill Corporation v. North Dakota.

Writing for the majority, Justice Anthony Kennedy said the rule that retailers must have a physical presence in a state in order for a state to compel them to collect and remit sales tax “is an incorrect interpretation of the commerce clause.”

He also called the regime “an extraordinary imposition” by the court on the rights of the states to collect taxes.

“Quill’s physical presence rule intrudes on states’ reasonable choices in enacting their tax systems,” Kennedy wrote. “And that it allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust. It is unfair and unjust to those competitors, both local and out of state, who must remit the tax; to the consumers who pay the tax; and to the states that seek fair enforcement of the sales tax, a tax many states for many years have considered an indispensable source for raising revenue.”

In National Bellas Hess, the Supreme Court held states could not require mail-order catalog companies to collect sales tax on every purchase if they did not have a physical presence in the state, later reaffirming that holding in Quill.

In the absence of out-of-state retailers collecting state sales tax on their own, which Amazon and other large online sellers now do, customers are supposed to pay the tax themselves. Because few consumers do this, states lose anywhere between $8 billion and $33 billion every year, according to a study cited in Kennedy’s opinion.

South Dakota was one such state, with the state estimating its inability to collect taxes from online retailers costs it between $48 million and $58 million per year in tax revenue. Seeking to bridge this shortfall, state lawmakers in 2016 passed a law allowing the state to collect sales tax from “certain remote sellers.”

The South Dakota law limits the requirement to out-of-state companies that bring in at least $100,000 or conduct at least 200 sales to customers in the state.

Though a lower court granted summary judgment to a group of large online retailers because the law conflicted with the Supreme Court’s precedent in the area, Kennedy on Thursday wrote that precedent is “flawed on its own terms” and “creates rather than resolves market distortions.”

Kennedy rejected claims from the retailers that attempting to comply with a tangle of sales tax regimes in different states would be crippling, saying concerns about compliance costs for large companies are overstated.

“In other words, under Quill, a small company with diverse physical presence might be equally or more burdened by compliance costs than a large remote seller,” Kennedy wrote. “The physical presence rule is a poor proxy for the compliance costs faced by companies that do business in multiple states.”

He also noted the rule in Quill puts businesses with traditional storefronts at a disadvantage with online retailers that can sell the same goods at lower prices by not collecting sales tax.

“In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers – something that has become easier and more prevalent as technology has advanced,” Kennedy wrote.

He acknowledged that Congress could undo the physical presence rule if it wanted, but said it should not be left to Congress “to address a false constitutional premise of this court’s own creation.”

While he noted overturning Supreme Court precedent is a serious undertaking, the boom of the internet has fundamentally transformed the issue from the time the court last considered it in Quill.

Kennedy was joined in the majority by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch.

Writing for an unusual coalition of justices that includes three of the court’s most liberal members, Chief Justice John Roberts wrote that while he agrees with the majority’s decision to overturn National Bellas Hess, members of Congress, not Supreme Court justices, should be the ones to tinker with the rules for the vast online marketplace that has developed under the precedent.

“Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress,” Roberts wrote. “The court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”

Roberts wrote the majority is seeking to reverse precedent with “an inexplicable sense of urgency,” noting some of the largest online retailers are already starting to collect sales tax voluntarily and that states are increasingly able to collect taxes on sales to out-of-state companies.

He also emphasized the burden on retailers attempting to comply with sales tax regimes across the country. Detailing a few oddities in local tax laws, such as New Jersey’s requirement that customers pay sales tax on yarn for “art projects” but not for sweaters, Roberts said the court’s decision could seriously harm small businesses that have been able to thrive online.

“People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country – but probably not if they have to figure out the tax due on every sale,” Roberts wrote.

Justices Sonia Sotomayor, Elena Kagan and Stephen Breyer joined Roberts’ dissent.

South Dakota Attorney General Marty Jackley, who argued the case for the state at the Supreme Court, praised the decision on Thursday.

“Today’s landmark decision is a win for South Dakota and for Main Street businesses across America that will now have a level playing field and tax fairness,” Jackley said in a statement.

In a statement on Thursday, online retailer Wayfair, one of the respondents in the case, said the decision likely will not have a significant impact on its business, as it already remits sales tax on roughly 80 percent of its sales. However, the company said the same cannot be said for smaller businesses.

“Wayfair has long supported a legislative solution that would establish a level playing field for brick-and-mortar and online retailers by permitting states to collect sales tax on online sales,” Wayfair said in a statement. “While we believe the court was not the ideal venue for creating this level playing field, we expect that today’s decision will bring clarity and certainty to this issue.”

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PDF: Supreme Court Ruling

AP: Online shoppers can be forced to pay sales tax, Supreme Court rules