Hawaii backs off taxing Internet shopping
By MARK NIESSE , 07.02.09, 08:56 AM EDT
HONOLULU -- Shopping on the Web from Hawaii will remain tax free, at least for a little longer.
After hearing pleas from state Internet business owners, Gov. Linda Lingle on Wednesday vetoed a bill that would have forced online retailers to collect Hawaii's 4 percent general excise tax if they advertise in the state.
Several Web-based companies, including Amazon.com ( AMZN - news - people ) and Overstock.com ( OSTK - news - people ), dropped their affiliate advertisers this week so they wouldn't have to collect sales taxes if the bill had become law.
Unless the Legislature's Democratic majority overrides the Republican governor's veto, Amazon said it would reinstate its Hawaii affiliates.
"The collateral damage is that all these Hawaii residents, thousands of them, are losing money from online advertising," said Dean Takamine, president of Honolulu online marketing company Synertech Media. "If this became law, I would have to take steps to move my company to a more business-friendly state."
The bill Lingle vetoed Wednesday would have allowed state taxes on Internet sales if the company has a presence in the state through the use of marketing associates, which refer customers to Web businesses.
By cutting its marketing efforts in Hawaii and other states, Amazon would no longer have a presence there and wouldn't have to collect the sales tax.
"It's rather futile because it puts small businesses out of business," said Rebecca Madigan, founder of the San Diego-based Performance Marketing Alliance, which represents affiliate marketers. "If merchants pull out, the state doesn't collect that tax anyway."
Lingle also included another measure on her potential veto list that would enlist Hawaii in the Streamlined Sales Tax Project, an effort to simplify tax rates nationwide so retailers could collect online sales taxes in those states even if they have no operations located there.
"The Streamlined Sales Tax would be a much more evenhanded and simplified way of collecting and remitting sales taxes," said Seattle-based Amazon spokeswoman Patty Smith.
The Legislature probably won't attempt to override the Internet tax veto that's based on affiliates because the measure has technical and legal flaws, said House Speaker Calvin Say, D-St. Louis Heights-Wilhelmina Rise.
It's also "questionable" whether the Streamlined Sales Tax veto will be overridden, Say said.
Taxes have always been required on all purchases - whether they're made inside Hawaii or not - but courts have ruled that only online businesses with physical operations in a state must collect the taxes, and residents seldom report them.
"It makes sense to collect what's due before we go out and raise new taxes," said Sen. Carol Fukunaga, D-Lower Makiki-Punchbowl, who favors the Streamlined Sales Tax. "This is a simpler way of how to solve the problem of taxing out-of-state sales."
Hawaii is missing out on about $37 million this year and $45 million next year in uncollected e-commerce sales, according to an April study by the University of Tennessee.
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