Following a major U.S. Supreme Court decision in 2018 (South Dakota v. Wayfair), many States, including ours, enacted “economic nexus” legislation, which means that we consider any business that transacts $100,000 or more in Hawaii sales or 200 or more Hawaii transactions to be subject to Hawaii tax laws, and we require such a business to comply with the law by registering and paying tax. That legislation went into effect on July 1, 2018.
Last year, our legislature followed up by enacting “market facilitator” legislation, meaning that a market facilitator such as Amazon (for Amazon Marketplace) would be required to pay our general excise tax (“GET”) for the Hawaii transactions that it facilitates. That legislation took effect on Jan. 1, 2020.
After this one-two punch, many more businesses that sell to Hawaii customers are going to find themselves with Hawaii tax obligations.
That circumstance creates corresponding opportunities for Hawaii individuals and businesses.
All states with sales tax or similar taxes, including Hawaii, impose a “Use Tax.” It’s designed to protect local businesses. If a local customer has a choice between buying local and buying from an online seller, and the online seller is not obligated to pay our GET, then the online seller has an advantage because the local seller must pay the tax and the online seller doesn’t have to. The Use Tax Law compensates for this by saying that if you as the local customer buy from the online seller (or any seller who is not obligated to pay our GET), then you are required to pay an amount comparable to the avoided GET. Most individuals don’t know about this tax, but many businesses do because the Department of Taxation will scrutinize large business purchases for this tax if the business is under audit.
If you are buying from a business that must pay our GET (whether or not it actually is paying), then you don’t have to pay Use Tax on purchases from that business. The trouble is that it’s not always obvious who is obligated to pay, and the facts could change over time. A 1988 Hawaii Supreme Court case involving a large auto dealership highlighted the problem. It paid Use Tax on purchases of motor vehicles for many years, thinking that the car manufacturer wasn’t obligated to pay GET. It was indeed paying – from 1969 to 1982 – but didn’t publicize the fact. The tax was 0.5% only, but over the several years and with the large purchases the dealership made, the Department collected over a million dollars extra because it was being paid by both the manufacturer and the dealership. Too bad, so sad, the court ruled, because the statute of limitations says you can only get the most recent three years refunded.
A Hawaii buyer can never really know whether its vendor pays GET because of tax return confidentiality rules, but it can take these steps:
- If the invoice shows the seller with a Hawaii address, don’t pay Use Tax.
- If the invoice shows Hawaii GET, don’t pay Use Tax.
- If the seller has an active Hawaii GET registration number (which can be searched for on the Department’s website) don’t pay Use Tax.
- If the buyer knows that the seller has a GET payment obligation, for example if it purchased $100,000 or more of merchandise (meaning that the seller had $100,000 in sales), then don’t pay Use Tax.
Taking these steps will allow most local buyers to avoid paying unnecessary Use Tax and will prevent the Department from doubling up on you. As buyers, we need to be vigilant and not be paying more taxes than we must.
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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.