If you are selling goods or products online and some of your customers are located in Hawaii, you need to be aware of the state’s Internet sales tax rules. Collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
A Note on Hawaii Tax Terminology
Instead of the more common term“sales tax, Hawaii law uses the terms general excise tax and GET. Hawaii’s Department of Taxation currently directs taxpayers to Tax Facts 37-1 for an explanation of the relationship between the two terms. In this article, sales tax and GET are used interchangeably.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
The corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
Example 1: You are on online retailer operating solely out of a warehouse in Atlanta, Georgia and make a sale through your website to a customer in Kailua, Hawaii—a state where your business has no physical presence: You are not required to collect sales tax from the Kailua customer.
Example 2: You are an online retailer with a store in Pearl City, Hawaii and make a sale through your website to a customer in Hilo, Hawaii: You are required to collect sales tax from the Hilo customer.
Example 3: After several years of operating solely out of a warehouse in Atlanta, Georgia, you open a one room satellite office just outside of Honolulu, Hawaii—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Waipahu, Hawaii: You are required to collect sales tax from the Waipahu customer.
While the physical presence rule may seem clear, in the case of Hawaii, as well as quite a few other states, it is necessary to emphasize that in Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connection) between a business and a state. Many states, including Hawaii, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents. In the process, these states have sometimes defined nexus in ways that could go beyond physical presence.
For guidance on how physical presence is determined specifically under Hawaii law, consult Section 237-13-02.01 ofTitle 18 of the Hawaii Administrative Rules, which states that the general excise tax is not due unless the seller has nexus with the state. According to Title 18 of the Hawaii Administrative Rules, “‘Nexus’ means, but is not limited to, physical presence in the State or the taxation district as the context may require.” In addition, Section 237 provides examples of when a retailer must or need not collect the GET. The final example states that a retailer that does not have an office, store, or other representation in the Hawaii has “no substantial nexus with the State” and is not subject to the general excise tax.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax (or general excise tax) but, rather, a use tax. For additional information, see the Hawaii Department of Taxation’s brochure on the state’s use tax. In response to the question “Are Internet purchases subject to GET or use tax?” the brochure states “If the seller has a GET license, then the seller is subject to GET on its Internet sales. If the seller is unlicensed, then the purchaser is subject to use tax on its purchases.”
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most online businesses, it is the long established physical presence rule that will apply. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Hawaii Department of Taxation to see if the rules have changed.
Updated: April 27, 2016