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. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, 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.
Below is an article on the current rules on Internet sales tax in Hawaii. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
A Note on Hawaii Tax Terminology
Instead of the more common term “sales tax,” Hawaii law uses the term “general excise tax.” Hawaii’s Department of Taxation currently directs taxpayers to Tax Facts 96-1 for an explanation of the relationship between the two terms. In this article, “sales tax” and “general excise tax” are used interchangeably.
The General Rule: Physical Presence in the State
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 a 1992 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:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For guidance on how physical presence is determined specifically under Hawaii law, consult Section 237-13-02.01 of Title 18 of the Hawaii Administrative Rules, which states that the general excise tax is not due unless the seller has “nexus” with the state. (In its Quill decision, the United States Supreme Court refers to several types of potential “nexus” between a business and a state, including one based on the Due Process Clause of the Constitution and one based on the Commerce Clause of the Constitution; the type of “nexus” (or connection) the Supreme Court ultimately found relevant for mail-order businesses was the Commerce Clause version, which, for all practical purposes, is physical presence. Hawaii government documents on the general excise tax, in turn, generally refer to "nexus” rather than “physical presence.” 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.”)
As you might expect, 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.
Example 1: You are operating solely out of a warehouse in Atlanta, Georgia and make a sale 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 operating solely out of a store in Pearl City, Hawaii and make a sale 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 to a customer in Waipahu, Hawaii: You are required to collect sales tax from the Waipahu customer.
The Customer’s Responsibility
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. The brochure indicates, for example, that use tax is due for custom software purchased over the Internet from an out-of-state company.
While you might not know it from looking solely at Hawaii’s sales tax statute, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states, as well as at the federal level. In fact, in 2009, the Hawaii legislature tried to enact a law that would require large Internet retailers, like Amazon.com and Overstock.com, that have so-called “click-through” arrangements with Hawaii residents, to collect and pay the general excise tax. However, the bill was vetoed by the Governor. At this time, Hawaii has not enacted any law that would require out-of-state retailers to collect sales tax from Hawaii customers.
In Hawaii , the physical-presence rule continues to apply for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Hawaii Department of Taxation to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.