Report Title:

Electronic Commerce; Streamlined Sales and Use Tax

Description:

Establishes a method by which to tax electronic commerce. Directs the Department of Taxation to make recommendations on how to amend existing general excise tax to conform with the model streamlined sales and use tax agreement. (SB1171 HD1)

THE SENATE

S.B. NO.

1171

TWENTY-THIRD LEGISLATURE, 2005

S.D. 2

STATE OF HAWAII

H.D. 1


 

A BILL FOR AN ACT

 

relating to electronic commerce.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that the National Conference of State Legislatures estimates that in 2003, Hawaii lost approximately $112,000,000 to $117,000,000 in state and local revenues due to the State's inability to capture tax revenues from electronic commerce transactions. The National Conference of State Legislatures estimates that by 2008, Hawaii will lose between $157,000,000 and $245,500,000 and stated that if nothing is done by 2008, Hawaii stands to be one of the top ten states with tax revenues lost in electronic commerce transactions.

The legislature further finds that with regard to the loss in revenues due to the State's inability to tax electronic commerce, Hawaii's situation is not unique. The Streamlined Sales Tax Project (Project) is an effort created by state governments, with input from local governments and the private sector, to simplify and modernize sales and use tax collection and administration. The Project's proposals include tax law simplifications, more efficient administrative procedures, and emerging technologies to substantially reduce the burden of tax collection. The Project's proposals are focused on improving sales and use tax administration systems for both local businesses and remote sellers for all types of commerce. Forty-two states and the District of Columbia are involved in the Project. Nationally, forty-five states and the District of Columbia impose a sales and use tax.

The Project was organized in March 2000, and is conducting its work through a steering committee with co-chairs and a number of work groups. Project participants are generally state revenue department administrators, but there are also representatives of state legislatures and local governments. Businesses, including national retailers, trade associations, manufacturers, direct marketers, telecommunications companies, leasing companies, technology companies, printers, accounting firms, and others, have actively participated in the Project by offering expertise and input, reviewing proposals, suggesting language, and testifying at public hearings.

The goal of the Streamlined Sales Tax Project is to provide states with a streamlined sales tax system that includes the following key features:

(1) Uniform definitions within tax laws. Legislatures may still choose what is taxable or exempt in their state. However, participating states will agree to use the common definitions for key items in the tax base and will not deviate from these definitions. As states move from their current definitions to the Project's definitions, a certain amount of impact on state revenues is inevitable. However, it is the intent of the Project to provide states with the ability to closely mirror their existing tax bases through common definitions;

(2) Rate simplification. States will be allowed one state rate and a second state rate in limited circumstances (food and drugs). Each local jurisdiction will be allowed one local rate. A state or local government may not choose to tax telecommunications services, for example, at one rate and all other items of tangible personal property or taxable services at another rate. State and local governments will accept responsibility for notice of rate and boundary changes at restricted times. States will provide an on-line rate/jurisdiction database to simplify rate determinations;

(3) State level tax administration of all state and local sales and use taxes. Businesses will no longer file tax returns with each local government within which it conducts business in a state. Each state will provide a central point of administration for all state and local sales and use taxes and the distribution of the local taxes to the local governments. A state and its local governments will use common tax bases;

(4) Uniform sourcing rules. The states will have uniform and simple rules for how they will source transactions to state and local governments. The uniform rules will be destination/delivery based and uniform for tangible personal property, digital property, and services. Special sourcing rules will be developed for unique industries;

(5) Simplified exemption administration for use- and entity-based exemptions. Sellers are relieved of the "good faith" requirements that exist in current law and will not be liable for uncollected tax. Purchasers will be responsible for paying the tax, interest, and penalties for claiming incorrect exemptions. States will have a uniform exemption certificate in paper and electronic form;

(6) Uniform audit procedures. Sellers who participate in one of the certified Streamlined Sales Tax System technology models will either not be audited or will have limited scope audits, depending on the technology model used. The states may conduct joint audits of large multi-state businesses; and

(7) State funding of the system. To reduce the financial burdens on sellers, states will assume responsibility for funding some of the technology models.

The legislature further finds that the states are also participating in a joint business – government study of the costs of collection on sellers. The Project proposes that states change their sales and use tax laws to conform with the simplifications as proposed by the Project. Thus, the simplifications would apply to all sellers. Sellers who do not have a physical presence or "nexus" are not required to collect sales and use taxes unless Congress chooses to require collection from all sellers for all types of commerce. Sellers without a physical presence can volunteer to collect under the proposed simplifications. Registration by sellers to voluntarily collect sales and use taxes will not infer that the business must pay business activity taxes, such as the corporate franchise or income tax.

As proposed by the Project, the streamlined sales tax system will provide sellers the opportunity to use one of three technology models. A seller may use Model 1 where a certified service provider, compensated by the states, will perform all of the seller's sales tax functions. A seller may use Model 2, a certified automated system, to perform only the tax calculation function. A larger seller with nationwide sales that has developed its own proprietary sales tax software may use Model 3 and have its own system certified by the states collectively. However, some sellers may choose to continue to use their current systems and still enjoy the benefits of the Project's simplifications.

The legislature further finds that the Streamlined Sales Tax Project envisions two components to the legislation necessary to accomplish the Project's goals. First, states would adopt enabling legislation referred to as the Uniform Sales and Use Tax Administration Act ("Act"). The Act allows the state to enter into an agreement with one or more states to simplify and modernize sales and use tax administration in order to reduce the burden of tax compliance for all sellers and all types of commerce.

According to the Project, states would amend or modify their sales and use tax laws to achieve the simplifications and uniformity required by the participating states working together. The Project refers to this legislation as the Streamlined Sales and Use Tax Agreement ("Agreement"). Some states will require only minor changes to current law to implement the requirements of the Agreement. Other states with more complicated sales tax laws may require significant changes to current law to be in accord with the Agreement.

In Hawaii, certain amendments will have to be made to the State's existing general excise tax law to comply with the requirements of the Agreement and Act. For example, the Project's Agreement requires a participating state to establish uniform rounding procedures when calculating tax liability and specific reporting requirements. Hawaii may also have to address such issues as the exemption of certain tangible goods from sales, use, or general excise taxation. Because Hawaii does not exempt tangible goods such as food from its excise tax, if it were required to do so under the Agreement, the State would need to identify and define such products for exemption.

A certificate of compliance would document each state's compliance with the provisions of the Agreement and cite applicable statutes, rules or regulations, or other authorities supporting such compliance. Public notice and comment will be provided before a state becomes part of the interstate Agreement. A state is in compliance with the Agreement if the effect of the state's laws, rules or regulations, and policies is substantially compliant with each of the requirements of the Agreement. If a state is found to be out of compliance with the Agreement, it will not be accepted into the interstate Agreement or will be sanctioned or expelled by the other participating states. In a voluntary system, sellers who are voluntarily collecting sales taxes for participating states may decide to no longer collect for the expelled state. Also, that state may not have a vote on changes in the Agreement.

Under the Agreement, a governing board will be comprised of representatives of each member state of the Agreement. Each member state is entitled to one vote on the governing board. The governing board is responsible for interpretations of the Agreement, amendments to the Agreement, and issue resolution. A State and Local Government Advisory Council and a Business and Taxpayer Advisory Council from the private sector will advise the governing board.

On November 12, 2002, thirty states and the District of Columbia approved the interstate Agreement provisions. As of April 2004, twenty states have moved forward and enacted all or part of the conforming legislation. It is anticipated that states that enacted the conforming legislation and are found to be in compliance with the Agreement will continue as the governing states of the interstate Agreement of the future.

SECTION 2. (a) No later than November 1, 2005, the department of taxation shall:

(1) Identify issues that need to be resolved to effectuate the orderly enactment and operation of a streamlined sales and use tax that is based on the Streamlined Sales Tax Project's model Agreement and Act, including issues of conformance with the State's existing general excise tax law and other laws as may be required;

(2) Draft policy recommendations to resolve these issues for the legislature to consider; and

(3) Conduct informational briefings for the legislature on its recommendations pursuant to paragraph (2) and its efforts to comply with the purposes of this Act.

(b) No later than twenty days prior to the convening of the 2006 regular session, the department of taxation shall submit proposed legislation to the legislature that provides for the implementation of a streamlined sales and use tax in accordance with the Streamlined Sales Tax Project's model Agreement and Act and any necessary conforming amendments to the State's existing general excise tax law and other laws as may be required.

SECTION 3. This Act shall take effect upon its approval.