State senators appear poised to pass a controversial measure that would allow Hawaii to tap into millions of dollars in uncollected taxes on Internet sales.

Lawmakers are again proposing legislation this year that would allow Hawaii to join 24 other states in the Streamlined Sales Tax Project. The Hawaii Department of Taxation has estimated the state loses about $25 million in uncollected general excise and use taxes from Internet sales.

Senate Bill 2226 has already cleared the Senate Economic Development and Technology Committee, and is set for decision-making by Ways and Means Thursday. The bill was co-introduced by Sens. Suzanne Chun Oakland, David Ige and Josh Green.

The bill proposes simplifying state tax laws to help “level the playing field between local and out-of-state retailers” through the state’s participation in the Streamlined Sales Tax Project. The project came about through the National Conference of State Legislatures and the National Governors Association, but is now a standalone nonprofit initiative.

“At its core, the Streamlined Sales Tax Project uses technology to accurately identify tax rates, collect taxes, and remit state tax revenues,” the bill says. Out-of-state vendors collect the sales tax of the state to which the goods or products are shipped. The 24 member states collected a total of about $210 million in tax revenue during calendar year 2011, according to Executive Director Scott Peterson.

SB 2226 goes on to say that “most Hawaii consumers do not realize that they owe the state a 4 percent tax on their out-of-state purchases via catalog, direct mail, or the Internet, and it is virtually impossible for the Department of Taxation to calculate and collect what individual taxpayers owe on those purchases.”

It’s an effort that started out modestly in 2003 with things like a study group and legislative oversight committee to guide the discussion. In 2009, lawmakers came up with a bill that would have required online retailers to collect and pay Hawaii’s GET on their affiliate programs within the state.

That 2009 measure fell apart amid threats from big online merchants1. Amazon and Overstock threatened to dump its Hawaii affiliates if the law passed. It passed the Legislature but former Gov. Linda Lingle vetoed the measure.

In testimony on the latest bill, S.B. 2226, the Tax Foundation of Hawaii wrote that lawmakers should be cautious before jumping on the bandwagon.

“Lawmakers and other states should understand that (Streamlined Sales Tax Project) membership does not lead to a sudden influx of free tax money,” the foundation said. “In any event, this money will come from Hawaii residents and should be looked at as a tax increase notwithstanding the existing liability under the use tax laws.”

Peterson with the Streamlined Sales Tax Project said that a state’s participation in the initiative should not be viewed as a tax increase. “That’s a misconception — it’s really just a way of making sure the people are paying the taxes they owe,” he said. “This is a best-practices for sales tax administration. A state that adopts these ideas is going down the road of making their sales tax easier for retailers to administer.”

In a separate study on collecting taxes on Internet sales, the Tax Foundation of Hawaii said some states are going in a different direction than SB 2226 with a so-called “Amazon approach” that seeks to redefine a vendor’s physical presence in a state for taxing purposes.

Hawaii lawmakers introduced a measure this session — House Bill 1694— but it appears to have stalled. Chun Oakland said that measure was similar to the 2009 proposal and put too big of a burden on small businesses. The Senate bill doesn’t do that and simply enforces what’s on the books.

HB 1694 had proposed that if certain conditions are satisfied, an out-of-state seller of “tangible personal property” via the Internet would be considered to be engaging in business in Hawaii, and therefore subject to the GET and/or use tax.

The Tax Foundation testified on that bill, too, saying it’s “far superior to the approach of the ‘streamlined sales tax’ in that it continues to maintain the structure and philosophy of the general excise tax rather than attempting to change Hawaiis tax into a ‘sales tax.’

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