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TAXWatch: The Wayfair Switch in Time

In late June, the U.S. Supreme Court decided the Wayfair v. South Dakota case.  It was a huge turning point in constitutional law involving the ability of states to tax “online sellers” such as Amazon, Newegg, and Wayfair.

“Yeah,” you might say.  “I know about online sellers because last April, Amazon started charging Hawaii GET, so I had to pay more for what I buy online. What a drag!”

But another way to look at the case is fairness to local businesses.  Local stores hire local people, pay taxes to local government, and support local communities.  Online stores typically didn’t do any of the above and were able to boast that local taxes weren’t added to purchase prices, giving them a 4% or 4.5% economic advantage.  (This is not quite true because the law says that the buyer is supposed to pay the 4% or 4.5% tax in that situation, which we call “Use Tax,” but many buyers, especially individuals, don’t.)

This year our legislature passed, and the Governor signed, Act 41 (S.B. 2514).  That law put key provisions of the South Dakota law into our GET law so we are well positioned to take advantage of South Dakota’s Wayfair victory.  It also said that it “shall take effect on July 1, 2018, and shall apply to taxable years beginning after December 31, 2017.”

Apparently, the Tax Department couldn’t contain its excitement over this turn of events.  On June 27, two days after the Wayfair decision was announced, the Department released Announcement 2018-10, which told taxpayers that if they met the criteria in the new law (200 transactions or $100,000 in sales in Hawaii either in the current or previous taxable year) that they were liable for GET as of the beginning of their taxable year.  For many taxpayers, that meant January 1, 2018.  The Department magnanimously offered to allow affected taxpayers to pay their back taxes ratably over the remainder of the year, without penalties and interest.  But it wanted the tax.

This would be a problem for some online sellers who had sold products or services to Hawaii customers for the first six months of the year.  Those sales transactions were already closed and completed, leaving no opportunity for the sellers to reevaluate their economic deals to take the Hawaii tax into account.

It seems that the Supreme Court foresaw just such a problem.  In its opinion, the Court noted that the South Dakota law had three features designed to prevent discrimination against or undue burdens upon interstate commerce, and one of them was that the law was not retroactive.  In that way it dropped a big hint that retroactivity was not going to be looked at favorably.

Act 41, moreover, wasn’t even retroactive.  It took effect on July 1, 2018, which probably meant that the Department had no business asking for tax retroactive to January in the first place.

On July 10, the Department amended Announcement 2018-10 to flip the Department’s position.  The new law would be applied from July 1, and there would be no retroactive application to that extent.  But there would be “catch-up payments” required for those taxpayers who tripped the threshold late in the year.  For example, if a taxpayer had no sales in Hawaii in 2018 but managed to break the threshold in sales in December 2019, then the Department wants tax on all $100,000 for the whole of 2019 to be paid with the December 2019 return.  Is that a fair outcome for the online seller that probably had no idea that the $100,000 would be achieved until November at the earliest?

Big note to businesses and others who are paying Use Tax:  After July 1, more vendors probably will be registered for GET.  If a vendor is registered for GET, the purchaser does not have to pay Use Tax.  So, it may pay to check your Use Tax list and stop paying tax on purchases from any newly registered vendor.

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About Tom Yamachika

Tom Yamachika
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.

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