Honorable Robert Bunda

President of the Senate

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Media, Arts, Science, and Technology, to which was referred S.B. No. 1171 entitled:

begs leave to report as follows:

The purpose of this measure is to establish a method by which the State can collect current use taxes now being lost on electronic commerce sales.

Testimony in support of the measure was received from the Retail Merchants of Hawaii, the Hawaii Government Employees Association, and the law firm of Chun, Kerr, Dodd, Beaman, and Wong. The Department of Taxation took no position on the measure. The Tax Foundation of Hawaii submitted comments.

Specifically, the measure requires the Department of Taxation (Department) to study issues dealing with the Streamlined Sales Tax Project and make recommendations to the Legislature through informational briefings by November 2005. The measure also requires the Department to submit proposed legislation to the Legislature prior to the convening of the 2006 Regular Session to implement a streamlined sales and use tax.

Your Committee finds that, according to the National Conference of State Legislatures, 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, based on a study conducted by the University of Tennessee, estimates that, by 2008, Hawaii will lose between $157,000,000 and $245,500,000, and states that, if nothing is done by that time, Hawaii stands to be one of the top ten states in terms of tax revenues lost in electronic commerce transactions.

A February 11, 2005, Honolulu Advertiser article reported that, according to a study conducted by Scarborough Research, a New York-based media research firm, fifty-two per cent of homes, or a projected 316,380 people in Honolulu, access the Internet via a pricier broadband connection, compared with a national average of thirty-three per cent. The Honolulu Advertiser article noted that this is the second time Honolulu has ranked first in broadband use on the survey conducted by the New York-based media research firm.

According to the Scarborough study, ten per cent of Honolulu's broadband users spent $2,500 or more in the past year, compared with a national average of nine per cent. Seventeen per cent of local broadband users spent between $1,000 and $2,499 a month, versus fifteen per cent nationally. The Honolulu Advertiser article concluded from the study's findings that Honolulu internet users with broadband connections spend more money online per month than high-speed surfers in other major cities across the United States.

The article stated that the most shopped-for items by Honolulu users were airline tickets, clothing or accessories, books, computer hardware and software, and CDs, tapes, and other music. Your Committee notes that all these transactions are retail transactions and, as such, would be subject to the State's existing use tax. Unfortunately, because no uniform means of collecting the State's use tax exists for electronic commerce transactions, the use taxes on the vast majority of these transactions go uncollected.

Your Committee also finds that, as of January 1, 2003, the Department of Taxation established a use tax project to collect more use tax on automobiles imported into the State. The use tax project involved the development and issuance of a new G-27 (Motor Vehicle Use Tax Certification) tax form by the Department of Taxation in order to make it easier for registrants of vehicles imported into the State to pay for the use tax at the same time they register the vehicle with a county. In the 2002 tax year, prior to the use tax project's establishment, the Department of Taxation collected $48,913 from non-business taxpayers registering imported vehicles. In the 2003 tax year, after the implementation of the use tax project, the Department of Taxation’s collections for the same category jumped over seven hundred per cent to $385,079. The results of this project show the potential of how the State can capture a greater amount of uncollected tax revenue if the State adopts a mechanism that provides a more efficient means of tax identification and collection. Your Committee believes that the uniform streamlined sales and use tax can be that mechanism.

Your Committee further finds that the 2001-2003 Hawaii Tax Review Commission recommended that the State participate in the Streamlined Sales Tax Project. To this end, the Legislature enacted Act 173, Session Laws of Hawaii 2003, which authorized the State to engage in interstate discussions to develop a simplified sales and use tax system.

Act 173, Session Laws of Hawaii 2003, codified as Chapter 255D, Hawaii Revised Statutes, is substantially similar to the model legislation drafted and recommended by the National Conference of State Legislatures for adoption by the states. The model legislation and Chapter 255D, Hawaii Revised Statutes, direct the revenue departments of participating states to engage in multi-state discussions to develop a simpler, uniform, and fairer system of sales and use taxation, that removes the burden imposed on retailers, preserves state sovereignty, and enhances the ability of the United States firms to compete in the global economy.

To assist the Department of Taxation, Chapter 255D, Hawaii Revised Statutes, also established an advisory council that was to be appointed by the Governor with whom the Department was to confer with when developing and advocating the State's streamlined sales and use tax policy.

To date, no advisory council members have been appointed and the advisory council has yet to be convened. Therefore, your Committee has amended the measure by adding provisions that amend Chapter 255D, Hawaii Revised Statutes, by repealing the establishment of the advisory council and all references appertaining thereto.

Your Committee believes that, based on the estimated revenue losses to the State attributable to uncollected electronic commerce transactions that are subject to Hawaii's existing use taxes, the State should immediately act upon the agreement of Project participating states to enact a uniform streamlined sales and use tax. Your Committee further believes that the provisions of the amended measure accomplish this purpose.

Your Committee has also made a few technical nonsubstantive changes.

As affirmed by the record of votes of the members of your Committee on Media, Arts, Science, and Technology that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1171, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1171, S.D. 1, and be referred to the Committee on Ways and Means.