Archive for June, 2009

Why an Internet tax under HB1405 won't help anyone

June 27th, 2009

Not one but two bills adopted by the 2009 legislature would tax Internet transactions in Hawaii.

One, HB1405, would require Internet vendors to collect the Hawaii gross excise tax (GET) on purchases from Hawaii. 1405 would treat “advertising affiliates” in Hawaii as the “substantial nexus” required by Quill Corp. v. North Dakota, a 1992 U.S. Supreme Court case.

The other, SB1678, would call for Hawaii to join 23 other states in adopting a cooperative “streamlined” (euphemism) national Internet sales and use tax. 1678 could not be effective until Congress passes a law to authorize this bill under the Commerce Clause.

Although both bills had mixed testimony, both passed and are now awaiting signature or veto by the Governor, who has traditionally opposed new taxes. But what will she do here?


The budget is making us frantic. We forget long-term economy building, we forget improving and making government more efficient. All we want to do is tax everything that moves to support a government that doesn't move.

Have we forgotten how important the Internet is to Hawaii? It is the great equalizer. It links us to the mainland and minimizes the isolation we might otherwise feel. It lets us shop as if we were there. Until now, although we’ve had to pay shipping charges, we didn’t have to pay GET.

With our relatively fast wire, it also gives us the opportunity, still largely unrealized, to develop an Internet and online media industry. And it gives our Internet operators the chance to make money by being affiliates of the big national retail sites like Amazon and many others.


Enter the 2009 legislature, terrified of the budget and looking in every corner for money to balance it. Enter Representative Isaac Choi, accountant in Manoa, known as the arch enemy and assassin of 221, who comes up with another anti-tech idea – taxing the Internet with 1405.

He thinks you just push Amazon around and presto out will pop $20 or $30 million of tax. Not so quick. If he’d thought it through, he’d have realized that it doesn’t work that way at all.

There will be no extra tax – Amazon will just terminate its affiliates in Hawaii, just as it did in New York when this came up. So terminated, the Hawaii online media industry will stop in its tracks, and Amazon will do exactly what it was doing before – not collect Hawaii GET.

1405 does do damage. The Hawaii affiliates will lose lots of income. The state will spend lots of money chasing around trying to find what Amazon is doing, but in the end the state will get no additional taxes, and Amazon will be unaffected. Beyond that, Amazon and the state could also get into a litigation donnybrook over the applicability of the Quill case.


1405 is thoughtless and unworthy. It’s not a good idea in any economy, much less this one. In French, this is called shooting ourselves in the foot, again.

It’s the same thing that happened with 221. With SB199, the legislature mangled the 221 tech tax credit to save tax money. They thought investors would keep on investing anyway, and the startups would have those investments anyway. Wrong. Investors are not stupid – if you take their incentive away, they take their investments away. The economy drops, the startups drop, and the investors go elsewhere, just when we need them most.

How different is that from what 1405 does to our online media industry? It’s the same short-sightedness. Wouldn’t it be a better thing to incentivize tech and the online media industry? If we cut them out, we lose them, and gain nothing. Who’s watching the store, so to speak?


Many people in the industry have objected to 1405, including Dean Takamine of Synertech Media, Roxanne Darling of Bare Feet Studios, Dan Leuck of TechHui, and Burt Lum and Ryan Ozawa of Bytemarks Cafe. The online community has risen up, but as in 221 it may be too little, too late.

It was clear in Amazon’s testimony: “If HB 1405 were enacted, Amazon would have little choice but to end its advertising relationships with Hawaii-based participants in the Amazon Affiliates Program.” Most recently, Amazon has confirmed that it plans to do exactly that on July 1st.

Perhaps the legislature is over-influenced by some of the pro-1405 testimony. We understand the opposition of the Retail Merchants, but why are the unions, the Social Workers Association and the Realtors Association moved to dump on online media? Do they speak for themselves?

Where was the attorney general? He volunteered opinions on bills clearly constitutional, but on 1405, where there are complex constitutional issues, he’s been silent. Do you think advertising by an affiliate is the same thing as a brick and mortar “substantial nexus” under the Quill case?


When you see not one but two bills aimed at the free use of the Internet, you can certainly feel the hot breath of the government all over a special place where government tax and regulation wasn’t necessary or appreciated. Perhaps the day of the free Internet is coming to an end.

One of the best things about Hawaii is that we could order from the Internet and get what we wanted from the mainland, especially things we could not find here, without paying that dreadful GET. However de facto, it was the one refuge from an otherwise plenary and regressive tax.

All this has provoked the State Tax Office to propose amnesty and resurrection of the long-unenforced “use” tax to tax Internet purchases in Hawaii. Clearly, the inviolability of the Internet, and the freedom it has offered, are in great jeopardy. The tax man is coming.


First, that tax policy must be thoughtful, not rush act. These proliferating nickel and time tax increases, both state and the city, are eating us alive. We have some of the highest taxes in the country. We really ought to think twice and three times before adopting knee jerk increases.

Second, that we have to think tech at all times. Every piece of legislation needs to be tested to see what it will do, pro or con, to diversification to a tech economy. Had this been done here, 1405 would not have passed. We need to incentive the development of our tech industry – it is the most important thing of all. We should not be dumping on it for a few illusory shekels.

How about spending some time showing Forbes it’s wrong? How about supporting business to work our way out of our incredibly bad rep from Superferry? How about some macro planning, and don’t tell me they’re doing that somewhere in DBEDT’s basement. Do we know where we are? Do we know where we’re going? Can we afford this kind of patchwork legislation?

Hopefully, Linda Lingle will exercise her veto. Hopefully, the next session will be better.

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