Trying to capture some of the state taxes that go uncollected on mail-order and Internet sales, state lawmakers have sent Gov. Linda Lingle two approaches to get Mainland retailers to collect and pay taxes on sales from Hawai'i.

One bill would allow Hawai'i to join 23 other states in the Streamlined Sales Tax Project to simplify state tax laws and encourage retailers like Amazon.com to collect and pay state sales and use taxes. States that have signed up for the project are unable to require retailers to pay the taxes, however, until Congress passes federal legislation clarifying it is not a burden on interstate commerce.

The second bill would immediately require Mainland retailers to pay the state's general-excise tax if they have an economic nexus in the Islands through a presence on local Web sites. Local Web sites can get paid commissions for referring customers to Mainland retailers through links.

States are losing out this year on nearly $7 billion — $36.6 million in Hawai'i — in uncollected taxes on Internet commerce, according to a study by researchers at the University of Tennessee.

Yet there are doubts about whether the Streamlined Sales Tax Project is practical because of the complexity of bringing uniformity to various state tax laws. Local Internet entrepreneurs, meanwhile, warn that Mainland retailers will sever Hawai'i affiliate marketing ties rather than pay the state's 4 percent general-excise tax.

Amazon.com, the nation's largest online retailer, wrote to Lingle last week urging her to veto the bill that would subject the Seattle-based company to the general-excise tax. The company said it would have little choice but to end advertising relationships with Hawai'i-based Web sites in its associates program. Amazon.com issued a nearly identical warning in North Carolina, where lawmakers are considering a similar bill to help with a budget deficit.

Lingle has until July 15 to sign, veto or allow the bills to become law without her signature.

A FAIRNESS ISSUE

With the growth of Internet commerce, many tax experts believe states will eventually find a mechanism to collect taxes from both online and mail-order sales, which would help with state budgets and also level the playing field for traditional brick-and-mortar businesses unable to escape state taxes.

Hawai'i consumers would pay more for mail-order and online purchases because retailers would likely pass the taxes on to customers.

"For me, I would want to go out and collect what is due before I impose new taxes," said state Sen. Carol Fukunaga, D-11th (Makiki, Pawa'a), who has been an advocate for the Streamlined Sales Tax Project for several years. "If anything, this is the kind of thing where you would say, 'Wouldn't we want to preserve those kinds of government services that everybody relies upon by collecting everything that is due and owing right now?' "

State Rep. Isaac Choy, D-24th (Manoa), said Hawai'i should be imposing the general-excise tax on Mainland retailers who make money through local Web sites. He said the Streamlined Sales Tax Project is a good idea but has been slow to develop. He noted that large states such as California have not joined.

"One-size-fits-all does not work. It just does not work," said Choy, an accountant. "I would rather establish economic nexus, and every other state can do their own thing. We don't have to agree to any master agreement. I think it's an easier way of doing it."

Choy and the state Department of Taxation has estimated that the economic nexus approach could corner about $4 million in uncollected taxes annually.

State Rep. Cynthia Thielen, R-50th (Kailua, Kane'ohe Bay), opposes both bills.

"I think the nexus one can hurt some of our local companies, and that just doesn't make sense," she said. "And the basic thing is that the people are just too overtaxed at this point."

KEY DECISION

The U.S. Supreme Court, in Quill Corp. v. North Dakota in 1992, ruled that it was an unconstitutional burden on interstate commerce for North Dakota to apply a use tax on an out-of-state office supply company that had customers but no outlets or sales representatives in the state. The court found there must be a "substantial nexus" through a physical presence in the state to prevent the reach of state taxes from interfering with the national economy.

The Supreme Court suggested Congress was better qualified to resolve the issue, which eventually led the National Governors Association and the National Conference of State Legislatures to back the Streamlined Sales Tax Project and push for federal legislation.

State lawmakers in New York, seeing an opening in the affiliate marketing agreements that retailers like Amazon.com have with local Web sites, passed a law last year as part of the state budget that imposes state taxes on such retailers. Amazon.com and Overstock.com sued the state, but the law was upheld in January by the state Supreme Court.

Amazon.com is appealing to the New York State Court of Appeals, the state's highest court. Several states, including Hawai'i and North Carolina, are following New York.

VETO URGED

Paul Misener, Amazon.com's vice president for global public policy, wrote in his letter to Lingle that the approach is "unconstitutional because it ultimately would require sellers with no physical presence in Hawai'i to collect general excise tax merely on the basis of contracts with Hawaiian advertisers." He said Hawai'i could instead follow the Streamlined Sales Tax Project with other states.

Several local Web entrepreneurs have also urged Lingle to veto the bill, arguing it would handicap the growth of Hawai'i's online business and media industry.

Local Web sites can become affiliates of retailers like Amazon.com or sign up with brokers such as LinkShare, which connect local bloggers and publishers with advertisers. Local Web sites receive commissions when customers follow links to Mainland retailers and buy products or fill out surveys and become future leads.

Dean Takamine, president of Synertech Media, an online marketing firm in Honolulu, said that if the bill becomes law, many Mainland retailers will drop affiliate marketing in the Islands.

"Basically, what they'll do is they'll just kick off all Hawai'i advertising affiliates," he predicted.