WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers Weekly Commentary For the Week of April 9, 2017 CreditAbles By Tom Yamachika, President This year’s legislative session, as in many others, considers many and varied forms of tax relief. Terms being bandied about include exemptions, deductions, and tax credits, and among tax credits there are the “CreditAbles” – refundable, nonrefundable, and assignable credits. This week we will take some of the mysteries out of those terms. An “exemption” or “exclusion” describes something that normally would be subject to tax – an item of income, perhaps – and says it won’t count toward figuring your tax. A “deduction” describes something that may or may not be subject to tax in the first place – such as an expense – and will be subtracted when figuring your tax. For personal income tax purposes, for example, a payment you get from an employer to reimburse you for bills you paid on your employer’s behalf is exempt (payments from your employer are normally taxable), but interest you paid to the bank on your mortgage is a deduction. Exemptions or deductions can be worth a little or a lot, depending on the tax rate. For state income tax where you are in the 8.25% bracket, for example, a $100 exemption or exclusion would change your tax bill by $8.25. Tax credits don’t reduce the income on which the tax is based. Instead, tax credits reduce tax directly. Different kinds of CreditAbles work differently, however. Refundable credits are functionally the same as cash. You can pay your tax bill with refundable credits, and if there are credits left over after all the tax is paid, the government will write you a check for the difference, just as if you paid your tax with the same amount of money. Typically, the Department of Taxation (DOTAX) doesn’t like refundable credits. They’re a lot of work, and involve more than one agency because under our system DOTAX can’t cut refund checks. Instead, a refund request needs to go through DOTAX’s checks and balances to the Department of Accounting and General Services, and those folks, after going through their own checks and balances, cut and mail the checks. I still wonder why DOTAX can’t cut its own checks. Nonrefundable credits are a lot less work because they are like store coupons. You can pay your tax bill with nonrefundable credits, but if there are any left over after your tax for the year is paid, no check is forthcoming. Instead, you need to wait for another occasion to use the credits – next year’s tax, perhaps. With assignable credits, the coupons can be bought and sold. The concept addresses nonrefundable credits that are earned by folks who typically don’t pay state tax, such as nonprofit charities or out-of-state organizations. A store coupon against tax is useless when you aren’t paying tax, but would be worth something to a person who does owe tax. In states that offer assignable credits, the credits typically trade at a small discount to compensate the buyer for the trouble it is going through. That’s one way a tax credit can be made valuable to a non-taxpayer without making the credit refundable. Putting this knowledge to work, one of the earlier drafts of a bill being considered by our legislature made a certain credit refundable and assignable. We said it didn’t make sense. Who would want to buy or sell cash? Fortunately, the powers that be saw the absurdity and got rid of the assignability feature. It turned out that the bill author wasn’t thinking about having taxpayers make a market to sell the credits, but wanted something slightly different, which might be accounted for in the next bill draft. That covers our list of CreditAbles. We trust that it will make the discussion of tax credits and incentives more understandable, and help make our tax system more tolerable. WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers Weekly Commentary For the Week of April 2, 2017 Economic Nexus: Solving the Online Tax Dodge By Tom Yamachika, President Recently there has been some confusion about a bill now in our legislature, SB 620, that would redefine how our general excise tax laws define “doing business.” The bill concerns a U.S. Constitutional concept called “substantial nexus.” Some amount of connection between a potential taxpayer and a State is needed before the State has power to impose that tax. The Supreme Court held in Quill Corp v. North Dakota, 504 U.S. 298 (1992), that some physical presence is needed before substantial nexus can be found. Thus, online retailers such as Overstock, Land’s End, and Amazon made a good business of selling into states without withholding and paying those states’ sales taxes. This was all legal, they claimed, because they have no physical presence in those states. Now, in Hawaii and in states that have sales taxes, the law says that if a person imports something from a retailer who doesn’t have to pay sales tax, then that person, the customer, becomes liable for the same amount of money. It’s called “Use Tax.” The purpose of Use Tax laws is to protect local businesses who must pay over state tax when they sell the same or similar products. If no tax is paid, the online retailer has a competitive advantage. Problem is, most consumers either aren’t aware of or don’t pay Use Tax, and although the Department of Taxation can and does force businesses to pay this tax, the Department hasn’t had the time or resources to beat up on ordinary consumers with a few online purchases. Thus, lots of tax goes uncollected – for Hawaii, one study by the University of Tennessee estimated the uncollected amount at $120 million just for the year 2012. So, you might ask, what could SB 620 possibly do? Obviously, it is not changing the U.S. Constitution. SB 620 basically tells businesses, “If you make at least $100,000 in sales into our state, we don’t care if you have physical presence or not. We’re going to go after you to collect our tax on this business activity.” Will the Supreme Court stick to its physical presence rule and say that a business that is making zillions of dollars in sales into a state has no “substantial nexus” just because it has no boots on the ground? Hawaii is not the only State to consider this type of legislation, which is sometimes called “economic nexus” or “factor presence nexus.” Others have passed it or are considering it. The Multistate Tax Commission, a nationwide network of State tax agencies, has an active “Sales & Use Tax Nexus Model Statute Project” that recommends that States adopt legislation with, among other things, economic nexus components. The legislation effectively raises the ante on the online retailers, who can look forward to court battles to invalidate the laws and huge tax bills if they lose. Some of the retailers are starting to knuckle under. Amazon recently announced that it reached agreement with our State to get a GET license and pay tax over to our State effective April 1, 2017. A January 2016 study estimated that Amazon by itself sold $255.6 million worth of retail goods statewide, avoiding $11.1 million in tax in 2015. With Amazon now collecting and paying, a good part of that $11.1 million will now come in the door every year. If you buy from Amazon after April 1, you will, no doubt, see another line on the bill passing on the Hawaii tax. But don’t scowl at it too much. If you bought the same merchandise from any local business, you probably will see the same line. Which means that Amazon and businesses like it now need to compete the old-fashioned way – on price, selection, and quality, and not based on legally due but uncollected tax. Moreover, that $11.1 million is only the tip of the iceberg. Another $110 million is potentially out there waiting to be collected. If we can collect more of the taxes that are due but unpaid, our government won’t have to squeeze law-abiding citizens even more to close the funding gap. To view the archives of the Tax Foundation of Hawaii's commentary click here.
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