Hawaii Department Of Taxation Finds Internet Retailer Has General Excise Tax Nexus

On July 10, the Hawaii Department of Taxation issued a letter ruling determining that an out-of-state Internet retailer was subject to the Hawaii General Excise Tax (GET) and the Honolulu County GET surcharge by virtue of its relationship with an affiliate that had a number of store locations in Hawaii and at least one store location in Honolulu County.1 In particular, since the affiliate accepted returns on behalf of the Internet retailer at its stores and also participated in a loyalty points program that allowed customers to accrue and redeem points interchangeably at either its stores or the Internet retailer's Web site, the affiliate was acting as an "agent" of the Internet retailer and established nexus for the Internet retailer.

Background

The taxpayer, an Internet retailer of fragrances and specialty items that was headquartered outside Hawaii, did not have any employees, solicitors, or real or tangible property located in the state. Moreover, shipments of its products were made via common carrier from out-of-state centralized warehouses or distribution centers.

While the taxpayer itself lacked a physical presence in Hawaii, the taxpayer's affiliate operated eight retail stores in the state. Beginning on or about September 1, 2011, the taxpayer and the affiliate began to operate a loyalty points program through which a customer could earn points for purchases made either from the taxpayer's Web site or the affiliate's retail stores. After a customer reached a certain amount of purchases, he or she received a fixed-price redeemable gift certificate for use at either a store location or the taxpayer's Web site. Also beginning on or about September 1, 2011, the taxpayer's customers were permitted to return items purchased via its Web site to affiliate store locations.

The substantive issue presented to the Department was whether the activities of the taxpayer's affiliate created GET nexus for the taxpayer at the state and county (Honolulu County) level.

GET Nexus Created by Affiliate Relationship

The Department initially addressed the relevant statutory and regulatory authorities in its letter ruling. The Hawaii Revised Statutes imposes a privilege tax on "persons on account of their business and other activities in the State measured by the application of rates against values of products, gross proceeds of sales, or gross income" in accordance with the U.S. Constitution and Congressional acts.2 The Department's regulation interprets...