CompUSA Stores, L.P. v. State.

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Electronically Filed
Supreme Court
SCAP-15-0000861
18-MAY-2018
08:10 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
---o0o---
COMPUSA STORES, L.P.,
Appellant-Appellant,
vs.
STATE OF HAWAI#I, DEPARTMENT OF TAXATION,
Appellee-Appellee.
SCAP-15-0000861
APPEAL FROM THE TAX APPEAL COURT OF THE STATE OF HAWAI#I
(CAAP-15-0000861; TAX APPEAL CASE NO. 1TX12-1-0264)
MAY 18, 2018
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.
OPINION OF THE COURT BY RECKTENWALD, C.J.
I. Introduction
This case requires us to determine if Hawaii’s use tax
violates the Commerce Clause or the Equal Protection Clause of
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the United States Constitution.
CompUSA Stores, L.P. (CompUSA) is a Texas-based limited
partnership which operated two retail stores in Hawai#i selling
personal computers and other consumer electronics until 2008.
CompUSA imported all goods that it sold from third party vendors
outside the state. Pursuant to the use tax statute, Hawai#i
Revised Statutes (HRS) § 238-2,1 in the years 2006, 2007, and
2008, CompUSA made use tax payments in the amount of $385,855.68,
$323,628.50 and $42,045.78, respectively.
In 2010, CompUSA filed claims for refund of its 2006,
2007, and 2008 use tax payments. The Department of Taxation
(Department) denied CompUSA’s request for refund. CompUSA
appealed, and its appeal was ultimately transferred to the Tax
Appeal Court.2 CompUSA and the Department’s Director of Taxation
(Director) submitted cross-motions for summary judgment to the
Tax Appeal Court. The Tax Appeal Court denied CompUSA’s Motion
for Summary Judgment, and granted the Department’s Motion for
1
HRS § 238-2 (Supp. 2004) provides, in relevant part:
There is hereby levied an excise tax on the use in
this State of tangible personal property which is
imported by a taxpayer in this State whether owned,
purchased from an unlicensed seller, or however
acquired for use in this State. The tax imposed by
this chapter shall accrue when the property is
acquired by the importer or purchaser and becomes
subject to the taxing jurisdiction of the State.
2
The Honorable Gary W.B. Chang presided.
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Summary Judgment, concluding that the use tax does not violate
the Commerce Clause or the Equal Protection Clause. CompUSA
timely filed its notice of appeal in the Intermediate Court of
Appeals (ICA) and subsequently filed its application for
transfer, which was granted.
In 2004, the legislature amended the use tax statute,
HRS § 238-2. CompUSA argues that the 2004 amendment to the
statute rendered the statute unconstitutional because the
amendment eliminated the application of the tax to in-state
unlicensed sellers, thereby limiting the tax to out-of-state
sellers. Thus, CompUSA argues that the use tax violates the
Commerce Clause and the Equal Protection Clause because the tax
discriminates against out-of-state commerce, and cannot be
justified by a legitimate local purpose.
We conclude that the current version of the statute
serves a legitimate local purpose of leveling the playing field
between in-state and out-of-state sellers, because in-state
sellers are subject to the general excise tax (GET), and out-of-
state sellers are subject to the use tax. Further, HRS § 237-
22(a) (Supp. 2002) and HRS § 238-3(i) (Supp. 2000) are designed
to ensure that out-of-state sellers are not over-taxed. Thus,
HRS § 238-2 does not violate the Commerce Clause of the United
States Constitution.
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In evaluating whether the current version of the use
tax statute violates the Equal Protection Clause, we agree with
CompUSA that the statute establishes a classification between in-
state and out-of-state sellers. However, the statute satisfies
rational basis review because the classification of out-of-state
sellers bears a rational relationship to the legitimate state
interest of “leveling the economic playing field” for local
businesses subject to the GET. Thus, HRS § 238-2 does not
violate the Equal Protection Clause of the United States
Constitution.
Accordingly, we affirm the Tax Appeal Court’s
October 6, 2015 judgment granting the Department’s motion for
summary judgment and denying CompUSA’s motion for summary
judgment.
II. Background
A. The Use Tax in Hawai#i
This court has summarized the use tax, HRS § 238-2, as
follows:
The use tax is closely connected with Hawaii’s general
excise tax (GET). The GET places a 0.5% tax on the
business of manufacturing and wholesaling in Hawai#i,
resulting in a price differential between the products
made and sold wholesale locally and the same products
made and sold wholesale on the mainland. In the
absence of a use tax that complements a GET, sellers
of goods acquired out-of-state theoretically enjoy a
competitive advantage over sellers of goods acquired
in-state: . . . out-of-state products would be less
expensive than in-state products, the prices of which
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would presumably reflect some pass-on of the GET.
CompUSA Stores LP v. Dep’t of Taxation (CompUSA I), 128 Hawai#i
116, 122, 284 P.3d 209, 215 (2011) (internal citations and
quotations omitted) (citing HRS § 238-2 (1993)).
In 2004, the legislature amended HRS Chapter 238 for
the following purpose:
The purpose of this Act is to clarify current use tax
laws in light of Baker & Taylor, Inc. v. Kawafuchi,
S.C. 23376 (Jan. 14, 2004) and administrative rule 18-
237-13-02.01 by:
(1) Clarifying when a seller is subject to the
0.5 per cent use tax;
(2) Restoring the imposition of taxes on goods
purchased both within and outside the
State; and
(3) Clarifying that the use tax applies to
sellers who acquire goods from outside the
State and import the product for sale or
resale in the State.
2004 Haw. Sess. Laws Act 114, § 1 at 431.
In Baker & Taylor, this court held that the use tax did
not apply to a mainland seller, Baker, who sold and shipped, FOB
(“free on board”) origin, books to the Hawai#i State Library. In
re Tax Appeal of Baker & Taylor, Inc. v. Kawafuchi, 103 Hawai#i
359, 361-62, 372, 82 P.3d 804, 806-07, 817 (2004). Title passed
to the library while the books were on the mainland, and thus
Baker did not own the goods when they arrived in Hawai#i, or use
them in Hawai#i. Id. Because the sale of books was directly
from Baker to the library, Baker therefore did not import the
books from an unlicensed seller, and Baker did not purchase the
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books and resell them to the library. Id. Thus, this court
concluded that Baker was not subject to the use tax under the
plain language of the statute.3 Id.
The 2004 amendment, inter alia, both added and removed4
language in HRS § 238-2:
There is hereby levied an excise tax on the use in
this State of tangible personal property which is
imported[, or] by a taxpayer in this State whether
owned, purchased from an unlicensed seller, or however
acquired for use in this State. The tax imposed by
this chapter shall accrue when the property is
acquired by the importer or purchaser and becomes
subject to the taxing jurisdiction of the State.
. . . .
For purposes of this section, tangible personal
property is property that is imported by the taxpayer
for use in this State, notwithstanding the fact that
title to the property, or the risk of loss to the
property, passes to the purchaser of the property at a
location outside this State.
2004 Haw. Sess. Laws Act 114, § 3 at 433, 435.
Further, the definitions for “import” and “purchaser”
were amended as follows to clarify that the use tax applies to
the purchase of tangible property from an unlicensed seller,
3
In 2004, CompUSA appealed the Department’s assessment of the use
tax under HRS § 238-2 on goods it transported from the mainland for the tax
period between July 1, 1999 and December 31, 2002. CompUSA argued that it was
not subject to the use tax under this court’s decision in Baker & Taylor.
CompUSA I, 128 Hawai#i at 118-19, 284 P.3d at 211-12. The tax appeal court
granted summary judgment against CompUSA, which the ICA affirmed. Id. at 119-
21, 284 P.3d at 212-14. On certiorari review, this court upheld the
assessment of the use tax against CompUSA holding that, under Baker & Taylor,
the use tax applied to CompUSA’s business activities. Id. at 127, 284 P.3d at
220.
4
Underlining indicates added text, and brackets with strikeouts
indicate removed text.
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whether the title passed in-state or out-of-state:
“Import” . . . . includes:
(1) The importation into the State of tangible
property, services, or contracting owned, purchased
from an unlicensed seller, or however acquired, from
any other part of the United States or its possessions
or from any foreign country, whether in interstate or
foreign commerce, or both[.]; and
(2) The sale and delivery of tangible personal
property owned, purchased from an unlicensed seller,
or however acquired, by a seller who is or should be
licensed under the general excise tax law from an
out-of-state location to an in-state purchaser,
regardless of the free on board point or the place
where title to the property transfers to the
purchaser.
. . . .
“Purchaser” means any person purchasing property,
services, or contracting and “importer” means any
person importing property, services, or
contracting[;], regardless if at the time of
importation, the property, services, or contracting is
owned by the importer, purchased from an unlicensed
seller, or however acquired; . . . .
2004 Haw. Sess. Laws Act 114, § 2 at 431-32.
The definition of “use” was also changed with the
addition of the following language:
and shall include control over tangible or intangible
property by a seller who is licensed or who should be
licensed under chapter 237, who directs the
importation of the property into the state for sale
and delivery to a purchaser in the State, liability
and free on board (FOB) to the contrary
notwithstanding, regardless of where title passes . .
. .
2004 Haw. Sess. Laws Act 114, § 2 at 432.
B. Tax Appeal Court Proceedings
The following facts appear undisputed from the record.
From January 1, 2006 through February 29, 2008, CompUSA conducted
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its retail business through two stores on Oahu. CompUSA did not
manufacture any of the products sold at its retail stores and
purchased all products from vendors and manufacturers located
outside of Hawai#i. CompUSA also purchased and imported products
for its own use in Hawai#i. CompUSA was thus assessed use tax in
the following amounts: (1) $385,855.68 in 2006; (2) $323,628.46
in 2007; and (3) $42,045.78 in 2008. On April 20, 2010, CompUSA
filed General Excise/Use Tax Annual Return & Reconciliation forms
for all three years, requesting a refund for the use tax paid in
each year. The Department denied the request for a refund on the
2006 tax year and issued tax assessments for the 2007 and 2008
tax years.
CompUSA subsequently filed its Notice of Appeal to the
Tax Appeal Court. CompUSA argued that HRS § 238-2 impermissibly
imposed a use tax directly on CompUSA in violation of the
Commerce Clause and Equal Protection Clause of the United States
Constitution, creating disparate treatment in the taxability of
CompUSA’s out-of-state purchases and similar purchases that could
have been made in the State of Hawai#i.
CompUSA moved for summary judgment, and the Director
filed a cross-motion for summary judgment. The Tax Appeal Court
held four hearings on the motions before granting the
Department’s motion for summary judgment and denying CompUSA’s
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motion for summary judgment.
The court explained that CompUSA contended that under
the pre-2004 statute, HRS § 238-2 imposed a use tax upon any
property that was purchased from an unlicensed seller, whether
the seller was in-state or out-of-state, and that after the 2004
amendment, the use tax was imposed only upon property purchased
from out-of-state unlicensed sellers. The court explained that
the Director contended that both before and after the 2004
amendment, “[HRS] § 238-2 imposed use tax liability upon all
purchases of goods from unlicensed sellers, whether they were in-
state or out-of-state sellers.”
The court conducted a plain-language analysis and
agreed with CompUSA. It explained that the pre-2004 version of
HRS § 238-2 imposed a tax on purchases of property that were
imported or purchased from an unlicensed seller. The court held
that by using the word “or,” it was clear that the legislature
intended to create two classes of property acquisition subject to
use tax liability. Before the 2004 amendment, a use tax would be
imposed upon property for resale that was (1) imported, or (2)
purchased from an in-state unlicensed seller.
The court then found that the post-2004 version of HRS
§ 238-2 changed the tax scheme; based on the plain language, the
court held that the meaning of unlicensed seller now referred
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only to out-of-state unlicenced sellers. The court concluded
that because the pre-amendment scheme imposed a tax on both in-
state and out-of-state unlicensed sellers, but the amended
statute imposes a tax only on out-of-state unlicensed seller
transactions, the amended 2004 version discriminates against out-
of-state unlicensed seller acquisitions.
However, the Tax Appeal Court found that, while
discriminatory, HRS § 238-2 does not violate the Commerce Clause
because it advances a legitimate local purpose that cannot be
adequately served by reasonable nondiscriminatory alternatives.
The court agreed with the Director, who asserted that the use tax
is legitimate because “it balances the general excise tax burden
that is imposed upon all business activity within the state.
Without striking such a balance, out-of-state unlicensed seller
transactions would be free of any general excise tax burden while
in-state unlicensed seller transactions would be unfairly
burdened.” Thus, the use tax levels the playing field. The Tax
Appeal Court noted that:
the Hawaii Supreme Court recognized the concept of
leveling the playing field by its own words,
“minimizing the price advantage of out-of-state
goods,” as a valid justification for imposing a use
tax upon taxpayer’s purchase of goods from an out-of-
state seller for use in Hawaii. CompUSA Stores LP v.
Department of Taxation, 128 Haw. 116, 123, 284 P.3d
209 (Sup.Ct. 2011).
(Formatting altered).
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The Tax Appeal Court concluded that the GET and the use
tax present a complementary tax scheme that does not violate the
Commerce Clause.
Finally, the Tax Appeal Court determined that the
classification established by the 2004 amendment is not a suspect
class, and thus, the constitutional challenge to the statute is
subject to rational basis review. As such, HRS § 238-2 does not
violate the Equal Protection Clause because the classification
made by HRS § 238-2 functioned to level the economic playing
field and was not arbitrary, capricious, or unreasonable.
Accordingly, the Tax Appeal Court denied CompUSA’s
Motion for Summary Judgment and granted the Department’s Motion
for Summary Judgment. The Tax Appeal Court issued its final
judgment on October 6, 2015.
C. Appeal to the ICA and Transfer Application
On November 3, 2015, CompUSA filed a notice of appeal.
On June 6, 2016, this court accepted CompUSA’s application for
transfer.
III. Standards of Review
A. Tax Appeal Court Summary Judgment Decisions
This court reviews an award of summary judgment de
novo, under the same standards applied by the trial
court. Therefore, summary judgment is appropriate if
the pleadings, depositions, answers to
interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine
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issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.
Where the appeal is from the Tax Appeal Court, it is
well settled that, in reviewing the findings of fact,
a presumption arises favoring its actions which should
not be overturned without good and sufficient reason.
The appellant has the burden of showing that the
decision of the Tax Appeal Court was clearly
erroneous. When the facts are undisputed and the sole
question is one of law, the decision of the Tax Appeal
Court is reviewed under the right/wrong standard.
Travelocity.com, L.P. v. Dir. of Taxation, 135 Hawai#i 88, 96-97,
346 P.3d 157, 165-66 (2015) (internal quotation marks and
citations omitted).
B. Constitutional Questions
“We review questions of constitutional law de novo,
under the right/wrong standard.” State v. Kalaola, 124 Hawai#i
43, 49, 237 P.3d 1109, 1115 (2010) (internal quotation marks and
citation omitted).
IV. Discussion
CompUSA presents two points of error:
1. The Tax Appeal Court erred as a matter of law
when it did not grant Taxpayer’s Motion for
Summary Judgment because there were no genuine
issues of material fact and Taxpayer was
entitled to judgment as a matter of law,
inasmuch as (a) HRS § 238-2 violates the
Commerce Clause; and/or (b) HRS § 238-2 violates
the Equal Protection Clause.
2. The Tax Appeal Court erred when it granted
Director’s Motion for Summary Judgment because
HRS § [sic] (a) HRS § 238-2 violates the
Commerce Clause; and/or (b) HRS § 238-2 violates
the Equal Protection Clause.
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A. GET and Use Tax
All business in Hawai#i are subject to the GET. This
court described the general excise tax or GET as follows:
The general excise tax, originally enacted in 1935 to
replace the short-lived business excise tax which was
passed in 1932 at the height of the Great Depression,
is the State’s principal source of governmental
revenue. In form, it is a tax imposed upon
entrepreneurs for the privilege of doing business; in
effect, it is more. It has been characterized as “an
amalgam of consumption, business and income taxation,”
for the ultimate burden is often shifted forward to
consumers. The tax applies at all levels of economic
activity from production or manufacturing to
retailing, albeit at different rates, and to virtually
all goods and services.
Matter of Tax Appeal of Cent. Union Church Arcadia Ret.
Residence, 63 Haw. 199, 202, 624 P.2d 1346, 1349 (1981) (internal
citations omitted); see also Pratt v. Kondo, 53 Haw. 435, 436,
496 P.2d 1, 2 (1972) (“virtually every economic activity
imaginable” is subject to the GET).
The use tax, HRS § 238-2, is a tax “on the use in this
State of tangible personal property which is imported by a
taxpayer in this State whether owned, purchased from an
unlicensed seller, or however acquired for use in this State.”
HRS § 238-2 (Supp. 2004). The use tax “shall accrue when the
property is acquired by the importer or purchaser and becomes
subject to the taxing jurisdiction of the State.” HRS § 238-2
(Supp. 2004). “The general theory behind such a tax is to make
all tangible property used or consumed in the State subject to a
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uniform tax burden irrespective of whether it is acquired within
the State, making it subject to the [GET], or from without the
State, making it subject to a use tax at the same rate.” Matter
of Hawaiian Flour Mills, Inc., 76 Hawai#i 1, 13, 868 P.2d 419,
431 (1994) (internal citations, formatting, and quotation marks
omitted).
B. Commerce Clause
CompUSA argues that Hawaii’s use tax violates the
Commerce Clause. The Commerce Clause grants Congress the power
to “regulate Commerce with foreign Nations, and among the several
States.” U.S. Const., art. I, § 8, cl. 3. The Commerce Clause
“has long been understood to have a ‘negative’ aspect that denies
the States the power unjustifiably to discriminate against or
burden the interstate flow of articles of commerce.” Oregon
Waste Sys., Inc. v. Dep’t of Envtl. Quality of the State of Or.,
511 U.S. 93, 98 (1994). The Commerce Clause “generally prohibits
states from levying taxes that impose multiple burdens on, or
discriminate against, interstate commerce.” Baker & Taylor, 103
Hawai#i at 367, 82 P.3d at 812.
1. On its Face, HRS § 238-2 Discriminates Against
Interstate Commerce.
In determining whether the “negative” or “dormant”
aspect of the Commerce Clause is violated by a statute, the first
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step is to determine whether “it discriminates on its face
against interstate commerce.” United Haulers Ass’n, Inc. v.
Oneida-Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330, 338
(2007). In the context of this first step:
“[D]iscrimination” simply means differential treatment
of in-state and out-of-state economic interests that
benefits the former and burdens the latter.
Discriminatory laws motivated by simple economic
protectionism are subject to a virtually per se rule
of invalidity, which can only be overcome by a showing
that the State has no other means to advance a
legitimate local purpose.
Id. at 338–39 (internal citations omitted).
HRS § 238-2 provides, in relevant part: “There is
hereby levied an excise tax on the use in this State of tangible
personal property which is imported by a taxpayer in this State
whether owned, purchased from an unlicensed seller, or however
acquired for use in this State.” (Emphasis added).
The term “use” under HRS § 238-1 includes:
any use, whether the use is of such nature as to cause
the property, services, or contracting to be
appreciably consumed or not, or the keeping of the
property or services for such use or for sale, the
exercise of any right or power over tangible or
intangible personal property incident to the ownership
of that property, and shall include control over
tangible or intangible property by a seller who is
licensed or who should be licensed under chapter 237,
who directs the importation of the property into the
state for sale and delivery to a purchaser in the
State, liability and free on board (FOB) to the
contrary notwithstanding, regardless of where title
passes . . . .
HRS § 238-1.
The definition of “import” includes “importation into
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the State of tangible property, services, or contracting owned,
purchased from an unlicensed seller, or however acquired, from
any other part of the United States or its possessions or from
any foreign country, whether in interstate or foreign commerce,
or both.” HRS § 238-1. Therefore, based on the plain language
of the statute, only those taxpayers that import tangible
personal property into the State, either through interstate
commerce or foreign commerce, are required to pay the use tax
under HRS § 238-2. Taxpayers who acquire their personal property
through intrastate commerce are not subject to the use tax.
“It is well established . . . that a law is
discriminatory if it taxes a transaction or incident more heavily
when it crosses state lines than when it occurs entirely within
the State.” Oregon Waste, 511 U.S. at 99 (quotation marks and
brackets omitted). HRS § 238-2 taxes the use of property that is
imported over state lines into Hawai#i, but does not tax the use
of property purchased within the state. Therefore, on its face,
HRS § 238-2 discriminates against interstate commerce.5
5
The Tax Appeal Court concluded that HRS § 238-2 was not
discriminatory on its face prior to the 2004 amendment. Ultimately, we need
not resolve that question because CompUSA’s relevant refund requests, which
are for the years 2006, 2007, and 2008, are governed by the current version of
HRS § 238-2.
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2. HRS § 238-2 Complies With the Commerce Clause Because
It Advances a Legitimate Local Purpose That Cannot Be
Adequately Served By Reasonable Nondiscriminatory
Alternatives.
If a tax law is discriminatory on its face, it will
nevertheless comport with the Commerce Clause if it “advances a
legitimate local purpose that cannot be adequately served by
reasonable nondiscriminatory alternatives.” Oregon Waste, 511
U.S. at 100-01. One such legitimate local purpose is to ensure
that those engaged in interstate commerce contribute their just
share of state tax burdens by imposing a tax that complements an
existing tax on intrastate commerce. Id. at 102-03; see also
Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 69
(1963) (concluding that the Louisiana use tax at issue was
discriminatory if considered on its own, but that a proper
analysis of its constitutionality must take “the whole scheme of
taxation into account”).
Under the “compensatory” or “complementary” tax
doctrine, “a facially discriminatory tax that imposes on
interstate commerce the rough equivalent of an identifiable and
‘substantially similar’ tax on intrastate commerce does not
offend the negative Commerce Clause.” Oregon Waste, 511 U.S. at
102-03. The United States Supreme Court has provided the
following framework for determining whether a discriminatory tax
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constitutes a “compensatory tax” so as to not contravene the
Commerce Clause:
To justify a charge on interstate commerce as a
compensatory tax, a State must, as a threshold matter,
identify the intrastate tax burden for which the State
is attempting to compensate. Once that burden has
been identified, the tax on interstate commerce must
be shown roughly to approximate—but not exceed—the
amount of the tax on intrastate commerce. Finally,
the events on which the interstate and intrastate
taxes are imposed must be substantially equivalent;
that is, they must be sufficiently similar in
substance to serve as mutually exclusive proxies for
each other.
Id. at 103 (internal citations omitted).
a. Identification of Intrastate Tax
As a threshold matter, we must identify the intrastate
tax for which the use tax seeks to compensate. See id. CompUSA
argues that there is no comparable intrastate tax because the
intrastate tax in Hawai#i, the GET, is imposed on in-state
purchasers, rather than in-state sellers. The Department argues
that, despite that difference, the GET is nevertheless the
intrastate tax for which the use tax compensates.
The intrastate tax “must serve some purpose for which
the State may otherwise impose a burden on interstate commerce.”
Fulton Corp. v. Faulkner, 516 U.S. 325, 334 (1996). A state has
“no general sovereign interest in taxing income earned out of
state”; therefore, a state “must identify some in-state activity
or benefit in order to justify the compensatory levy.” Id.; see
Maryland v. Louisiana, 451 U.S. 725, 759 (1981).
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In Fulton, the United States Supreme Court concluded
that North Carolina’s interstate “intangibles tax” violated the
Commerce Clause. 516 U.S. at 327. The interstate “intangibles
tax” functioned as follows:
[A] corporation doing all of its business within the
State would pay corporate income tax on 100% of its
income, and the taxable percentage deduction allowed
to resident owners of that corporation’s stock under
the intangibles tax would likewise be 100%. Stock in a
corporation doing no business in North Carolina, on
the other hand, would be taxable on 100% of its value.
For the intermediate cases, holders of stock were able
to look up the taxable percentage for a large number
of corporations as determined and published annually
by the North Carolina Secretary of Revenue
(Secretary). In 1990, for example, the Secretary
determined the appropriate taxable percentage of IBM
stock to be 95%, meaning that IBM did 5% of its
business in North Carolina, with its stock held by
North Carolina residents being taxable on 95% of its
value.
Id. at 328.
The Secretary argued that the intrastate general
corporate income tax was complementary because one of the
services provided by the State, which was supported by that tax,
was to maintain a capital market for corporations. Id. at 335-
36.
The Court determined that the “intangibles tax” had no
comparable intrastate tax because “the linkage in this case
between the intrastate burden and the benefit shared by
out-of-staters is far too tenuous to overcome the risk posed by
recognizing a general levy as a complementary twin.” Id. at 336.
In other words, the intrastate tax did not provide the same
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benefits and burdens as the interstate “intangibles tax.”
In contrast to the circumstances in Fulton, the United
States Supreme Court has stated that a use tax complements a
sales tax because “a State is attempting to impose a tax on a
substantially equivalent event to assure uniform treatment of
goods and materials to be consumed in the State.” Maryland, 451
U.S. at 759. The Court has extended that holding to a gross
receipts tax, like Hawaii’s GET. In International Harvester, the
Court stated, “[t]here is the same practical equivalence whether
the tax is on the selling or the buying phase of the transaction.
Each is in substance an imposition of a tax on the transfer of
property.” Int’l Harvester Co. v. Dep’t of Treasury of State of
Ind., 322 U.S. 340, 348 (1944). The Court continued that in
light of its decisions upholding the “constitutional authority to
impose a sales tax or a use tax on these transactions[,] . . . a
constitutional difference is not apparent when a ‘gross receipts’
tax is utilized instead.” Id.
The interstate use tax in Hawai#i is designed to
complement the intrastate GET. See Matter of Habilitat, Inc., 65
Haw. 199, 209, 649 P.2d 1126, 1133–34 (1982) (“The [use] tax
buttresses the [GET] as [the use tax] is designed to prevent the
avoidance of excise taxes through direct purchases from the
mainland. Its ultimate purpose is to remove the competitive
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advantage an out-of-state wholesaler or retailer would otherwise
have over a seller subject to the payment of State excise
taxes.”). The GET intrastate tax is similar to a sales tax in
that it applies “at all levels of economic activity . . . and to
virtually all goods and services” and “the ultimate burden [of
the GET] is often shifted forward to consumers.” Arcadia, 63
Haw. at 202, 624 P.2d at 1349. Thus, the GET is unlike the
intrastate corporate income tax in Fulton because the GET is a
“substantially equivalent taxable event,” rather than a tax that
has only a remote connection to the interstate tax. See id.; see
also Habilitat, 65 Haw. 199, 649 P.2d 1126; Hawaiian Flour, 76
Hawai#i 1, 868 P.2d 419.
By identifying the GET as the intrastate tax, the
Department has met its burden to identify the intrastate tax
burden for which the state is attempting to compensate. See
Oregon Waste, 511 U.S. at 103.
b. Tax Amounts are Approximate
Once the intrastate tax is identified, we must
determine if the tax on interstate commerce roughly approximates
the amount taxed on intrastate commerce without exceeding it.
Oregon Waste, 511 U.S. at 102-03. CompUSA argues that the tax
amounts are not approximately equal because an in-state buyer
pays no tax on an in-state purchase, but will always pay a use
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tax on the purchase of the same item purchased out-of-state.
CompUSA also argues that the taxes are not approximate because a
purchaser subject to the use tax would not be entitled a credit
for gross receipts taxes paid to another state.
First, the GET and use tax scheme is designed to make
the tax rate the same between intrastate and interstate taxation.
Hawaiian Flour, 76 Hawai#i at 13, 868 P.2d at 431 (“The general
theory behind such a tax is to make all tangible property used or
consumed in the State subject to a uniform tax burden
irrespective of whether it is acquired within the State, making
it subject to [the GET], or from without the State, making it
subject to a use tax at the same rate.”) (internal quotations and
citation omitted).
Second, as previously discussed, the burden of the GET
is generally passed on to the consumer. Arcadia, 63 Haw. at 202,
624 P.2d at 1349. Therefore, there should be little difference
between what a consumer pays on in-state as opposed to out-of-
state transactions.
Finally, in instances where the use tax would exceed
the GET, exemptions, deductions, and credits are provided by
statute, including for gross receipts taxes paid to another
state. See HRS §§ 237-22 and 238-3(i). A more developed
discussion of HRS §§ 237-22 and 238-3(i) as they relate to this
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issue is presented in the analysis of the use tax under the
“internal consistency” test, infra.6 Thus, the use tax and GET
tax scheme are approximate.
c. Taxes are Complementary
Finally, the Department must show that the taxes are
complementary, that is “the events on which the interstate and
intrastate taxes are imposed must be substantially equivalent;
that is, they must be sufficiently similar in substance to serve
as mutually exclusive proxies for each other.” Oregon Waste, 511
U.S. at 103.
The United States Supreme Court has upheld the
complementary nature of a use tax and sales tax. See, e.g.,
Henneford v. Silas Mason Co., 300 U.S. 577, 582-83 (1937). In
Oregon Waste, the Supreme Court maintained that “use taxes on
products purchased out of state are the only taxes [the Court
has] upheld in recent memory under the compensatory tax
doctrine.” 511 U.S. at 105; see Fulton, 516 U.S. at 339 (listing
tax pairings that the Supreme Court previously held were not
sufficiently similar to be mutually exclusive proxies for each
other).
The GET and use tax in Hawai#i operate so as to be
6
See infra, Section 3 (“HRS § 238-2 Also Satisfies the Internal
Consistency Test.”) for a full discussion of tax credits.
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complementary--like sales taxes and use taxes in other states.
This court described the complementary nature of Hawaii’s use tax
and GET in Hawaiian Flour:
In the absence of a use tax that complements a GET,
sellers of goods acquired out-of-state theoretically
enjoy a competitive advantage over sellers of goods
acquired in-state: not being subject to the GET,
out-of-state products would be less expensive than
in-state products, the prices of which would
presumably reflect some pass-on of the GET. Thus, the
use tax buttresses the [GET] as it is designed to
prevent the avoidance of excise taxes through direct
purchases from the mainland. Its ultimate purpose is
to remove the competitive advantage an out-of-state
wholesaler or retailer would otherwise have over a
seller subject to the payment of State excise taxes.
76 Hawai#i at 13, 868 P.2d at 431 (internal citations,
formatting, and quotation marks omitted).
CompUSA makes several arguments to show that Hawaii’s
use tax violates the Commerce Clause.7 CompUSA argues that the
7
CompUSA asserts that the use tax does not level the playing field
for local vendors because it leaves in-state purchases from unlicensed
businesses free from a tax burden. The only evidence presented by CompUSA
that unlicensed businesses are free from a tax burden is the change of
language when HRS § 238-2 was amended in 2004, discussed supra in Section
II.A. The Director argues that no version of HRS § 238-2 ever imposed a use
tax on in-state purchases.
Hawai#i statutes and Hawai#i caselaw suggest that the pre-amended
version of HRS § 238-2 did not cover in-state sellers. Both before and after
the 2004 amendment, the definition of “unlicensed seller” subject to the use
tax excludes any business subject to the GET, whether or not the seller holds
a license under the GET. HRS § 238-1. This interpretation is consistent with
the extraordinarily broad sweep of the GET. Chapter 237 “subjects to the
general excise tax virtually every economic activity imaginable.” Pratt, 53
Haw. at 436, 496 P.2d at 2. The GET statute defines eight categories of
businesses subject to the GET, and a catchall provision, which provides that
the GET is imposed “[u]pon every person engaging or continuing within the
State in any business, trade, activity, occupation, or calling not included in
the preceding paragraphs or any other provisions of this chapter.” HRS § 237-
13 (Supp. 2003) (emphases added). The catchall provision existed long before
the use tax was amended in 2004, and Hawai#i case law has long interpreted the
(continued...)
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purchaser of in-state goods is not subject to the GET, while the
purchaser of out-of-state goods is subject to the use tax.8 We
agree with CompUSA that purchasers of in-state goods are not
subject to the GET. However, this distinction is not material
since, as we previously held, businesses that pay GET generally
pass on the cost of the GET to the purchasers of in-state goods.
See Arcadia, 63 Haw. at 202, 624 P.2d at 1349 (the GET “has been
characterized as ‘an amalgam of consumption, business and income
taxation,’ for the ultimate burden is often shifted forward to
consumers”); Hawaiian Flour, 76 Hawai#i at 13, 868 P.2d at 431
(“the prices of [in-state products] would presumably reflect some
pass-on of the GET”).
CompUSA also argues that there is a reasonable
nondiscriminatory alternative to Hawaii’s use tax, which is
7
(...continued)
GET to apply to every type of in-state business in Hawai#i. See, e.g., Matter
of Grayco Land Escrow, Ltd., 57 Haw. 436, 443, 559 P.2d 264, 270 (1977) (“in
plain and unmistakable language, the statute evidences the intention of the
legislature to tax every form of business, subject to the taxing jurisdiction,
not specifically exempted from its provisions.” (citation omitted)).
In sum, HRS § 238-1 excludes from the definition of unlicensed
seller any seller subject to the GET, whether or not the seller has a GET
license, and the GET is imposed on all business activity in Hawai#i. Thus,
there does not appear to be a category of in-state unlicensed businesses in
Hawai#i which the pre-amendment version of HRS § 238-2 covered.
8
In making its arguments, CompUSA relies on Molloy v. Gov’t of the
Virgin Islands, 594 F. Supp. 2d 595, 597 (D.V.I. 2007), arguing “the United
States District Court for the District of the Virgin Islands held that a
personal use tax similar in structure and effect to HRS § 238-2 violated the
Commerce Clause.” Molloy is distinguishable because there was no sales tax or
GET in the Virgin Islands against which the use tax was balanced; only out-of-
state purchases were subject to a tax. Id.
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“similar to Arizona’s alternative – that is, impose the use tax
on all transactions and give credit for any purchases from
licensed businesses.” The Director argues that imposing the tax
upon all in-state and out-of-state purchases would still result
in a competitive advantage for out-of-state merchants. The
Director explains that CompUSA’s proposal would require Hawai#i
consumers to perform an extra step when they purchased locally –
they would have to report their in-state purchases and then
request a credit. Further, the Director argues that it would
thus be easier, and potentially less expensive, for Hawai#i
consumers to simply purchase out-of-state goods. We agree with
the Director that adding an additional taxpayer burden on in-
state purchases would defeat the purpose of leveling the playing
field.
Thus, the interstate and intrastate taxes are
substantially equivalent and complementary. Accordingly, the use
tax advances a legitimate local purpose that cannot be adequately
served by reasonably nondiscriminatory alternatives; therefore,
the use tax satisfies Oregon Waste and does not violate the
Commerce Clause.
3. HRS § 238-2 Also Satisfies the Internal Consistency
Test.
CompUSA argues that HRS § 238-2 also violates the
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Commerce Clause because it is not internally consistent–-another
method of determining if a tax scheme violates the Commerce
Clause. The United States Supreme Court described the internal
consistency test as follows:
[The internal consistency test], which helps courts
identify tax schemes that discriminate against
interstate commerce, looks to the structure of the tax
at issue to see whether its identical application by
every State in the Union would place interstate
commerce at a disadvantage as compared with commerce
intrastate.
By hypothetically assuming that every State has the
same tax structure, the internal consistency test
allows courts to isolate the effect of a defendant
State’s tax scheme. This is a virtue of the test
because it allows courts to distinguish between (1)
tax schemes that inherently discriminate against
interstate commerce without regard to the tax policies
of other States, and (2) tax schemes that create
disparate incentives to engage in interstate commerce
(and sometimes result in double taxation) only as a
result of the interaction of two different but
nondiscriminatory and internally consistent schemes.
Comptroller of Treasury of Maryland v. Wynne, 135 S. Ct. 1787,
1802 (2015) (internal quotations omitted).
States avoid multiple taxation by providing statutory
exemptions from the use tax when a sales tax has already been
paid in another state. See Tyler Pipe Indus., Inc. v. Washington
State Dep't of Revenue, 483 U.S. 232, 245 (1987); Goldberg v.
Sweet, 488 U.S. 252, 263-64 (1989).
CompUSA asserts that HRS § 238-2 is internally
inconsistent because Hawaii’s use tax does not have an adequate
credit or exemption for taxes paid to another state. CompUSA
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also argues that HRS § 238-3(i) does not provide a credit for the
GET, also known as gross receipts tax, paid to another state. We
disagree. When utilized together, HRS § 238-3(i) and HRS § 237-
22 are compliant with the Commerce Clause’s requirements to avoid
multiple taxation.
In the HRS use tax chapter, HRS § 238-3(i) provides
that, “Each taxpayer liable for . . . [the use tax] shall be
entitled to full credit for the combined amount or amounts of
legally imposed sales or use taxes paid by the taxpayer . . . to
another state and any subdivision thereof . . . .” Thus, HRS
§ 238-3(i) provides a full credit for sales or use taxes paid out
of state.
In the HRS GET chapter, HRS § 237-22 provides that
payments for sales, gross receipts, or use taxes paid out of
state will be offset. HRS § 237-22(b) requires that “each
taxpayer liable for the tax imposed by this chapter shall be
entitled to full offset for the amount of legally imposed sales,
gross receipts, or use taxes paid by the taxpayer with respect to
the imported property, service, or contracting to another state
and any subdivision thereof . . . .” (Emphasis added).
Further, HRS § 237-22(a) requires that the GET include
exemptions or deductions where needed to comply with the United
States Constitution and laws of the United States. See HRS
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§ 237-22(a) (2002) (“In computing the amounts of any tax imposed
under this chapter, there shall be excepted or deducted from the
values, gross proceeds of sales, or gross income so much thereof
as, under the Constitution and laws of the United States, the
State is prohibited from taxing, but only so long as and only to
the extent that the State is so prohibited.”). Thus, HRS
§ 237-22 guards against multiple taxation by mandating exemptions
or deductions where multiple taxation arises.
Accordingly, the use tax is complementary and
internally consistent, and the Director has met the burden to
prove that the use tax, HRS § 238-2, does not violate the
Commerce Clause.
C. Equal Protection Clause
CompUSA argues that HRS § 238-2 violates the Equal
Protection Clause because the statute does not withstand rational
basis review. When examining an equal protection claim, this
court applies rational basis review unless fundamental rights or
suspect classifications are implicated. KNG Corp. v. Kim, 107
Hawai#i 73, 82, 110 P.3d 397, 406 (2005). A party challenging
the constitutionality of a statutory classification subject to
rational basis review has the burden of showing, “with convincing
clarity, that the classification is not rationally related to the
statutory purpose, or that the challenged classification does not
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rest upon some ground of difference having a fair and substantial
relation to the object of the legislation, and is therefore not
arbitrary and capricious.” Id. at 82, 110 P.3d at 406 (emphasis
omitted).
The rational basis standard “is especially deferential
in the context of classifications made by complex tax laws. In
structuring internal taxation schemes the States have large
leeway in making classifications and drawing lines which in their
judgment produce reasonable systems of taxation.” Nordlinger v.
Hahn, 505 U.S. 1, 11 (1992) (internal citations omitted); see
Gen. Motors Corp. v. Tracy, 519 U.S. 278, 311 (1997) (“in
taxation, even more than in other fields, legislatures possess
the greatest freedom in classification.”).
CompUSA argues that the 2004 amendment to HRS § 238-2
in response to Baker & Taylor created disparity between two
different classes of taxpayers, in-state purchasers and out-of-
state purchasers. CompUSA argues that the burden the law now
imposes on only out-of-state purchases is not rationally related
to the stated legislative purpose in enacting the changes to HRS
§ 238-2, and thus the classification is “palpably arbitrary.”
Although the statute establishes a classification
between in-state and out-of-state sellers, HRS § 238-2 survives
rational basis review. As explained in detail in the above
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Commerce Clause analysis, the classification of out-of-state
sellers bears a rational relationship to the legitimate state
interest of “leveling the economic playing field” for local
businesses subject to the GET. Thus, the classification is not
arbitrary or irrational, and the statute does not violate the
Equal Protection Clause. See KNG Corp., 107 Hawai#i at 82, 110
P.3d at 406. The Tax Appeal Court was correct in so concluding.
V. Conclusion
For the foregoing reasons, we affirm the Tax Appeal
Court’s October 6, 2015 judgment granting the Director’s motion
for summary judgment and denying CompUSA’s motion for summary
judgment.
Christopher J. Muzzi /s/ Mark E. Recktenwald
for appellant
/s/ Paula A. Nakayama
Kimberly Tsumoto Guidry
for appellee /s/ Sabrina S. McKenna
/s/ Richard W. Pollack
/s/ Michael D. Wilson
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