The Fee Detective recently wrote about the Hawai'i Legislature's seeming willingness to crank up taxes on rental cars -- specifically at airports -- in an attempt to make "rental car users at airports" (ostensibly, tourists) pay for their transportation infrastructure. Concurrently, the State of Hawai'i was suing various large online travel agencies (OTAs) for taxes related to rental cars in Hawai'i ranging from the year 2000 through 2013, claiming that the travel companies should have been collecting (and paying) all Hawai'i imposed taxes despite not having a physical presence in Hawai'i. The lawsuit about rental cars follows a lawsuit the state previously had pursued against the same online travel agencies (OTAs) about hotel stays but the seeds of the lawsuit were planted in a case heard by the U.S. Supreme Court all the way back in 1991 (Quill Corp. v. North Dakota).
Was there Internet Commerce in 1991?
No, there was not. Quill Corp v. North Dakota was about mail-order sales and the U.S. Supreme Court declared that requiring a company to collect taxes on behalf of the 10,000 different tax jurisdictions in the United States was an unconstitutional burden on interstate commerce. The court ruled that if a business has a physical presence in a state, they have to collect sales taxes on mail-order sales and the concept of physical presence was extended to internet commerce when that sales channel opened in the mid-1990s.
So how Did Hawai'i win the Earlier Hotel Case?
By pushing the case through the Hawai'i court system, not through the federal courts. Although state courts are junior to federal courts, the major travel companies would need a federal court to pick up the case if they were claiming the tax collection continued to violate the U.S. Constitution. In the Hawai'i hotel case, the Hawai'i Supreme Court ruled that the various travel companies were responsible for paying the hotel excise taxes assessed by the State of Hawai'i but not the hotel occupancy taxes assessed by the State of Hawai'i. Despite the major travel companies having no presence in Hawai'i (and not owning the hotels), the court ruled that one set of taxes was fair game to collect while the other was off-limits. Once the State of Hawai'i won lower court rulings against the OTAs for hotel stays, they followed the same process (and successful rationale) against the same OTAs for rental car transactions.
Why is the State of Hawai'i Pushing the Rental Car Issue Now?
Cases take a while to weave their ways through courts (and appeals), which makes that a reasonable question. After the State won the early court cases about hotels, the State's tax division sent tax bills to the same companies about their rental car transactions. It wasn't "second verse, same as the first" but instead a simple case of "only use the parts of the verse that help our cause". Hawai'i was able to keep "tens of millions" from the hotel case. Wonder how rental car taxes compare to hotel taxes in Hawai'i? We find the answer to this question in news reports:
(Hawai'ian Legislators) said the measure could mean hundreds of millions more in taxes for Hawaii's treasury.
The State effectively slow-played the rental car side of the case by using hotels as a rehearsal. Yet this doesn't mean anything for current or future renters; the various online travel agencies began listing all the rental car taxes and fees Hawai'i claimed were owed back when the State sent tax bills early this decade. And the online travel agencies often didn't even collect any taxes -- when a renter pays for a rental car at the counter, the only groups who are party to the contract are the renter and the rental car company. If anything, renters in the past five years may have been unnecessarily charged taxes the State deemed necessary but may have run afoul of the U.S. Supreme Court precedent. And no, the State of Hawai'i is not going to return money to renters if the travel agencies win their tax appeal.
What About that U.S. Supreme Court Precedent?
After more than 2.5 decades, the U.S. Supreme Court has agreed to hear South Dakota v. Wayfair -- apparently, the Dakotas (both North and South) are really into collecting sales taxes on transactions across state lines. Whether the Supreme Court maintains the ruling from Quill Corp. v. North Dakota or reverses that decision, we would expect to see changes in the rental car industry.
Curious about the current case at the Hawai'i Supreme Court? Background information is available from the docket. Interested in hearing the Hawai'i Supreme Court proceedings or need a sleep aid? A recording of the recent proceedings is available.