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 Hawaii 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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