Hawai'i lawmakers want to increase the collection of state taxes on Internet sales, although it could be another year or two before local online shoppers are affected.

House Bill 2419 makes changes to Hawai'i's general excise tax code, allowing the state to join the Streamlined Sale Tax Project, a voluntary effort of several states to collect taxes on Internet transactions. The bill, which passed out of a conference committee late Friday, goes up for votes by the full Legislature on Thursday.

If the bill becomes law, Hawai'i will petition to join the Streamlined Sale Tax Project. Once Hawai'i is accepted into the state tax group, businesses in participating states would be urged to collect taxes from Hawai'i Internet shoppers and Hawai'i businesses selling goods online would in turn voluntarily collect taxes from out-of-state buyers.

So far, 13 states have joined the cooperative effort, and another seven states, including Hawai'i, are in the process of joining.

Hawai'i residents already must pay a 4 percent use tax on out-of-state goods purchased via the Internet or catalogs. Many residents don't know about the tax rule, and those who know may not comply with it. Still, consumers aren't likely to pay both the use tax and a sales tax when online retailers begin collecting Hawai'i taxes on transactions.

State officials are concerned that they are missing out on a growing source of tax revenue as people increasingly shop online. Although it would be voluntary for businesses to collect it, the streamlined sales tax would generate an estimated $10.3 million in added annual revenues for Hawai'i, according to a recent report by University of Tennessee professor William Fox.

Lawmakers also are concerned that local businesses are at an increasing disadvantage to Internet businesses that don't collect sales taxes and can charge less as a result. Currently, catalog companies and strictly online retailers are required to charge sales taxes only in states where they have operations, such as warehouses and distribution facilities, so most Internet shops do not collect Hawai'i state taxes.

Joining the tax collection effort "kind of levels the playing field and it is a lot fairer for Hawai'i businesses — they're in sync with whoever is selling to Hawai'i consumers from outside the state," said state Sen. Carol Fukunaga, (D-11th (Makiki, Pawa'a), a bill proponent.

It likely would be a year or two before Hawai'i starts collecting taxes on Internet sales for other states and vice-versa, she said.

But collecting taxes on Internet transactions is a complicated proposition, and the cooperative effort among states is not going smoothly, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i. Big manufacturing states such as California, Texas, Ohio and Illinois want the taxes to be assessed at the tax rate of the state where an item is purchased, he said.

Hawai'i's law would assess taxes at the rate of the state where items are received.

"Without the participation of these big states, you can't have full compliance," Kalapa said. "If that's the case, what good is it" for Hawai'i to participate?

Among the details that still need to be resolved is who will provide the businesses with the software they need to calculate, collect and remit taxes collected for other states.

Participation among the businesses will remain voluntary unless Congress requires Internet tax collections.

Businesses are not supposed to face added costs as a result of the effort to collect sales taxes on Web purchases.

"I only would be concerned if it increased my overhead," said Jim Wayman, president of Hawaii Coffee Co., which sells coffee in stores and online. "My concern is how many employees will I have to hire to figure this out."

Carol Pregill, Retail Merchants of Hawaii president, said the trade group shares such concerns but supports the bill. The key to getting businesses to participate is to ensure that collecting the taxes won't increase their costs, she said.

"The only way to make sure that our concerns are met is to be part of the discussion," Pregill said. "Right now, participation in the Streamlined Sales Tax Project is voluntary. That takes care of our retailers here — you do or you don't" participate.

Reach Sean Hao at shao@honoluluadvertiser.com.