Gov. Linda Lingle's veto yesterday of a bill that would apply the state's general excise tax to Mainland retailers with Internet links to Hawai'i will likely stand, after state lawmakers said they will not attempt an override because of a technical flaw.

Amazon and Overstock.com had threatened to cancel affiliate marketing arrangements with local Web sites if the bill became law, and both have since canceled Hawai'i affiliations. The Seattle- and Utah-based companies contend that the bill was unconstitutional because neither has a physical presence in the Islands and should not be subject to the state tax.

Local Internet businesses and bloggers had predicted other companies would follow Amazon.com and Overstock.com and drop affiliates in Hawai'i.

"I am vetoing this bill immediately to help ensure Hawai'i is not economically hurt by legislation that was not well thought out and would have negative consequences for nonprofits such as the University of Hawai'i bookstore, and businesses throughout our state," Lingle said in a statement. "I am hopeful by vetoing this bill that Mainland-based companies will promptly restore their relationships with our state."

Lingle also said the state attorney general found that the bill may be legally defective because its scope was broader than the subject of its title.

2ND TAX PROPOSAL

State House Majority Leader Blake Oshiro, D-33rd ('Aiea, Halawa Valley, 'Aiea Heights), said House lawmakers will not try to override the veto because of the technical flaw. Overrides require a two-thirds majority of votes in both the House and Senate to succeed.

Oshiro also said it is questionable whether the House would override a potential veto of a separate Internet tax proposal. That bill would allow Hawai'i to join nearly two dozen other states in the Streamlined Sales Tax Project to simplify state tax laws and help persuade retailers to collect and pay state taxes. The compact is voluntary. States are not able to require retailers to collect state taxes until Congress passes federal legislation signaling that the project does not interfere with interstate commerce.

Consumers in Hawai'i are supposed to pay a use tax on mail-order and Internet purchases, but the state does not enforce the law except on some big-ticket purchases such as automobiles. Hawai'i is losing as much as $37 million a year in uncollected taxes on Internet commerce.

The two Internet tax approaches had been paired together as they moved through the Legislature last session, so the death of one could mean trouble for the other.

State Sen. Carol Fukunaga, D-11th (Makiki, Pawa'a), noted that Amazon.com and other retailers prefer the Streamlined Sales Tax Project because it would bring some uniformity to conflicting state tax laws. She believes it would also help level the playing field for brick-and-mortar businesses that have to pay state taxes.

"I think it's the appropriate path to take for a state," Fukunaga said. "It's not intended to create any kinds of new pressures, it's simply to collect taxes that are currently on the books."

State Rep. Isaac Choy, D-24th (Manoa), said Amazon.com and Overstock.com are basically arguing that they want to do business in Hawai'i but do not want to pay state taxes. "The mail-order business and Internet sales business are growing by leaps and bounds, and we're going to have to tax that tax base sometime in the future, and do it properly," he said. "One, it's a huge tax base. And two, it's a fairness issue for the brick-and-mortars."

AMAZON.COM FREEZE

Amazon.com, the nation's largest online retailer, dropped affiliates in Hawai'i, North Carolina and Rhode Island because of the tax issue. The states had modeled the tax proposals after a law passed in New York last year that Amazon.com is challenging in court.

Overstock.com dropped affiliates in Hawai'i, North Carolina, Rhode Island and California. "It's awful to have to terminate these relationships with affiliates, simply because they live in states where unconstitutional laws are being passed," Patrick Byrne, Overstock.com's chairman and chief executive officer, said in a statement. "However, politicians have to remember that a tax is a price that government charges for a service, and when they raise their prices, we're going to buy less of their services."

Local Internet advocates warned that the bill could chill financial opportunities for local Web sites, from small one-person blog sites to larger operations such as the Advertiser and the Star-Bulletin.

"I'm hoping that Amazon.com and Overstock.com will reinstate Hawai'i affiliates," said Troy Fujimoto, new media director for the Star-Bulletin.