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### 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 Electronically Filed Supreme Court SCAP-15-0000861 18-MAY-2018 08:10 AM*** FOR PUBLICATION IN WE ST’S HAWAI # I REPORTS AND PACIFI C REPORTER ***



### 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, in the years 2006, 2007, and 1 

### 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. CompUSA and the Department’s Director of Taxation 2 

### (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

HRS § 238- 2 (Su pp. 2 004) provi des, in re levan t par t: 1 There is h erebylevi ed an exci se ta x on the u se in this State of t angib le pe rsona l pro pertywhic h is impor ted b y a t axpay er in this Stat e whe ther owned , purch ased from an un licen sed s eller , or howev er acqui red f or us e in this State . The tax impos ed by this chapt er sh all a ccrue when the prope rty i s acqui red b y the impo rter or pu rchas er an d bec omes subje ct to the taxin g jur isdic tion of th e Sta te. The H onora ble G ary W .B. C hang presi ded. 2 

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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-statesellers are subject to the general excise tax (GET), and out-ofstate 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 withCompUSA that the statute establishes a classification between instate 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 u se ta x is close ly co nnect ed wi th Ha waii’ s gen eral

excis e tax(GET ). T he GE T pla ces a 0.5% tax on th e busin ess o f man ufact uringand whole salin g in Hawai # i, resul ting in a price diff erent ial b etwee n the prod ucts made and s old w holes ale l ocall y andthe same produ cts made and s old w holes ale o n the main land. In the absen ce ofa us e taxthat comp lemen ts a GET, selle rs of go ods a cquir ed ou t-of- state theo retic ally enjoya compe titiv e adv antag e ove r sel lers of go ods a cquir ed in-st ate: . . . out- of-st ate p roduc ts wo uld b e les s expen sive than in-st ate p roduc ts, t he pr ices of wh ich



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wouldpres umabl y ref lect some pass- on ofthe 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 p urpos e of this Act i s to clari fy cu rrent use tax laws in li ght o f Bak er & Taylo r, In c. v. Kawa fuchi , S.C. 23376 (Jan . 14, 2004 ) andadmi nistr ative rule 18- 237-1 3-02. 01 by : (1) Clari fyingwhen a se ller is su bject to t he 0.5 p er ce nt us e tax ; (2) Resto ring the i mposi tion of ta xes o n goo ds purch ased both withi n andouts ide t he State ; and (3) Clari fyingthat the use t ax ap plies to selle rs wh o acq uire goods fromouts ide t he State and impor t the prod uct f or sa le or resal e in the S tate. 

### 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. Id. 3 

### The 2004 amendment, inter alia, both added and removed 4 

### language in HRS § 238-2:

There is h erebylevi ed an exci se ta x on the u se in this State of t angib le pe rsona l pro pertywhic h is impor ted[, or] by a taxpa yer i n thi s Sta te wh ether owned , pur chase d fro m an unlic ensedsell er, o r how ever acqui red f or us e in this State . The tax impos ed by this chapt er sh all a ccrue when the prope rty i s acqui red b y the impo rter or pu rchas er an d bec omes subje ct to the taxin g jur isdic tion of th e Sta te.

. . . . For p urpos es ofthis sect ion, tangi ble p erson al prope rty i s pro pertythat is i mport ed bythe taxpa yer for u se in this Stat e, no twith stand ing t he fa ct th at title to t he pr opert y, orthe risk of lo ss to the prope rty, passe s to the p urcha ser o f the prop erty at a locat ion o utsid e thi s Sta te. 

### 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,

In 20 04, C ompUS A app ealedthe Depar tment ’s as sessm ent o f the use 3 tax u nder HRS § 238- 2 on goods it t ransp ortedfromthe mainl and f or th e tax perio d bet ween July 1, 19 99 an d Dec ember31, 2002. CompUSA argue d tha t it was not s ubjec t to the u se ta x und er th is co urt’s deci sion in Ba ker & Tayl or. CompU SA I, 128 Hawai # i at 118-1 9, 28 4 P.3 d at 211-1 2. T he ta x app eal c ourt grant ed su mmaryjudgment again st Co mpUSA , whi ch th e ICAaffi rmed. Id. at 1 19- 21, 2 84 P. 3d at 212- 14. On ce rtior ari r eview , thi s cou rt up held the asses sment of t he us e taxagai nst C ompUS A hol ding that, unde r Bak er & Taylo r, the u se ta x app lied to Co mpUSA ’s bu sines s act iviti es. Id. a t 127 , 284 P.3dat 220.
Under linin g ind icate s add ed te xt, a nd br acket s wit h str ikeou ts

4 indic ate r emove d tex t. 

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### whether the title passed in-state or out-of-state:

“Impo rt” .
. . . inc ludes : (1) The i mport ation into the State of t angib le prope rty, servi ces, or co ntrac ting owned , pur chase d from an un licen sed s eller , or howev er ac quire d, fr om any o ther part of th e Uni ted S tates or i ts po ssess ions or fr om an y for eign count ry, w hethe r in inter state or forei gn co mmerc e, orboth [.]; and (2) The s ale a nd de liver y of tangi ble p erson al prope rty o wned, purc hasedfroman u nlice nsed selle r, or ho weveracqu ired, by a sell er wh o is or sh ould be licen sed u nder the g enera l exc ise t ax la w fro m an out-o f-sta te lo catio n to an in -stat e pur chase r, regar dless of t he fr ee on boar d poi nt orthe place where titl e to the p roper ty tr ansfe rs to the purch aser.

. . . . “Purc haser ” mea ns an y per son p urcha sing prope rty, servi ces, or co ntrac ting and “ impor ter” means any perso n imp ortin g pro perty , ser vices , or contr actin g[;], rega rdles s if at th e tim e of impor tatio n, th e pro perty , ser vices , or contr actin g is ownedby t he importe r, pu rchas ed fr om an unli cense d selle r, orhowe ver a cquir ed; .
. . . 

### 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 s hall inclu de co ntrol overtang ible or in tangi ble prope rty b y a s ellerwho is li cense d or who s houldbe licen sed u nder chapt er 23 7, wh o dir ects the impor tatio n of the p roper ty in to th e sta te fo r sal e and d elive ry to a pu rchas er in the State , lia bilit y and f ree o n boa rd (F OB) t o the cont rary notwi thsta nding , reg ardle ss ofwher e tit le pa sses . .

. . 

### 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 allpurchases of goods from unlicensed sellers, whether they were instate 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 concludedthat because the pre-amendment scheme imposed a tax on both instate and out-of-state unlicensed sellers, but the amended statute imposes a tax only on out-of-state unlicensed sellertransactions, the amended 2004 version discriminates against outof-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 H awaii Supr eme C ourt recog nizedthe conce pt of level ing t he pl ayingfiel d by its o wn wo rds, “mini mizin g the pric e adv antag e of out-o f-sta te goods ,” as a va lid j ustif icati on fo r imp osinga us e tax u pon t axpay er’s purch ase o f goo ds fr om an out- ofstate sell er fo r use in H awaii . Co mpUSAStor es LPv. Depar tment of T axati on, 1 28 Ha waii 116, 123, 284 P .3d 209 ( Sup.C t. 20 11). 

### (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 revi ews a n awa rd ofsumm ary j udgme nt de novo, unde r the same stan dards appl ied b y the tria l court . Th erefo re, s ummar y jud gment is a pprop riate if the p leadi ngs, depos ition s, an swers to inter rogat ories , andadmi ssion s on file, toge ther with the a ffida vits, if a ny, s how t hat t here is no genu ine



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issue as t o anymate rial fact and t hat t he mo ving partyis e ntitl ed to a ju dgmen t as a mat ter o f law
. Where the appea l is from the T ax Ap peal Court , it is well settl ed th at, i n rev iewin g the find ings of fa ct, a pre sumpt ion a rises favo ring its a ction s whi ch sh ould not b e ove rturn ed wi thout goodand suffi cient reas on. The a ppell ant h as th e bur den o f sho wing that the decis ion o f the Tax Appea l Cou rt wa s cle arly erron eous. Whe n the fact s are undi spute d andthe sole quest ion i s one of l aw, t he de cisio n of the T ax Ap peal Court is r eview ed un der t he ri ght/w rong stand ard. 

### 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 T ax Ap peal Court erre d as a mat ter o f law when it di d not gran t Tax payer ’s Mo tion for Summa ry Ju dgmen t bec ause there were no g enuin e issue s of mater ial f act a nd Ta xpaye r was entit led t o jud gment as a matt er oflaw, inasmuch a s (a) HRS § 238 -2 vi olate s the Comme rce C lause ; and /or ( b) HR S § 2 38-2 viola tes the E qual Prote ction Clau se. 2. The T ax Ap peal Court erre d whe n it grant ed Direc tor’s Moti on fo r Summary Judgm ent b ecaus e HRS § [sic ] (a) HRS § 238 -2 vi olate s the Comme rce C lause ; and /or ( b) HR S § 2 38-2 viola tes the E qual Prote ction Clau se.



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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 g enera l exc ise t ax, o rigin ally enact ed in 1935 to repla ce th e sho rt-li ved b usine ss ex cise tax w hich was passe d in 1932 at th e hei ght o f the Grea t Dep ressi on, is th e Sta te’s princ ipal sourc e of gover nment al reven ue. In fo rm, i t is a taximpo sed u pon entre prene urs f or th e pri vileg e of doingbusi ness; in effec t, it is m ore. It h as be en ch aract erize d as “an amalg am ofcons umpti on, b usine ss an d inc ome t axati on,” for t he ul timat e bur den i s oft en sh iftedforw ard t o consu mers. The tax appli es at all level s of econo mic activ ity f rom p roduc tion or ma nufac turin g to retai ling, albe it at diff erent rate s, an d to virtu ally all g oods and s ervic es. 

### 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]i scrim inati on” s implymean s dif feren tial treat ment of in -stat e andout- of-st ate e conom ic in teres ts th at benef its t he fo rmer and b urden s the latt er. Discr imina tory laws motiv ated by si mple econo mic prote ction ism a re su bject to a virt uallyper se ru le of in valid ity, whichcan only be ov ercom e by a sho wing that the S tate has n o oth er me ans t o adv ance a legit imate loca l pur pose. 

### 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 u se, w hethe r the use is ofsuchnatu re as to c ause the p roper ty, s ervic es, o r con tract ing t o be appre ciabl y con sumedor n ot, o r the keep ing o f the prope rty o r ser vices for such use o r forsale , the exerc ise o f anyrigh t or powerovertang ible or intan gible pers onal prope rty i ncide nt to the owner ship of th at pr opert y, an d sha ll in clude cont rol o ver tangi ble o r int angib le pr opert y by a sel ler w ho is licen sed o r who shou ld be lice nsed underchap ter 2 37, who d irect s the impo rtati on ofthe prope rty i nto t he state for sale and d elive ry to a pu rchas er in the State , lia bilit y andfree on b oard (FOB) to t he contr ary n otwit hstan ding, rega rdles s of where titl e passe s . . . . 

### 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

The T ax Ap peal Court conc ludedthat HRS § 238 -2 wa s not 5 discr imina tory on it s fac e pri or to the 2004 amendment. Ult imate ly, w e nee d not r esolv e tha t que stion beca use C ompUS A’s r eleva nt re fund reque sts, which are f or th e yea rs 20 06, 2 007, and 2 008, are g overn ed bythe curre nt ve rsion 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 ju stifya ch arge on in terst ate c ommer ce as a compe nsato ry ta x, a State must , as a thr eshol d mat ter, ident ify t he in trast ate t ax bu rden for w hich the S tate is at tempt ing t o compensa te. Once that burde n has been ident ified , the tax on in terst ate c ommer ce mu st be sh own r oughl y to appro ximat e—but not excee d—the amoun t of the t ax on intr astat e commerce . Fi nally , the e vents on w hich the i nters tate and i ntras tate taxes are impos ed mu st be subs tanti ally equiv alent ; that is, t hey must b e suf ficie ntly simil ar in subst ance to se rve a s mut uallyexcl usive prox ies f or 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] c orpor ation doin g all of i ts bu sines s wit hin t he State woul d paycorp orate inco me ta x on 100% of it s incom e, an d the taxa ble p ercen tage deduc tion allow ed to re siden t own ers o f tha t cor porat ion’s stoc k und er the i ntang ibles tax wouldlike wise be 10 0%. S tock in a corpo ratio n doi ng no busi ness in No rth C aroli na, o n the o ther hand, woul d be taxab le on 100% of i ts va lue. For t he in terme diate case s, ho lders of s tock were able to lo ok up the taxab le pe rcent age f or a large numb er of co rpora tions as d eterm ined and p ublis hed a nnual ly by th e Nor th Ca rolin a Sec retar y of Reven ue (Secr etary ). In 1990 , forexample, the S ecret ary deter minedthe appro priat e tax able perce ntage of I BM stockto b e 95% , mea ning that IBM d id 5% of i ts busin ess i n Nor th Ca rolin a, wi th it s sto ck he ld by NorthCaro lina resid ents beingtaxa ble o n 95% of i ts 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 19*** FOR PUBLICATION IN WE ST’S HAWAI # I REPORTS AND PACIFI C REPORTER *** 

### 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 differencebetween what a consumer pays on in-state as opposed to out-ofstate 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. Thus, the use tax and GET 6 

### 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

See i nfra, Sect ion 3 (“HR S § 2 38-2 Also Satis fies the I ntern al 6 Consi stenc y Tes t.”) for a full disc ussio n of tax c redit s. 

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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 th e abs ence of a use t ax th at co mplem ents a GET , selle rs ofgood s acq uiredout- of-st ate t heore tical ly enjoya co mpeti tive advan tage over selle rs ofgood s acqui red i n-sta te: n ot be ing s ubjec t to the G ET, out-o f-sta te pr oduct s wou ld be less expe nsive than in-st ate p roduc ts, t he pr ices of wh ich w ould presu mablyrefl ect s ome p ass-o n of the G ET. Thus, the use t ax bu ttres ses t he [G ET] a s it is de signe d to preve nt th e avo idanc e of excis e tax es th roughdire ct purch ases from the m ainla nd. I ts ul timat e pur pose is to re move the c ompet itive adva ntage an o ut-of -stat e whole saleror r etail er wo uld o therw ise h ave o ver a selle r sub ject to th e payment of St ate e xcise taxe s. 

### 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. CompUSA argues that the 7

CompU SA as serts that the use t ax do es no t lev el th e pla ying field 7 for l ocal vendo rs be cause it l eaves in-s tate purch ases from unlic ensed busin esses free froma ta x bur den. The only evide nce p resen ted b y CompUSA that unlic ensedbusi nesse s are free froma ta x bur den i s the chan ge of langu age w hen H RS § 238-2 was amend ed in 2004 , dis cusse d sup ra in Sect ion II.A. The Dire ctor argue s tha t no versi on ofHRS § 238 -2 ev er imposeda us e tax o n in- state purc hases
.

Hawai # i sta tutes and Hawai # i cas elaw sugge st th at th e pre -amen ded versi on ofHRS § 238 -2 di d not cove r in- state sell ers. Bothbefo re an d aft er the 2 004 a mendm ent, the d efini tion of “u nlice nsed selle r” su bject to t he us e tax e xclud es an y bus iness subj ect t o the GET, whet her o r not the selle r hol ds a lic ense underthe GET. HRS § 238 -1. This inter preta tion is co nsist ent w ith the e xtrao rdina rily broadswee p of the G ET. Chapt er 23 7 “su bject s to the gener al ex cise tax v irtua lly e very econo mic a ctivi ty im agina ble.” Pra tt, 5 3 Haw. at 43 6, 49 6 P.2 d at 2. T he GE T sta tute defin es ei ght c atego ries of busin esses subj ect t o the GET, and a cat chall prov ision , whi ch pr ovide s tha t the G ET is impo sed “ [u]po n eve ry pe rson engag ing o r con tinui ng wi thin the State in a ny bu sines s, tr ade, activ ity, occup ation , or calli ng no t inc ludedin the p reced ing p aragr aphs or an y oth er pr ovisi ons o f thi s cha pter. ” HR S § 2 37- 13 (S upp. 2003) (emp hases adde d). The c atcha ll pr ovisi on ex istedlongbefo re the u se ta x was amen ded i n 200 4, an d Haw ai # i cas e lawhas long inter prete d the (cont inued ...) 

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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. We 8 

### 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

(...c ontin ued) 7 GET t o app ly to ever y typ e of in-st ate b usine ss in Hawa i # i. S ee, e .g., Matte r of Gr ayco Land Escro w, Lt d., 5 7 Haw . 436 , 443 , 559 P.2d264, 270 (1977 ) (“i n plain and unmis takab le la nguag e, th e sta tute evide nces the i ntent ion o f the legis latur e to tax e very form of bu sines s, su bject to t he ta xing juris dicti on, not s pecif icall y exe mptedfromits provi sions .” (c itati on om itted )).

In su m, HR S § 2 38-1 exclu des f rom t he de finit ion o f unl icens ed selle r anysell er su bject to t he GE T, wh etheror n ot th e sel ler h as a GET licen se, a nd th e GET is i mpose d on all b usine ss ac tivit y in Hawai # i. Thus, there does not appea r to be a categ ory o f in- state unli cense d bus iness es in Hawai # i whi ch th e pre -amen dment vers ion o f HRS § 23 8-2 c overe d.

In ma king its a rgume nts, CompU SA re lies on Mo lloy v. Go v’t o f the 8 Virgi n Isl ands, 594 F. Su pp. 2 d 595 , 597 (D.V .I. 2 007), argu ing “ the U nited State s Dis trict Cour t forthe Distr ict o f the Virg in Is lands heldthat a perso nal u se ta x sim ilar in st ructu re an d eff ect t o HRS § 23 8-2 v iolat ed th e Comme rce C lause .” M olloyis d istin guish able becau se th ere w as no sale s taxor GET i n the Virg in Is lands agai nst w hich the u se ta x was bala nced; onlyout- ofstate purc hases were subj ect t o a t ax. 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 withthe Director that adding an additional taxpayer burden on instate 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 inter nal c onsis tencytest ], wh ich h elps court s ident ify t ax sc hemes that disc rimin ate a gains t inter state comm erce, look s to the s truct ure o f the tax at is sue t o see whet her i ts id entic al ap plica tion by everyStat e in the U nion wouldplac e int ersta te comme rce a t a d isadv antag e as compa red w ith c ommer ce intra state . By hypothe tical ly as sumin g tha t eve ry St ate h as th e same tax s truct ure, the i ntern al co nsist ency test allow s cou rts t o iso late the e ffect of a defe ndant State ’s ta x sch eme. This is a virt ue ofthe test becau se it allo ws co urts to di sting uish betwe en (1 ) tax s cheme s tha t inh erent ly di scrim inate agai nst inter state comm erce witho ut re gard to th e taxpoli cies of ot her S tates , and(2) tax s cheme s tha t cre ate dispa rate incen tives to e ngage in i nters tate comme rce (and somet imes resul t in doubl e tax ation ) onl y as a resul t of the i ntera ction of t wo di ffere nt bu t nondi scrim inato ry an d int ernal ly co nsist ent s cheme s. 

### 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 twodifferent classes of taxpayers, in-state purchasers and out-ofstate 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 for appellant Kimberly Tsumoto Guidry for appellee /s/ Mark E. Recktenwald /s/ Paula A. Nakayama /s/ Sabrina S. McKenna /s/ Richard W. Pollack /s/ Michael D. Wilson

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