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May 16, 2016

CT pushes to collect taxes from remote companies

PHOTO | Steve Laschever Department of Revenue Services Commissioner Kevin Sullivan is trying to figure out ways to collect sales taxes from online retailers and other businesses that don't have a physical presence in the state, but sell to Connecticut customers.

Connecticut's tax commissioner and other officials want to write the next chapter in an ongoing push to collect tax revenue from online companies and others located outside the state.

Several years after the state got online retail giant to begin collecting and remitting millions of dollars a year in sales tax to Connecticut's coffers, Department of Revenue Services Commissioner Kevin B. Sullivan is eyeing a new target: Airbnb, an online marketplace that collects a fee for allowing property owners to list and rent lodging to travelers.

Sullivan wants Airbnb — and is currently negotiating with the company — to collect and remit the state's 15 percent lodging tax from its Connecticut customers, a levy that currently brings in about $100 million annually from hotels and other brick-and-mortar lodging businesses in the state.

The negotiations, though currently limited to one company, are part of a broader effort by Sullivan and other state officials to collect money they feel Connecticut is owed from online companies that sell to Nutmeg State residents and businesses. It's also a way, Sullivan said, to level the playing field for Connecticut-based businesses that already collect sales, hotel and other taxes.

The Airbnb talks also come as Connecticut lawmakers, many of whom are averse to further tax hikes on in-state companies and residents, continue to stare down billion-dollar budget deficits in the coming years.

Big bounty in taxes

Sullivan estimates the state could reap $125 million or more per year if online companies collect and remit sales taxes on goods and services they sell in Connecticut.

“When you're in a situation like this, you want to be sure you're collecting [tax revenues] that you're supposed to collect,” Sullivan said in an interview. “It's never a question of whether these sales are taxable. It's only a question of who pays and collects the tax.”

Though the confidential Airbnb negotiations hadn't yielded an agreement as of last week, the nonpartisan Office of Fiscal Analysis has already baked an additional $1 million in lodging-tax revenue into its latest projections for the coming fiscal year, which it released May 4, indicating OFA assumes a deal will get done.

Sullivan said he didn't provide OFA with the $1 million revenue estimate. He also declined to discuss specifics of the Airbnb talks.

But any resulting agreement could include a pledge from the state not to pursue Airbnb for disputed back taxes, while Airbnb could pledge to collect and remit the lodging tax moving forward.

That would be similar to the deal the state hatched with Amazon in 2013, except the Seattle-based company also agreed to build a $50 million distribution center in Windsor.

It's not clear if Airbnb would be required to establish a physical presence in the state, which would make it easier for Connecticut to legally levy sales taxes on the company's in-state transactions.

Broadening the tax horizon

Sullivan is pursuing Airbnb on his own accord, but this year he urged the state legislature to help him target a much broader array of remote companies.

Legislation proposed in February, which died in the Senate during the regular session, would have required all out-of-state retailers with a certain level of receipts from Connecticut customers — the bill didn't set a figure — to collect and remit sales tax. As of press time, it was not clear if legislators, who were in special session late last week, might include that language in the budget implementer bill for fiscal year 2017.

The concept of taxing companies based solely on their economic activity in a state, rather than more historically common factors such as local property or payroll, is called “economic nexus.” It's a controversial concept that's already been adopted in Alabama, South Dakota and several other states.

Businesses argue that it flies in the face of a 1992 Supreme Court precedent set in Quill v. North Dakota, which said a state could not collect sales and use tax from a company that didn't have a physical presence in the state.

Sullivan and his fellow reformers don't dispute that fact, but they argue both the Supreme Court and Congress have failed to provide states with a sales-tax solution for a modern age, where e-commerce sales have grown to nearly $342 billion per year in the United States. Virtually no one was shopping online at the time of the Quill decision, which came just one year after the first public website was published.

A fairer tax

Sullivan said sales tax economic nexus wouldn't be a windfall for the state, but it would be fairer for businesses here.

“It gives us a stronger hand in terms of arguing for collection and remittance in the state of Connecticut,” he said.

Through their expansion of economic nexus, state governments are almost daring the Supreme Court to reassess the Quill decision, said Paul Graney, a partner at accounting firm Marcum LLP who has Connecticut clients.

More than half of states have already applied the economic nexus principle to their corporate income tax laws, including Connecticut in 2009. That's when the General Assembly passed a law that required remote companies that sell more than $500,000 in goods and services to Connecticut customers to pay corporation tax.

But expanding that concept to sales tax is especially bold, Graney said, because that's the specific levy the Quill ruling addressed. Graney said the mounting trend of sales tax economic nexus is “the next step in overaggression by the states,” adding it's a burden for companies with nexus in multiple states to collect and remit sales tax, particularly because some states, though not Connecticut, also allow for local and county-level taxes.

Political, legal calculus

He summed up the political calculus for states seeking to assign tax nexus to remote companies this way: “First, I'm taxing a company that isn't in my state, so there is no one to complain I'm hurting in-state businesses,” he said. “Next, I get free money without having to provide any services at the state or local level.”

Alan Lieberman, managing partner at Hartford law firm Shipman & Goodwin, said state governments were further emboldened by a message last year from Supreme Court Justice Anthony Kennedy, who expressed hope that an appropriate case would emerge for the High Court to reexamine the Quill decision and a previous ruling on which it relied.

Kennedy made those remarks during a ruling last year on a Colorado sales-tax law.

Many, including Sullivan, believe Alabama's law could be the one the court finally decides to review.

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