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September 3, 2018

CT ramps up efforts to collect online sales tax revenues

HBJ Photo | Sean Teehan Department of Revenue Services Commissioner Scott Jackson said Connecticut has sales tax collection agreements with about 500 online retailers.
Photo | HBJ File State Capitol building.
By Sean Teehan

Back in June, a Supreme Court decision overturned a long-held standard that no state can collect sales taxes from e-commerce businesses that lack a physical presence, or “nexus,” within its borders.

That was a week after Gov. Dannel P. Malloy signed into law a measure requiring online retailers doing more than $250,000 of business and 200 transactions annually in Connecticut to pay state sales tax.

Connecticut's law was ahead of the curve and received little attention but underscores the state's efforts in recent years to expand sales tax collections from online retailers, a strategy that has been emboldened by the recent Supreme Court decision.

The state's new law, which received bipartisan support, is set to go into effect Dec. 1, and will be a boon to Connecticut's coffers, says Scott D. Jackson, commissioner of the Department of Revenue Services. DRS is projecting the state will collect between $35 million and $40 million in fiscal 2019 because of it.

But the reaction of a few local merchants who operate brick-and-mortar shops and sell products online ranged from indifference to dread as they contemplated a marketplace in which every state has a different sales tax law by which they must abide.

The South Dakota v. Wayfair Supreme Court decision opens the door for other states to adopt their own online sales tax regulations.

“They're going to shut down e-commerce for the small business man,” said Curtis Hanks, who owns Smith Worthington Saddlery Co. in Hartford. Hanks, a Republican whose company does a small portion of its saddle sales online, said he'd rather see a federal online sales tax standard than each state making up their own rules.

“I think there should be an entirely level playing field,” Hanks said.

Under Connecticut's law, “marketplace facilitators,” which are defined as the entity that facilitates the sale in Connecticut (think Amazon or Overstock) are responsible for paying sales taxes. It also stipulates that “referrers,” or companies that match customers to merchants, submit annual reports to DRS containing the name and address of each seller they worked with the previous year. That requirement starts Jan. 31, 2020.

The Malloy administration has been working on sales tax agreements with online sellers in recent years and there has been some success. In 2013, for example, Amazon agreed to remit Connecticut's 6.35-percent sales tax to DRS for sales to in-state buyers.

In recent months, the state has been ramping up those efforts, Jackson said. It currently has agreements in place with about 500 online sellers including Amazon, Overstock, Wayfair, Groupon and Spotify.

That's why DRS isn't scrambling to put into place systems to enact the new law, Jackson said.

“There's nothing that we need to do to prepare for it,” Jackson said, but he noted that some businesses seemed to wait to see what the Supreme Court had to say before entering into any agreement. “There were some folks who were kind of banking on (the recent Supreme Court decision) going the other way.”

Wayfair decision

Connecticut consumers, of course, have always been required to pay sales tax for online transactions, but few have actually done so on their own. Meantime, many internet retailers over the years declined to collect and remit the tax to states they don't have a physical presence in.

June's Supreme Court decision turned that legal precedent on its head.

“This notion of nexus being a physical presence is something from the last century,” Jackson said.

The Supreme Court's decision “essentially affirms decisions that we already made,” he added.

But like Hanks, Brenda Mierzejewski fears the state law and Supreme Court decision will lead to a system in which small to mid-sized vendors like herself will have to navigate a series of possibly complicated tax laws and reporting requirements for each state in which they do business.

Mierzejewski owns and operates Mizzi Cosmetics in Portland. The store sells the nontoxic lip balms she makes out of a brick-and-mortar shop on Meshomasic Trail, and online through its website. After four years in business, she said, things finally started looking stable. But since about half her business is through internet sales, she's worried about the changing tax environment. She also struggles to see how the Connecticut law would help businesses that operate strictly out of a storefront.

“I don't see the benefit just yet,” Mierzejewski said. “It absolutely worries me.”

Ankit Harpaldas, who with his family owns several businesses in Hartford including Greenway Market and Capital Spirits, said they have little to no online presence.

While it does seem fairer that online businesses pay the same sales tax his family's businesses are responsible for, he doesn't see the new law affecting business one way or the other.

“In theory, if we're paying tax to do business in Connecticut … online businesses should have to do it, too,” Harpaldas said “But I don't see it affecting my business.”

DRS is already collecting sales tax from online businesses that have entered into agreements with the state, Jackson said. The law will mostly affect large-scale operations, he added.

“You don't have to worry about DRS auditors coming to audit your lemonade stand,” Jackson said.

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