Connecticut, like many states, has tried to capture more tax revenue from online sales since the U.S. Supreme Court opened the door in 2018.
But the state auditors recently noted Connecticut’s tax department never implemented a 2019 legislative directive designed to rake in an extra $30 million from internet transactions.
While some lawmakers aren’t ready to abandon it, getting to that savings could be politically tricky.
It all hinges on whether Connecticut wants to overhaul its sales tax system.
“It’s likely there’s a lot of money being left on the table,” House Majority Leader Jason Rojas, D-East Hartford, said Friday.
“On my street alone, not a day goes by when I don’t hear the trucks, whether it be UPS or FedEx or Amazon” delivering packages, said Sen. John Fonfara, D-Hartford. “You see the activity every day.”
The Supreme Court recognized that activity in June 2018 when it upheld a South Dakota law that allowed it to collect taxes from out-of-state businesses that sell to South Dakota residents.
Prior to the ruling, states only could tax sellers with a physical presence — such as a store or a warehouse — within their borders.
Many states quickly responded with laws redefining which businesses must collect and remit sales tax. Connecticut requires out-of-state merchants to collect and remit sales tax if they make at least 200 transactions per year involving Connecticut residents and have at least $100,000 in gross sales to residents here.
But many businesses, particularly smaller ones, still don’t comply with these new tax rules, and Connecticut and other states struggle to enforce their laws.
Twenty-four states formed the Streamlined Sales Tax Project to share information about online transactions and enhance collections.
Connecticut isn’t a member, but the 2019 legislature tried to see if the state could reap some of the benefits from this collaborative approach. It specifically directed the Department of Revenue Services to develop a list of “certified service providers” who could help increase out-of-state business compliance with Connecticut’s sales tax laws.
These providers are agents certified by the multi-state coalition to help online businesses perform many of their sales tax functions, particularly collecting taxes and remitting them to the correct state.
Connecticut legislators even assumed $30 million of additional revenue would be collected annually starting in the 2020-21 fiscal year because of this initiative. Sales tax receipts from all sources totaled about $4.8 billion last fiscal year, according to the state’s Consensus Revenue Report.
But the state’s Auditors of Public Accounts, John Geragosian and Clark Chapin, noted in a recent report that the tax department never prepared this list or reported back to the legislature by February 2020 as originally instructed.
In a written response to the auditors, the tax department wrote that “it must be noted for record purposes that the DRS has not been contacted by the General Assembly with regard to said public act.”
So why was the issue dropped?
Mark Boughton didn’t become commissioner of revenue services until December 2020, well after the February deadline.
But Boughton told the CT Mirror that legislators didn’t realize Connecticut must make a larger commitment if it wants to piggyback on the multi-state effort to collect more sales tax receipts from the online arena. If the state wants to use the project’s certified service providers to collect more sales tax, it likely would have to join the coalition.
The Streamlined Sales Tax Project members must have a simple system of sales tax rates and exemptions. Member states are allowed one general rate for most items, and a second rate — generally lower — for food and drugs.
Connecticut has a hodge-podge system that includes a base sales tax rate of 6.35%; a luxury rate of 7.75% on high-priced jewelry and motor vehicles; a 1% surcharge on restaurant meals; a 2.99% rate on certain boats and boat motors; and dozens of exemptions.
Connecticut not only exempts food, medicine, much clothing and other items commonly exempted in other states, it also waives sales tax on other goods and services that critics have called non-essential. These include amusement and recreation services, electrology services and winter boat storage.
Gov. Ned Lamont and the 2019 legislature eliminated a modest number of sales tax exemptions but only after a heated debate.
Boughton said his department always stands ready to work with the legislature if members want to revisit this issue when the regular 2023 session starts in January. But the ball is in lawmakers’ court.
“I’m intrigued by” a streamlined sales tax system, Boughton added, “but I understand the political landmines that exist in doing that.”
Many of Connecticut’s brick-and-mortar stores have added websites in recent years to compete with online-only businesses, said Tim Phelan, executive director of the Connecticut Retail Merchants Association.
Still, Connecticut merchants of all kinds largely comply with sales tax remittance laws, Phelan said, adding that out-of-state sellers who flout those rules continue to hold an unfair advantage.
“We support any effort to make sure those taxes are collected,” he said.