Connecticut, like many states, has been trying to collect more tax revenue from online sales since the US Supreme Court opened the door in 2018.
But state auditors recently found that the Connecticut IRS never implemented a 2019 legislative directive aimed at raking in an additional $30 million from internet transactions.
While some lawmakers are unwilling to give up, achieving those savings could be politically difficult.
It all depends on whether Connecticut wants to overhaul its sales tax system.
“It’s likely that there is still a lot of money on the table,” House Majority Leader Jason Rojas, D-East Hartford, said Friday.
“On my street alone, not a day goes by that I don’t hear the trucks, whether it’s UPS or FedEx or Amazon,” said Sen. John Fonfara, D-Hartford. “You see the activity every day.”
The Supreme Court recognized this activity in June 2018, when it upheld a South Dakota statute that allowed it to levy taxes on out-of-state businesses that sell to South Dakota residents.
Before the ruling, states could only tax sellers with a physical presence — like a store or warehouse — within their borders.
Many states responded quickly with laws that redefined which companies must collect and remit sales tax. Connecticut requires out-of-state merchants to collect and remit sales tax if they conduct at least 200 transactions per year with residents of Connecticut and generate at least $100,000 in gross sales to residents here.
But many businesses, especially smaller ones, are still not compliant with these new tax rules, and Connecticut and other states are struggling to enforce their laws.
Twenty-four states created the Streamlined Sales Tax Project to share information about online transactions and improve collections.
Connecticut isn’t a member, but the 2019 Legislature tried to see if the state could reap some of the benefits from this cooperative approach. It specifically directed the Department of Revenue Services to create a list of “certified service providers” who could help improve out-of-state businesses’ compliance with Connecticut’s sales tax laws.
These providers are certified agents by the Multi-State Coalition to assist online businesses in fulfilling many of their sales tax functions, specifically collecting taxes and remitting them to the correct state.
In fact, Connecticut lawmakers estimated the initiative would generate an additional $30 million annually beginning in fiscal year 2020-21. According to the state’s Consensus Revenue Report, sales tax receipts from all sources totaled about $4.8 billion in the past fiscal year.
However, state auditors John Geragosian and Clark Chapin noted in a recent report that the tax division never produced that list or reported to lawmakers as of February 2020 as originally instructed.
In a written response to the auditors, the tax office wrote that “for record purposes, it should be noted that the DRS has not been contacted by the general meeting regarding this public act.”
So why was the topic dropped?
Mark Boughton only became Commissioner of Revenue Services in December 2020, well past the February deadline.
But Boughton told the CT Mirror that lawmakers failed to recognize that Connecticut would have to make a bigger commitment if it wanted to piggyback on efforts from several states to rake in more sales tax revenue from the online arena. If the state wanted to use the project’s certified service providers to collect more sales tax, it would likely have to join the coalition.
Streamlined Sales Tax Project members must have a simple system of sales tax rates and exemptions. Member States are granted a general rate for most items and a second, generally lower, rate for food and medicines.
Connecticut has a mishmash regime that includes a base sales tax rate of 6.35%; a luxury tax rate of 7.75% on high-priced jewelry and automobiles; a 1% surcharge on restaurant meals; a rate of 2.99% on certain boats and boat engines; and dozens of exceptions.
In addition to exempting groceries, medicines, many clothing items, and other items commonly exempt in other states, Connecticut also waives sales tax on other goods and services that critics have called nonessential. These include amusement and recreation services, electrology services, and winter boat storage.
Gov. Ned Lamont and the 2019 Legislature scrapped a modest number of sales tax exemptions, but only after heated debate.
Boughton said his department is always ready to work with lawmakers if members wish to revisit this issue when the 2023 regular session begins in January. But the ball is in the hands of the legislature.
“I’m fascinated by” a streamlined sales tax system, Boughton added, “but I understand the political landmines that exist in the process.”
Many Connecticut brick-and-mortar stores have added websites in recent years to compete with online-only stores, said Tim Phelan, executive director of the Connecticut Retail Merchants Association.
Still, merchants of all types in Connecticut largely comply with sales tax remittance laws, Phelan said, adding that out-of-state sellers who flout those rules continue to have an unfair advantage.
“We support all efforts to ensure these taxes are collected,” he said.