AP NEWS

Connecticut finds plug for $1.5B December tax drain

February 18, 2019

After the December enactment of a new Connecticut law forcing online vendors to remit sales taxes for merchandise sold by other individuals and entities using their websites, the state registered a 34 percent increase in sales tax collections compared to December 2017.

Connecticut enacted the law on the heels of last June’s landmark U.S. Supreme Court decision South Dakota v. Wayfair that authorized states to require online sales tax collections, long an open question due to previous precedents limiting state jurisdiction in cross-border commerce.

Connecticut sales tax revenues in December increased by $97 million from a year earlier, pushing to $384 million the state’s haul, excluding taxes for lodgings. The state had seen dwindling December sales tax collections the previous three years, despite a 2013 agreement with online giant Amazon to levy sales taxes at the point of sales for purchases sent to Connecticut.

In December, the state Department of Revenue Services began requiring all “marketplace facilitators” with annual sales of at least $250,000 in Connecticut — some 600 in all — to file a business tax registration application to obtain a Connecticut sales tax permit. Marketplace sellers are required to report sales as well.

“The legislation that ... passed last year — in terms of remote sellers (and) internet sellers that went into effect on December 1, 2018 — is a fantastic tool,” said Scott Jackson, commissioner of the state Department of Revenue Services, speaking in late January in Hartford before a committee of the Connecticut General Assembly. “We had already had written settlement agreements with more than 400 of the top 500 remote sellers. We (increased) the list of the 500 to 1,000 — and we’re doing very well.

“There’s a point of diminishing returns after about No. 600 (and)they don’t meet the thresholds of the law,” Jackson added. “It doesn’t mean we won’t reach out to them and ask them to participate, because we expect them to grow.”

Connecticut’s December surge in sales tax collections came against the backdrop of a 1.2 percent drop in retail sales nationally that month, as estimated last week by the U.S. Department of Commerce. Online sales nationally was up 17 percent for the 2018 holiday season, however, including sales up to the Black Friday shopping weekend after Thanksgiving.

Assuming Connecticut retailers performed in line with national retail trends, then the state was able to collect sales taxes on as much as $1.5 billion in additional economic activity, presumably the large majority of it from online purchases.

In his second month in office, Gov. Ned Lamont has floated several ideas to increase sales tax collections by broadening the base of items to which they could apply. As of last July, Connecticut’s 6.35 percent standard sales tax was the 12th highest in the nation, according to the Tax Foundation, not including a 7.75 percent sales tax on luxury goods.

The state ranked 33rd nationally if combining the average effect of local sales tax levies allowed in New York and many other states.

With Connecticut having seemingly plugged a major hole in its sales tax collections, DRS is turning its attention this year to “use” taxes that businesses and individuals are required to pay for goods or services purchased outside Connecticut but used within the state’s borders.

Last month, Jackson agreed with a description of use taxes as an “honor system” that many evade, costing the state needed revenue, but said his department is adding tools to discover violations.

“We ... have cooperative agreements with the major credit card companies where we can validate certain information,” Jackson said. “It is an honor system, but because of the transformation to a digital economy, it gives us more pathways to track down information, to validate information and to ensure that the fair share is being paid.”

Alex.Soule@scni.com; 203-842-2545; @casoulman