Legislators likely to drop ‘Amazon Law’

The chances of survival for a controversial bill to force collection of sales taxes on Internet transactions have become very slim as the regular legislative session nears its May 5 deadline, key lawmakers said Thursday.

The problem, according to leaders of the Finance, Revenue and Bonding Committee, is that many legislators fear businesses could be harmed regardless of whether action is taken.

On one hand, traditional book stores and other businesses without a major Internet presence have argued increasingly in recent years that their profits are being undercut by online retailers who don’t collect the 6 percent Connecticut sales tax.

But the nation’s largest on-line retailer, Amazon.com, threatened last month to sever its ties with thousands of Connecticut businesses that receive commissions by directing shoppers to the Amazon site if the state tries to tax Internet sales.

“I think people really are sensitive to all of these small businessmen and women,” Rep. Cameron C. Staples, D-New Haven, co-chairman of the finance panel, said, adding lawmakers’ uncertainties were not helped by Amazon.com’s threat. “I think the behavior of Amazon, to threaten the small businesses in this state as a means to avoid collecting income tax, is reprehensible.”

But while legislators believe Amazon would carry out its threat – having seen the online retailer fire affiliates in other states that have enacted laws similar to the bill proposed here – what is less certain is how much Connecticut stands to gain, Staples added.

Connecticut Voices for Children, a New Haven-based public policy and research group, cited University of Tennessee research in a report last month that estimates Connecticut could lose nearly $50 million in 2010 from unpaid sales taxes from Internet transactions.

Nationally states lose a total of $7 billion a year in sales tax revenue, according to an analysis by the Center on Budget and Policy Priorities, a nonprofit fiscal and public policy group based in Washington, D.C.

Yet the legislature’s nonpartisan Office of Fiscal Analysis estimated the bill would produce between $8.4 million and $9.3 million in revenue next fiscal year.

Connecticut residents are required by law to pay the sales tax on goods purchased tax-free either out-of-state or on line. Those obligations, known as the “use tax,” are supposed to be reported on annual state income tax returns.

But officials concede many residents do not pay the use tax. The $13.4 million in use tax paid last year by Connecticut income tax filers represented less than one-half of 1 percent of all sales tax revenue.

The finance committee’s other co-chair, Sen. Eileen M. Daily, D-Westbrook, said she also believes many legislators feel caught – worried about Amazon.com and other online retail giants retaliating by firing affiliates here, but equally concerned about small Connecticut stores losing business to the Internet.

“I think when this was a fledgling business, people didn’t want to harm it,” she said. “But to have this undermining our local businesses is not anything, I think, anyone foresaw.”

“If Connecticut were to enact RB 5481, Amazon and presumably dozens of other out-of-state retailers would simply sever affiliate advertising relationships with Connecticut residents,” Paul Misener, Amazon’s vice president for global public policy, wrote in testimony submitted to the Finance, Revenue and Bonding Committee on March 15.

Misener added that residents of other states that haven’t enacted similar measures “could still participate in the affiliates’ program and earn referral fees in part on retailers’ sales to Connecticut consumers.”

These sales affiliates, which are the linchpin of legislative attempts here and in other states to collect sales tax revenue due on ever-growing Internet sales, total nearly 200,000 nationwide, and about 2,800 in Connecticut, according to Rebecca Madigan, executive director of the southern California-based Performance Marketing Association.

Of those 2,800 Connecticut affiliates, she estimated that 70 percent are linked to Amazon. Madigan’s organization represents Amazon, other online giants such as Google, Yahoo and eBay, as well as a growing affiliate network.

Misener did not return a telephone call seeking comment Thursday afternoon.

Connecticut, like several other states, is trying to find its way around a 1992 U.S. Supreme Court decision that held a state cannot force businesses to collect sales taxes unless they have a physical presence within that state.

One possible route was mapped out in 2008 when New York enacted a law that said online retailers have a “nexus,” or physical presence, if their New York sales affiliates generate a threshold level of business.

The Connecticut bill sets a nexus test of $2,000 in quarterly sales generated over four consecutive quarters by in-state affiliates.

While the New York law is tied up in a legal challenge brought by Amazon, other states that have enacted similar statutes, including Colorado, North Carolina and Rhode Island, have seen Amazon fire its sales affiliates within their boundaries.

Neither the state Department of Revenue Services nor the state’s chief business lobbying entity, the Connecticut Business and Industry Association, took a position on the bill.

CBIA Senior Vice President Joseph F. Brennan said his organization has members on both sides of this issue, but added the best move might be to wait for better research. “Until there’s a real detailed analysis of this, those legislators who are being cautious are right,” he said. “You have assumptions that some people are being harmed or would be harmed, but a lot of these questions really haven’t been fully answered.”

Sen. Andrew W. Roraback of Goshen, the ranking Republican senator on panel, agreed that many legislators are fearful that adopting this bill now could make the business climate worse amid an already sluggish economy.

But Roraback, who voted against the measure in committee, said he understands it is designed to enforce an existing tax, not to impose a new one, and warned that the issue won’t go away soon.

Sooner or later, Roraback added, government eventually must address the tax advantage effectively granted to online retailers. “My sympathies are totally aligned with the small, individual booksellers,” he said.