Gov. Dannel P. Malloy announced a new agreement Monday that will result in Amazon.com collecting the state sales tax on Connecticut purchases.
And the online retailing giant, which now can resume working with thousands of small Connecticut companies to drive business to its website, also will open a $50 million distribution center in the next two years, employing about 300 people.
“All in all, this is a win for our state’s taxpayers, our Main Street retailers and our workforce,” Malloy said. “Amazon’s multimillion dollar investment and the hundreds of jobs that will come with both the construction and operation of their future facility will unquestionably boost our local economy.”
“These are good-paying jobs with good benefits that will contribute to the fabric of Connecticut communities,” said Paul Misener, Amazon’s vice president for global public policy.
Monday’s announcement was the latest development in a two-year battle between Connecticut and Amazon as the state tries to stem the gradual loss of sales tax revenue to online commerce.
The common misconception that online purchases are exempt from sales tax stems in large part from the longstanding refusal of many Internet retailers to collect and remit the tax. Consumers are supposed to report and pay it themselves through their annual state income tax filing, though few do.
The sales tax raised $3.3 billion last fiscal year, but only about $10 million of that was paid through income tax filings.
A 2010 analysis by the Center on Budget and Policy Priorities, a nonprofit fiscal and public policy group based in Washington, D.C., estimated that states lose a total of $7 billion a year in sales tax revenue tied to online transactions.
“In fact, what they were doing was ignoring our laws,” Malloy said.
Connecticut’s solution hinges on sales affiliates, local companies that receive a small commission for redirecting customers to a retailer’s website. Any firm with more than $2,000 in annual sales generated through its Connecticut affiliates effectively has a physical presence in the state, according to the statute, and therefore must collect and report sales tax.
According to the southern California-based Performance Marketing Association — which represents Amazon and other online giants such as Google, Yahoo and eBay, as well as a growing affiliate network — nearly 3,000 Connecticut firms affiliated with online retailers made $236 million from these relationships.
But once the Connecticut statute was enacted, Amazon severed much of its affiliate ties here, avoiding the sales tax obligation — but also blocking a system that drove considerable shopping traffic to its website.
Under the agreement the Malloy administration reached, Amazon will collect sales tax when purchases are made, starting in November. In exchange, Amazon will again be able to work with Connecticut businesses to generate more shopping activity.
“They are willing to do business with affiliates in the state again,” Malloy said.
The governor added that Connecticut expects to gain about $15 million per year in sales tax from Amazon, and offered no incentives to encourage Amazon to open a distribution center here.
“There are no strings attached with respect to this $50 million commitment,” he said. “We weren’t going to mix the two” issues.
Amazon hasn’t decided yet in which community the center would be located.
Most states are battling with online retailers to collect sales taxes, and Malloy added that he remains optimistic that Congress will enact a comprehensive solution in the next few years.
“I continue to believe that this issue of tax fairness and compliance needs to be addressed at the federal level,” he said.
Rebecca Madigan, executive director of the Performance Marketing Association, praised both Malloy and Amazon on Monday for reaching the understanding. “This is good for Amazon and this is good, obviously, for the state of Connecticut,” she said.
But Madigan also urged state officials to consider repealing the Amazon law, adding it could open the door for thousands of Connecticut companies to increase earnings and grow their businesses by working with other online retailers.