A 2008 New York law that has sparked a growing feud between states and online sales giants such as Amazon.com is being considered by Connecticut’s legislature as officials scramble for new dollars to close growing budget deficits.
But while taxing Internet sales could be worth hundreds of millions of dollars, efforts by other states to go after that money have wound up hurting small local enterprises that play a minor role in the vast world of online commerce.
The Finance, Revenue and Bonding Committee will conduct a public hearing Monday on a bill patterned after the New York statute and designed to work 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.
The key to the New York measure, dubbed the “Amazon law,” hinges on sales affiliates, local companies that receive a small commission for redirecting customers to the retailer’s web site. New York legislators determined that any firm with more than $10,000 in annual sales generated through its New York affiliates effectively has a “nexus” or physical presence in the state, and therefore sales taxes must be collected.
While the New York law is tied up in a legal challenge brought by Amazon, other states have made similar efforts to get taxes from residents shopping on line through what have become known as “Amazon laws.” In at least two states–Rhode Island and Colorado–the losers have been the states’ affiliates, who effectively were fired by Amazon.
In all, 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. Amazon.com is one of the nation’s largest online retailer with thousands of affiliates nationwide, the center says.
The Connecticut bill sets a nexus test of $2,000 in quarterly sales generated over four consecutive quarters by in-state affiliates.
Rep. Cameron C. Staples, D-New Haven, co-chairman of the finance committee, said he believes this approach could offer a solution for what some state officials believe amounts of hundreds of millions of dollars in lost annual sales tax revenue.
“Many people I know do most of their shopping online, and as the younger generation gets older that’s only going to increase,” added Rep. Vincent J. Candelora of North Branford, ranking House Republican on the finance committee. “That’s a big dilemma that we have to address.”
Connecticut residents are required by law to pay the sales tax on goods purchased tax-free either out-of-state or online. 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 key to the new bill’s chances, Staples said, whether it ultimately would harm Connecticut businesses.
The Democrat-controlled finance committee tried three years ago to bring Connecticut into the Streamlined Sales Tax Project, a coalition of 44 states and the District of Columbia that tries to encourage online and other remote retailers to collect sales taxes voluntarily. As an incentive to participating companies, the project provides for limited auditing and offers amnesty for any prior unreported taxes.
But it also requires member states to dramatically simplify their sales tax codes for both online and traditional sales, mandating uniform rates and barring certain exemptions tied to price. That would pose problems for Connecticut, which has several exceptions to the primary, 6 percent rate, including higher charges for hotel stays, a reduced rate for data processing services, and a complete exemption for clothing purchases priced at less than $50.
Gov. M. Jodi Rell’s budget agency, the Office of Policy and Management, and the legislature’s Republican minority, oppose the streamline approach.
But OPM spokesman Jeffrey Beckham, like Candelora, said the New York approach is worth close review. “We are generally supportive of any way we can constitutionally collect sales tax revenues due to the state,” he said, adding Connecticut could be losing “hundreds of millions of dollars” in annual revenue.
But Beckham and other state officials have said it is extremely difficult to gauge just how much might be at stake without the raw data from online retailers. The legislature’s nonpartisan Office of Fiscal Analysis estimated last month that the sales tax overall would bring in $3.08 billion from all transactions this fiscal year, down almost $91 million from the level anticipated when the budget was adopted last September, and $560 million below the amount it raised two fiscal years ago.
And though the recession clearly played a role in driving down tax collections, the growing popularity of Internet shopping is a factor, Candelora said, adding “I think it’s no coincidence that our sales tax continues to decline.”
The Connecticut Business and Industry Association won’t testify against the bill, CBIA lobbyist Bonnie D. Stewart said Friday. And while the CBIA, which represents over 10,000 businesses, always is on guard for legislation that could harm companies, “if something is currently taxable under the law, we don’t have a problem with the state trying to get the money.”
A telephone call seeking comment from Amazon’s media relations center late Friday afternoon was not returned.