Amazon.com and other online retailers have severed their Connecticut business ties, rather than accede to a new state law that will require any online company with a physical presence in the state to collect the sales tax. But now, it seems, the taxman cannot be so easily dodged.
“They can run, but they cannot hide,” said Kevin B. Sullivan, the commissioner of revenue services. “Amazon, Overstock and others have had more than enough business presence in Connecticut before the new remote sellers legislation passed this session.”
Patterned after legislation enacted in New York three years ago and now written into law in seven states, the measure is designed to close a loophole in state tax rules opened by a 1992 U.S. Supreme Court decision and the subsequent growth in online commerce. The high court essentially held that states cannot force businesses to collect sales taxes unless they have a physical presence within that state.
Connecticut’s solution hinges on sales affiliates, local companies that receive a small commission for redirecting customers to a retailer’s web site. Any firm with more than $2,000 in annual sales generated through its Connecticut affiliates effectively has a “nexus” or physical presence in the state, according to the statute, and therefore must collect and report sales tax.
“They all knew it was coming,” said Rep. Patricia M. Widlitz, D-Guilford, co-chairwoman of the tax-writing Finance, Revenue and Bonding Committee. “It wasn’t a surprise.”
Originally built into the new biennial budget legislation, which was enacted May 4, the new rule was scheduled to start July 1, the first day of the next fiscal year. But after dozens of online retailers, including O.Co, formerly known as Overstock.com, announced they would sever ties with their Connecticut affiliates, lawmakers included a provision in an omnibus budget policy bill adopted June 7 — one day before the regular legislative session’s adjournment — that reset the rule implementation date retroactive to May 4.
It was unclear Tuesday how that might affect sales tax revenue forecasts involving online transactions.
But what had been a two-month adjustment period was cut short by nearly four weeks. And last Friday another online giant, Amazon.com, gave word it was dropping its Connecticut affiliates.
“It was quite catastrophic when they adopted it” back in May, but “now these retailers feel trapped,” said Rebecca Madigan, executive director of the southern California-based Performance Marketing Association, which represents Amazon, other online giants such as Google, Yahoo and eBay, as well as a growing affiliate network.
“They are clearly trying in Connecticut to capture everyone who sells online,” she said. “They are really trying to shut down e-commerce.” The nearly 3,000 Connecticut firms affiliated with online retailers made $236 million last year from those relationships and paid about $7 million in state income taxes, Madigan added.
But both Widlitz and Sullivan said the legislation only is designed to enforce existing law.
A common misconception among Connecticut consumers, lawmakers say, is that Internet transactions are exempt from sales tax. If retailers don’t collect and remit the tax back to Revenue Services, consumers are supposed to report and pay it themselves through their annual state income tax filing.
But while the sales tax raised just under $3.1 billion last fiscal year, less than $8.3 million of that was paid through income tax filings.
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.
Advocates of the bill contend neighborhood book stores and other small businesses, which must force their customers to pay sales tax, simply cannot compete with Amazon.com and other major online retailers.
Widlitz added that the change in effective date was made only to correct an error that should have been fixed one month ago. “We should have put it into effect with the passage of the new budget,” she said. “Everyone certainly knew for months that it was our intention to pursue this.”
But Sen. Andrew W. Roraback of Goshen, ranking GOP senator on the finance panel, said lawmakers also have heard warnings for months that an estimated 3,000 Connecticut affiliates of online retailers stood to lose a significant portion of their own revenue.
And while Roraback added he believes Congress needs to develop a cohesive national policy on online sales to protect both Internet retailers and more traditional stores, his biggest fear right now is that industry reaction to the policy change ultimately could translate into lost private-sector jobs.
“It’s been made pretty clear what the online retailers would do,” Roraback said, adding that the last-minute switch in effective dates had to leave a bad taste in remote sellers’ mouths.
“Who can blame them for a mass exodus,” he said. “We are yelling fire in a crowded theater, and the exits are reflecting that.”
Thomas M. Caporaso, president of the Clarus Marketing Group of Middletown, said his small, online marketing business employs about 25 workers — eight of which were added in recent months thanks in part to affiliate relationships with Amazon, Overstock and dozens of other online retailers.
Plans to add more workers have to be put on hold, he said, adding his chief task now is to re-evaluate the companies earnings and try retain the staff he has.
“We’re going to have to see what effect all of this is going to have on our revenue,” Caporaso said, adding he fears more online firms will sever ties here in the coming months. “The pace has definitely picked up.”