Connecticut consumers recovering from what has become the single-largest online shopping day of the year — informally called Cyber Monday — might want to take a second look at their receipts.
Because regardless of a new statute designed to force online retailers to collect and remit sales taxes, many still don’t do it for different reasons.
Looking to buy men’s boots? Macys.com collects Connecticut sales tax when the purchase is made. Amazon.com does not. But consumers who choose the latter still owe sales tax to the state.
The result is a confusing holiday season for online shoppers.
“States are desperate for sales tax revenue, but the best hope to resolve this mess lies with the federal government,” 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. “States like Connecticut that have tried to force retailers to collect the tax are finding it is just creating more problems.”
“I understand this seems terribly unfair, a terrible way to pass the buck,” state Department of Revenue Services Commissioner Kevin B. Sullivan said Monday. “But there is a tax and we are all obligated to pay it.”
A common misconception among Connecticut consumers, state 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 as the “use tax” listed on their annual state income tax filing.
But while the sales tax raised more than $3.3 billion last fiscal year, only about $8 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.
The dilemma for Connecticut and most other states has been how to collect sales taxes from one of the fastest growing segments of the retail market when merchants won’t do it for them.
The General Assembly’s solution, enacted in early June, was patterned after legislation enacted in New York three years ago and now written into law in seven states. It specifically 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 in that state.
The Connecticut statute 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 “nexus” or physical presence in the state, according to the statute, and therefore must collect and report sales tax.
Also following a pattern played out in other states that adopted similar statutes, dozens of online retailers, including O.Co. — formerly known as Overstock.com — and Amazon. com, announced they would sever ties with their Connecticut affiliates.
The nearly 3,000 Connecticut firms affiliated with online retailers made $236 million last year from relationships with those and other online retailers, and paid about $7 million in state income taxes, Madigan said. She estimated that 900 affiliates in the state already have been dropped and warned the number could grow in 2012.
The New York legislation, which has come to be known as “Amazon’s Law,” was upheld by that state’s Supreme Court, but it continues to be challenged by online retailers in the federal courts.
The fate of Connecticut’s version of the law may hinge on that battle.
But Madigan said the matter could be resolved more quickly next year in Congress, where two proposals already are pending to impose a uniform, national mandate on all online retailers to collect and remit sales taxes.
The administration also supports this concept, Department of Revenue Services spokeswoman Sarah Kaufman said.
“Internet-based businesses have had their incomes devastated, and we want to put these businesses back to work,” Madigan said. But her association also supports such a mandate because it would at least require all online retailers, large and small, to operate under the same rules. Under the current system, one online merchant could comply, but there are no guarantees that a competitor would do the same.
Earlier this month Amazon publicly endorsed a bipartisan measure offered by U.S. Sens. Michael Enzy, R-Wyo., Richard Durbin, D-Ill., and Lamar Alexander, R-Tenn. Amazon’s vice president for global public policy, Paul Misner, wrote in a release that the company “will work with Congress, retailers, and the states to get this bi-partisan legislation passed. It’s a win-win resolution.”
But advocates of Amazon’s Law contend that neighborhood bookstores and other small businesses, which must force their customers to pay sales tax, also have been hurt by competing with online retailers that don’t collect the levy — and they can’t wait for federal action.
“How can we expect our Main Street businesses, our brick-and-mortar businesses, to survive in this climate when they have one hand tied behind their back?” said state Sen. Andrew Roraback of Goshen, ranking GOP senator on the Finance, Revenue and Bonding Committee.
Connecticut has submitted formal notification to Amazon seeking sales taxes that were owed before the company severed its affiliate ties here, Sullivan said, adding that similar requests are being developed for eBay.com and Overstock. But this is just the first stage in a complicated process that could take a year or 18 months of notices, responses and requests for further information before Connecticut likely would be ready even to take legal action, he said.
“We don’t know even know how much their sales are” in cases of many companies, Sullivan said. “We don’t even know what we don’t know.”
In the interim that means consumers need to keep track of their receipts and report any sales tax they owe next year.
But both Sullivan and Madigan conceded that state government’s options are limited in cases when consumers refuse to pay.
“It’s virtually unenforceable,” Madigan said, adding that Connecticut would be best served by focusing its efforts on supporting national tax reform.
Sullivan also conceded that the department lacks the staffing to pursue all consumers who don’t pay. But he noted that the issue could be raised during an audit or some other proceeding.