Though a popular target for critics, Connecticut’s sales tax burden is fairly modest when compared with sales taxes in other states, according to a report from nonpartisan legislative analysts.
And while Connecticut’s base sales tax rate rose last year for the first time in nearly two decades, neither a state panel examining business-related taxes nor a key business lobby say that the sales tax is a chief concern.
“We’re really kind of middle-of-the-pack with our sales tax,” state Department of Revenue Services Commissioner Kevin B. Sullivan, who is co-chairman of the state’s Business Tax Task Force. “Even regionally we’re in the hunt.”
“It really depends on the industry and the business,” said Joseph Brennan, who said that for many companies, the state income and corporation levies, or even local property taxes, are bigger concerns.
At first glance, Connecticut’s 6.35 percent sales tax rate appears high. It stands 11th highest among the District of Columbia and the 45 states that have a sales tax, and it’s not too far from the state with the top rate — 7.25 percent in California.
But a recent report from the Connecticut Office of Legislative Research notes that many states allow counties and municipalities to levy sales taxes. Thus, the rates in these states vary across localities and, in some cases, the combined state and local rates are substantially higher than the state’s base sales tax rate.”
And while Connecticut dedicates a fraction of its $4 billion annual sales tax revenue for municipal aid, it doesn’t allow cities and towns to levy a sales tax.
Once state and local sales tax burdens are applied, Connecticut’s ranking falls to 31st. Its 6.35 percent rate is well below the top burden — 9.43 percent imposed in Tennessee — and 2 percentage points higher than the lowest — 4.35 percent in Hawaii, according to Office of Legislative Research.
Connecticut’s sales tax is broader than that of surrounding states, the report notes. Gov. Dannel P. Malloy and the legislature last year both raised the base rate from 6 percent to 6.35 percent — the first base hike since 1992 — and also eliminated several sales tax exemptions.
For those Connecticut companies that do express concerns about the sales tax, its breadth and complexity is a chief complaint, Brennan said. The state has dozens of sales tax exemptions worth nearly $3.2 billion this fiscal year, according to the legislature’s nonpartisan Office of Fiscal Analysis.
“There’s an awful lot of confusion, especially regarding compliance,” Brennan added.
But a report filed earlier this year by Sales Tax Notes, a leading journal on tax policy and administration, also found that Connecticut’s sales tax, though broad, imposes a modest burden when compared with personal income here.
It concluded that states, on average, spend 34.5 percent of their personal income on goods and services that were subject to sales tax in 2010. But in Connecticut, the ratio was just 26.2 percent.
Fourteen states tax grocery food purchases; Connecticut does not. And while 24 states, including Connecticut, tax digital products, the Nutmeg State is the only one that taxes digital downloads at a reduced rate of 1 percent.
Sullivan, whose study panel must report its findings to the governor next month, said one of the biggest sales-tax issues businesses raised with his group doesn’t involve the competitiveness of Connecticut’s tax rate.
State law does exempt some business purchases from sales taxes. For example, the state imposes only a minimal sales tax on data processing services that companies buy. Sullivan said the panel is finding that some carefully targeted exemptions “are probably one of the most powerful economic development tools the state has, and some of the least well-known.”
Businesses also have expressed concerns about sales-tax fairness issues, the commissioner added. State officials have been struggling for more than a year to force Amazon, Overstock and other online mega-stores to collect and remit sales taxes.
“More people are purchasing things via the Internet and are skirting paying the sales tax and that really hurts” traditional stores, said Tim Phelan, president of the Connecticut Retail Merchants Association.
Controlling both the overall sales tax rate and the range of goods it’s imposed on “is still a very important issue for us,” Phelan added, but the ongoing issue of tax fairness and online sales “is one of the biggest challenges we face.”
Connecticut adopted a law in 2011 that 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 and therefore must collect and report sales tax.
Overstock, Amazon and other retailers have responded largely by cutting ties with their affiliates here.