By John Biello (’18) is Tax Division Chief in the Audit and Compliance Bureau of the Connecticut Department of Revenue Services.
States across the country are experiencing a consistent downward trend in sales tax collection. This is the result of the proliferation of online retailers who do not collect and remit sales tax. Shifting focus from sales tax collection to use tax enforcement can help Connecticut and other states reverse this trend.
Most large online retailers have steadfastly refused to collect sales tax, relying on the United States Supreme court decision, Quill v. North Dakota, in which the Court held that a retailer must have physical presence in a state before it can be required to collect sales tax. In 1992, when the Court decided Quill, online retail markets did not exist.
The retail industry has evolved from primarily local brick and mortar establishments to online platforms where consumers are able to make purchases at any time of the day or night from retailers located anywhere in the world. Customers like the convenience of online shopping and the savings that result when an online retailer does not charge sales tax. Over the next five years Connecticut will lose $2.7 billion in sales tax revenue.
Relying on the provisions of Connecticut General Statutes, §§12-426(4) and (5), the State of Connecticut has adopted a policy to address the tax gap between online and brick and mortar retailers in one of two ways. Online retailers can either register with the State and collect sales tax or provide the State Department of Revenue Services (DRS) with Connecticut customer information that DRS will use to enforce the use tax.
Retailers who refuse to comply with either option are subject to a $500 per diem penalty for each day that they fail to comply. Irrespective of which option the online retailer selects, the tax obligation is the same. Connecticut’s sales and use tax rate is 6.35%. The only difference is that sellers remit sales tax; while consumers remit use tax.
The policy accomplishes several goals.
First, it will increase in the tax revenues that Connecticut relies on to fund important government services. The rate of return is in excess of 1,500%. The revenue projection is for a $7 million tax collection increase per year with a total of $35 million collected over the first 5 years of implementation.
Second, it levels the playing field for local brick and mortar establishments by reducing the customer’s incentive to shop online to save money. Lastly, communities benefit from the jobs created and taxes collected from local businesses.
Since implementation in January 2018, DRS has collected $1.5 million in additional taxes, registered 104 online retailers to collect and remit sales tax and has begun an outreach campaign to collect the use tax based on customer lists provided by several online retailers.
The evolution of retail trade, where transactions can be initiated remotely with no physical presence in a state, is an ongoing and direct threat to the sales tax revenue streams. The physical presence standard set forth in Quill is antiquated in today’s retail sales market and state tax administrators continue to look for ways to collect taxes without running afoul of Quill.
Use tax enforcement is an elegant solution that is not dependent on physical presence, is fiscally sound and provides a substantial return on investment.