Connecticut is planning to take a more aggressive stance toward taxing out-of-state ecommerce sellers. The state’s new guidelines won’t be released until early 2018, but Revenue Commissioner Kevin B. Sullivan has revealed some details.

According to an email to Bloomberg BNA, “Connecticut will pursue a ‘cookie’ nexus regime … similar to a first-of-its-kind regulation already in place in neighboring Massachusetts.” The Bay State’s groundbreaking policy — that web-based cookies on in-state computers and devices constitute a physical presence — took effect on Oct. 1, 2017.

Massachusetts’ new tax policy

Under the Massachusetts regulation (830 CMR 64H.1.7: Vendors Making Internet Sales), an out-of-state internet vendor “not otherwise subject to tax” is required to register with the state and collect and remit Massachusetts sales or use tax if the vendor made more than $500,000 in Massachusetts internet sales during the preceding 12 months, and at least 100 separate sales for delivery into Massachusetts.

The regulation flies in the face of precedent, which holds that a business must have a physical presence in a state for the state to tax it. Yet Massachusetts maintains that internet vendors do, in fact, have a significant enough connection to the state for it to mandate tax collection. For example, large internet sellers typically store in-state software (e.g., “apps”) and ancillary data (e.g., “cookies”) on the computers, laptops, and handheld devices of in-state customers. Learn more about the Massachusetts internet cookie tax here.

Since the new policy took effect, Massachusetts “has received several hundred registrations from companies looking to begin collecting sales tax,” according to Massachusetts Department of Revenue General Counsel Kevin Brown.

Connecticut sees Massachusetts, raises it

It’s no surprise that Connecticut is following suit: The state has been working to tax remote sales since 1989 (see a brief history of Connecticut’s remote sales tax policy). Furthermore, in March 2017, the Department of Revenue Services (DRS) issued a media release calling a tax on remote retailers “a matter of fundamental fairness” and stating, “We are going to close this tax loophole for big retailers doing big business in Connecticut (Connecticut Pursues Sales Taxes Not Paid by On-Line Retailers).

The policy currently under consideration would tax out-of-state internet sellers making more than $300,000 in annual in-state sales. Sullivan told Bloomberg BNA that the guidance will be “based on the state’s existing maximum nexus criteria, and include examples of physical presence similar to what Massachusetts is doing.”

Sullivan thinks that “Massachusetts is on to something.” As he explained in a recent interview with Jeremy Abrams of Crowell & Moring, the physical presence standard upheld in Quill Corp. v. North Dakota 504 U.S. 298 (1992) predated the birth of ecommerce. At that time, selling remotely “wasn’t the predominant force in the marketplace that it has become.”

The DRS is committed to ensuring all companies (i.e., local and remote) “compete on a level playing field.”

“Top 500 companies” under scrutiny in Connecticut

Indeed, the state already appears to be making progress on that front. Sullivan told Abrams that his department has scrutinized the top 500 remote retailers and identified which are already collecting. “We have notified the others that there is a reporting statute in Connecticut and we expect them to disclose to us for the past 2 years their Connecticut destined sales.” He added that this was not a new policy — “This has been on the books forever” — but said it had “never been used this way before.”

So far, it seems to have had a modicum of success. Sullivan says 22 companies have registered and now tax their online sales to Connecticut. Yet it is controversial, and we hear that some tax advisors tell their clients to proceed with caution since Connecticut cannot enforce its policy unless the Supreme Court of the United States revisits and amends Quill (which could happen in 2018), or Congress grants states the authority to tax remote sales (which seems less and less likely).

Connecticut is far from the only state challenging the status quo: Other efforts to increase remote sales tax collections include economic nexus laws and use tax notice and reporting requirements. In response to Washington’s new law, which gives remote retailers the option of collecting taxes or complying with use tax notice and reporting requirements, Amazon has decided to collect and remit tax on behalf of its marketplace sellers.

Learn more about state efforts to tax remote sales from the Avalara Resource Center.