Connecticut Department of Revenue Services cracks down on non-collecting sellers and their customers
The Connecticut Department of Revenue Services (DRS) has informed approximately 3,000 taxpayers that they owe the state use tax. How does the DRS know this? It has records from non-collecting out-of-state sellers in hand.
Early last fall, the DRS reached out to non-collecting internet retailers and gave them a choice: 1) Register with the state and start collecting tax on Connecticut sales moving forward, or 2) Turn over three years’ worth of electronic sales records for all individual sales made to customers with Connecticut addresses. WTNH.com reports that 200 online retailers agreed to collect Connecticut sales tax. Others decided to comply with the information request.
According to DRS Commissioner Kevin Sullivan, the information will help the DRS improve its use tax collections. He is clearly pleased to have it: “Usually we don’t have the data, but in several cases companies have said … we’ll squeal on our customers and you can beat up on them. The people who sold to them have ratted them out.” He would rather companies collect and remit tax instead. “The last thing I really want to do is be chasing individuals for their use tax.” However, the state intends to use the information it obtains to improve consumer use tax collections.
Consumers owe use tax when sales tax isn’t collected by a retailer at the point of sale, yet compliance is notoriously low in all states: Only roughly 2 percent of taxpayers typically remit use tax to their state tax authority. For all state tax departments, the costs of use tax enforcement usually outweigh the benefits. As a result, Connecticut misses out on approximately $70 million in use tax revenue annually.
Can Connecticut do this?
In March 2017, the DRS issued a press release stating, “Current state law requires out-of-state sellers of goods that have a substantial economic presence in the state to collect and remit sales tax. If not, ... DRS is authorized to require disclosure of untaxed sales and pursue collection.” Connecticut law (Conn. Gen. Stat. Section 12-426(4) and (5)) authorizes the commissioner or his designee to “examine the books, papers, records, and equipment of any person selling services or tangible personal property and any person liable for the use tax.”
To better administer the use tax, the commissioner is also authorized to “require the filing of information reports by any person or class of persons having in his or their possession or custody information relating to sales of services or tangible personal property the storage, acceptance, consumption or other use of which is subject to the tax.”
These reports “shall be filed when the commissioner requires and shall set forth the names and addresses of purchasers of the services or tangible personal property, the sales price of the services or property, the date of sale and such other information as the commissioner may require.”
In other words, while it appears that Connecticut is acting within the law, it’s possible the state’s request could be challenged. Or ignored.
According to Scott Peterson, Vice President of Government Affairs at Avalara and former sales tax director of the South Dakota Department of Revenue, “Many states enacted similar laws in 1988–89, but were told by businesses to pound sand. South Dakota was authorized to buy lists, and was told no every time.”
Why are companies complying with the DRS request?
Why Connecticut appears to be seeing a different result now is a mystery, but it could have something to do with changing times. 1988–89 predated the internet. With the rise of ecommerce, and the technological advances that come with it, states have become much more aggressive in their efforts to increase remote sales and use tax revenue.
Many states have enacted laws that expand nexus (the connection between a state and a business that triggers a tax collection obligation) to include connections to in-state businesses (affiliate nexus), referrals from in-state businesses (click-through nexus), a certain amount of economic activity (economic nexus), and even the presence of web cookies and software on in-state computers. Several states have been sued over their efforts to increase remote sales tax collections because according to a United States Supreme Court decision, Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a state cannot tax a business that doesn’t have a physical presence in the state. In fact, a case questioning the constitutionality of South Dakota’s economic nexus law is currently before the Supreme Court; hearings are expected to be held in April.
Yet, unlike South Dakota, Connecticut didn’t mandate collection and remittance; it asked businesses to comply or provide information. In this respect, it’s more like states that have enacted non-collecting seller use tax notice and reporting requirements to obtain that information.
Non-collecting sellers use tax notice and reporting requirements
Alabama, Colorado, Louisiana, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, Vermont, and the state of Washington have all imposed use tax notice and reporting requirements on non-collecting sellers that do a certain amount of business in the state. Most require the retailer to inform consumers at the point of sale that the seller doesn’t collect sales tax and the consumer could owe the state use tax. In addition, non-collecting sellers are generally required to send annual purchase summaries to customers and annual customer information reports to the state. Learn more here.
Connecticut could have enacted a new non-collecting seller use tax notice and reporting law like the states listed above. Such laws are legal and apparently effective: the Supreme Court allowed Colorado’s law to stand; Amazon, Etsy, and Walmart are complying with Washington’s law; and Amazon is turning third-party seller information over to the state of Rhode Island because of its law.
Instead, Connecticut’s taking a slightly different path. And it appears to be seeing some success. Learn more about Connecticut's efforts to tax remote sellers here.
I got a letter from the DRS letter. Now what?
If you’re a Connecticut resident or business that received a DRS notice about your use tax obligation, don’t simply ignore it. The state is prepared to waive interest and penalties for taxpayers who immediately pay what they owe. However, you should verify that your purchase records match the DRS information. If there’s a discrepancy, or if you have questions, contact the Department of Revenue Services or speak with a trusted tax advisor.
If you’re a non-collecting seller that makes sales in Connecticut and the DRS has asked you to either collect and remit tax or provide customer information, don’t simply ignore it. Failure to comply with the information request could lead to substantial penalties under Public Act No. 17-147, which took effect July 1, 2017, and permits the Commissioner of Revenue to impose a penalty of $500 per day on non-compliant sellers.
Businesses should weigh options carefully: What would it mean to register with the state and collect Connecticut sales tax moving forward? What would it mean to comply with the information request? Are there other options? Now may be a good time to explore all your options: If you haven’t heard from Connecticut today, you could hear from another state tomorrow.
The tax experts at Avalara Professional Services can help you understand your options and determine a course. Learn more.
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