Connecticut is at it again. The state plans to tax sales by out-of-state sellers making “a significant volume of sales” into the state. In a media release dated March 28, 2017, Commissioner of Revenue Services Kevin Sullivan explains that it is time to close the loophole that enables many remote retailers to sell to Connecticut consumers without collecting and remitting Connecticut sales and use tax. It is, he says, “a matter of fundamental fairness.” This could signal a significant change in Connecticut tax policy. However, it isn’t the state’s first attempt to tax remote sales. As the following timeline indicates, the state has been striving to up its remote sales and use tax revenue for nearly three decades.

1989: Connecticut adopts and suspends economic nexus

In 1989, Connecticut imposed a sales and use tax collection responsibility on certain out-of-state retailers with a substantial economic presence, but no physical presence, in the state. However, after the Supreme Court held in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) that North Dakota did not have the authority to tax sales by companies lacking a substantial physical presence in the state, the Connecticut Department of Revenue Services (DRS) decided to not enforce its 1989 law. The new policy was announced in special notice SN 92(19), “Effect of Quill Corp. v. North Dakota on the Collection of Use Tax by Retailers Who Engage in Business in Connecticut Only by Selling Items Through Mail Order Catalogs With Delivery by Common Carriers.”

2011: Connecticut adopts affiliate and click-through nexus

Almost 20 years after suspending enforcement of its economic nexus policy, Connecticut in 2011 enacted an affiliate nexus law that imposed a sales and use tax collection obligation on certain out-of-state sellers with ties to in-state affiliates. For example, a remote retailer may establish affiliate nexus by “engaging in regular or systematic solicitation of sales of tangible personal property in Connecticut.” Connecticut also adopted a click-through nexus policy whereby referrals, including online referrals from in-state entities, can trigger nexus for certain out-of-state sellers.

2013: Connecticut throws remote tax policy into question

In late 2013, DRS revoked SN 92(19) and issued an announcement that bathed remote retailers in uncertainty. It explained that SN 92(19) “may no longer be relied upon as of the effective date of its revocation.” In other words, as Cara Griffiths of Tax Analysts wrote, DRS left out-of-state retailers with “no concrete sense of what will constitute nexus with the state for sales and use tax purposes.” By way of guidance, businesses that could be affected by that announcement were advised merely to contact DRS “for additional information.”

2017: Connecticut seeks level playing field

Quill was decided — and Connecticut’s initial economic nexus tax policy was suspended — before there was commercial activity on the nascent internet. In 1992, Supreme Court justices and Connecticut officials could not have anticipated the explosion of online retail or the ease with which internet sellers would one day reach consumers in other states. Unforeseen also was the extent of the impact sales by non-collecting remote internet sellers would have on state sales tax revenue. Today, although “compliance has significantly increased,” DRS estimates that “at least $70 million is being evaded annually.” This is bad for state coffers and for the in-state retailers that have to collect tax. The state maintains that the situation creates an uneven playing field for in-state businesses. In the March 28 media release, Commissioner Sullivan explained that fair competition on a level playing field is “not possible when out-of-state retailers promote, facilitate, contract and deliver the same goods and services as in-state businesses but only Connecticut businesses bear the burden of tax collection and the pricing disadvantage of including sales tax.” In addition, he said, the current tax policy imposes a burden on Connecticut consumers, who are required to remit use tax on their untaxed purchases of taxable goods and services. Sullivan’s department will focus on “big retailers doing big business in Connecticut,” not “out-of-state retailers that make a modest amount of sales into Connecticut.” The DRS notice “Connecticut Pursues Sales Taxes Not Paid By On-Line Retailers” provides additional information.

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