SALT Report 1205 – Many cash-strapped states struggling to fill the gaping holes in their budgets are aggressively pursuing online retailers for sales and use taxes they feel they are owed. Connecticut, who is grappling with a $3.3 billion dollar budget deficit, is one of several states putting pressure on large internet retailers, particularly Amazon.com and Overstock.com, to collect and remit sales tax by passing an internet tax law.
Connecticut’s law requires online sellers to collect sales tax on purchases shipped to Connecticut residents if the online seller has affiliates located within the state. The law is similar to legislation passed in New York three years ago and is designed to close a loophole in the 1992 US Supreme Court decision that says states cannot force businesses to collect sales tax unless they have a physical presence within that state. Consequently, states are changing the definition of “physical presence” to include anyone with a store, warehouse, distribution center, sales agent, representative, delivery truck, or website promoting their services.
Originally, Connecticut’s law was to be implemented July 1, the first day of the next fiscal year. However, after dozens of online retailers announced they would sever ties with their Connecticut affiliates, lawmakers made a provision in an omnibus budget policy bill adopted June 7, one day before the legislative session adjourned, that changed the tax law’s implementation date retroactive to May 4.
In response to the bill, Amazon severed ties with their Connecticut affiliates effective immediately. Further, Amazon sent a letter to the Connecticut DRS and their affiliates claiming the company “is not obligated to abide by the law because it does not have a presence in Connecticut and will not collect and remit taxes to the state, as protected by the U.S. Constitution.” Connecticut officials argue that Amazon should have been collecting tax during the period in which the new law was enacted in May until they severed their relationship with affiliates in June.
Amazon’s fight has become the motivating force behind the potential passage of federal legislation. Recently a group of Congressmen, led by Sen. Dick Durbin of Illinois, introduced the Main Street Fairness Act. It authorizes states that agree to simplify and unify their sales tax rules to require remote sellers to collect the tax. Currently, 24 states have passed legislation to streamline their tax rules; however, Connecticut is not one of them.
Paul Misener, Amazon’s Vice President for Global Public Policy said the online retailer has “long supported a simple, nationwide system of state and local sales tax collection, evenhandedly applied to all sellers, no matter their business model, location, or level of remote sales.”
Mark Griffin, Overstock.com’s general counsel, is wary of the impact the recent legislation will have on online retailers. He said, “the legislation, in its current form, is unfair and impractical, as there are 7,000 to 10,000 taxing districts across the country, all of which have their own rules and tax holidays and despite efforts to unify them, it will be a nightmare for online retailers to comply.”
Connecticut officials are not backing down, despite the impact of lost jobs and the consequent drop in other tax revenues for the state. Commissioner of Revenue Services Kevin Sullivan said, “They can run but they cannot hide. Amazon, Overstock and others have had more than enough business presence in Connecticut before the new remote sellers legislation passed. And they were clearly doing business with sufficient state nexus on and after the May 4th effective date of the new state law.”