Pullman & Comley, LLC
March 15, 2018
The rise of the internet retailer has created significant loss of sales tax revenue for state revenue agencies due to the loss of revenue from sales and use tax collected in brick-and-mortar retail establishments. Historically, in-state retailers are required to collect sales tax on goods sold to customers in retail locations and remit the sales tax (or use tax, both of which are referred to as sales tax herein for simplicity) to state revenue authorities on the customer’s behalf. When a customer purchases an item in a state with no sales tax or a lower sales tax than his or her home state, the customer is responsible for paying the difference to his or her home state’s taxing authorities. However, few individuals are aware of this requirement and compliance is a significant issue.
Companies without a physical presence in a particular state have historically not been required to collect sales tax in such state even if they are selling to a customer in that state. This rule is based on the so-called “physical presence standard” for determining whether a company has what is referred to as “sufficient nexus” for the state to require the company to collect and remit sales tax to the state directly and was upheld in the long-standing Supreme Court decision of Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The practical effect of this rule, however, is that a Connecticut resident who purchases an item online from a company with no physical presence in Connecticut is responsible for reporting the purchase to Connecticut’s Department of Revenue Services and paying the sales tax directly. Of course, consumers rarely complete this step and Connecticut never receives its sales tax.