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Draining the Remote Sales Tax Swamp
By Connecticut Department of Revenue Services Commissioner Kevin Sullivan
Commissioner's Column
ationally, one of the fast-
est growing sectors of the
economy is worth more than
$340 billion in sales. Yet it's
protected from the administrative cost
of sales tax collection and enjoys the
market advantage of tax-free shop-
ping. This retail sector boasts the most
sophisticated marketing and fulfillment
systems in the world.
Sound like the kind of interstate
competitive advantage the federal
Constitution's Commerce Clause was
meant to prevent? Well, guess again.
Since the U.S. Supreme Court's 1992
non-decision in the Quill case, out-
of-state tax preference and unfair
competition has prevailed. The Supreme
Court virtually begged Congress to
drain this swamp. Yet Congress has
done nothing and states, leaving the
states in what the late Justice Scalia
called a "legal quagmire."
Consequently, remote sellers continue
to compete with comparable in-
state retailers on a decidedly un-level
commercial playing field. Nationally,
the best estimate of tax loss is $23
billion and that data is four years
old. For Connecticut, the annual loss
probably exceeds $125 million in sales
tax evasion and uncollectable use
tax liability. This is not a question of
some new tax. It's simply a matter of
collecting what is already due.
So what's a state to do? We must
be more creative and more assertive.
We have to push the legal envelope
until the courts or Congress have no
choice but to heed Justice Kennedy's
recent plea to revisit Quill and undo
commercial protectionism.
How do we do that? DRS quietly took
an important step a few years ago
when we rescinded prior guidance that
bizarrely committed us not to consider
economic nexus in determining the
sales tax obligations of out-of-state
sellers. Let's be clear. There is no
principled reason to hold that remote
sales are any less present for purposes
of sales tax constitutional nexus than
corporate tax nexus when measured
by the volume, purposefulness,
and profitability of business activity
directed to Connecticut.
We could also compel collection and
remittance by remote sellers subject
to a credit for the cost of doing so
through existing state-certified third-
party, software-based agents. This was
anticipated federally in the bipartisan
Marketplace Fairness Act that did pass
in the U.S. Senate and would likely
pass constitutional muster.
Finally, the recent federal decision
in the 10th Circuit Court of Appeals
upholding Colorado's informational
regulation of remote sales offers an
additional way to level the commercial
playing field. As a condition of doing
business in Connecticut, online
retailers that do not collect and remit
sales tax could be required to inform
Connecticut buyers of their existing
use tax obligations and annually report
to DRS the destination and amount
(but not the nature) of untaxed retail
sales to Connecticut buyers for the
purpose of paying the existing state
use tax.
Alternatively, we know there is a
strong relationship between income
and online purchasing. DRS CT 1040
instructions could simply include a
table of estimated annual use tax
liability or we could even pre-populate
the return accordingly, subject to
taxpayer modification and signed
declaration of completeness.
Of course, remote sales are just one
example of disconnect between legacy
tax law and modern commerce. The
whole "sharing" economy continues to
grow, but what are the tax obligations
of a company like Uber and its drivers?
Occupancy tax obligations for hotel
room brokers, Airbnb, VRBO or
HomeAway? Tax policy has a lot of
catching up to do.
Remote sellers continue to compete with comparable in-state
retailers on a decidedly un-level commercial playing field.