Connecticut Seeks a Part of the Wayfair Action

A bill passed in Connecticut’s 2018 legislative session seeks to expand the conditions under which certain out-of-state retailers must collect and remit Connecticut sales tax. This is another version of the so-called Amazon tax which seeks to compel e-commerce retailers to collect state and local sales taxes from customers, even if they are not the seller themselves.  Although nicknamed the “Amazon tax,” the bill would subject all e-commerce marketplace facilities, including those such as Etsy and eBay.  If signed by Governor Malloy as expected, Connecticut would become the 6th state to pass such a tax, along with Minnesota, Oklahoma, Pennsylvania, Rhode Island, and Washington.

To do this, An Act Concerning the Department of Revenue Services’ Recommendations Regarding State Taxation and Collection, S.B. 417, expands the definition of “retailer” to include out-of-state companies that promote the sale of tangible personal property over the internet, software, or other form of electronic delivery.  Sec. 12-407(12).  As a tradeoff, the bill also raises the minimum threshold for sales to 200 retail sales or $250,000 of gross receipts from sales to destinations within Connecticut.  Sec. 12-407(12).

Kevin Sullivan, the Commissioner of Connecticut’s Department of Revenue Services, has lobbied consistently for e-commerce taxing authority, estimating that Connecticut loses between $100 million and $200 million a year in revenue from the failure of online retailers to collect and remit sales taxes to the states.

Of course, this bill was passed in the shadow of South Dakota v. Wayfair, Inc., argued before the United States Supreme Court on April 17, 2018, which challenges the holding in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that sales tax may not be charged on out-of-state retailers that lack a physical presence in the state.  In its Petition for Writ of Certiorari, the State of South Dakota has asked the Supreme Court to abrogate the physical presence requirement for charging sales tax to allow states to collect sales tax from internet sellers who may have no physical presence in the state.

If Quill’s physical presence requirement is upheld, the new reach of the bill would almost certainly be considered to violate the Court’s interpretation of the Commerce Clause of the Constitution.  If, however, the Supreme Court takes the opportunity presented in Wayfair to strike down the physical-presence requirement for sales tax, then Connecticut will already be in position to require the collection and remittance of sales tax for out-of-state online retailers who exceed the 200 sales or $250,000 gross receipts threshold.  A decision in Quill is expected by the end of June.

Connecticut’s approach relies entirely on Quill being overturned, whereas other states, such as Rhode Island, have instead attempted to bring online activity within the scope of “physical presence” by claiming that the use of software by in-state customers on their computer, smartphones, and other devices including cookies and data tracking tools—which are almost universally employed by online retailers—satisfies the “physical presence” requirement enunciated in Quill.  Even if Quill is upheld, the approach adopted by Rhode Island might survive initial review, whereas Connecticut’s approach would almost certainly be overturned.

It is unclear at this point whether Connecticut’s Department of Revenue Services will attempt to extract compliance with an expanded sales tax law on out-of-state retailers pending a decision in the Quill case.  E-commerce retailers should, however, be prepared in the event that Quill is overturned by the Wayfair decision to evaluate their potential liability. 

For further questions, contact Brad Mondschein or Kelly O’Donnell.

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