The state Department of Revenue Services is combing through customer records from major online retailers to hunt down taxpayers who skipped out on the often-ignored use tax.
Kevin Sullivan, commissioner of the tax department, said it’s part of an effort to ramp-up collection of the use tax; Connecticut taxpayers are supposed to pay the state a 6.35 percent tax on any purchases made out-of-state or online where no sales tax is paid, but the vast majority do not.
“Usually we don’t have the data, but in several cases companies have said … we’ll squeal on our customers and you can beat up on them,” Sullivan said. “The people who sold to them have ratted them out.”
A tax expert in Washington, D.C., said Connecticut is the first state to take this approach: requesting data from retailers about online purchases by state residents that were not subject to sales tax and checking to see if the customers made required tax payments.
An estimated $70 million of the use tax is evaded in Connecticut annually and compliance with the tax stands at about 12 percent, according to the department.
“The states at large have been reticent to pursue customers for use tax,” said Stephen P. Kranz, a partner and tax attorney at McDermott Will & Emery, a Washington, D.C. law firm. “It’s much easier from an efficiency perspective to get the retailer to collect the tax. But data makes it possible to pursue customers, and Connecticut is the first state to go down that path in a real way.”
Several taxpayers told The Courant they received letters from the Department of Revenue Services this week detailing information about purchases they made from Newegg, an online retailer of computer components and other electronics headquartered in California.
“Newegg Inc. has provided the Department of Revenue Services records of your online purchases during taxable years 2014, 2015 and 2016,” the letter reads. “According to these records, you made purchases from Newegg in at least one of these years but were not charged Connecticut sales tax. Therefore, you owe state use tax on the items you purchased because you did not pay sales tax to a retailer.”
The letters contain the total amount of purchases made and the tax due, plus interest and penalties. Sullivan said the state is waiving interest and penalties for taxpayers who send a check promptly, acknowledging that many individuals are still unfamiliar with the use tax. An estimated 3,000 state taxpayers have received the letters.
“We’ve had a lot of phone calls; the companies have had a lot of phone calls from taxpayers,” Sullivan said. “The reason we’re offering the opportunity to avoid the interest penalty is because we acknowledge that some taxpayers probably have no idea that they owe a use tax. But it’s hard to miss on their income tax form every year.”
Newegg and other companies gave up their customer records in response to letters that the state tax department sent last summer to about 150 online retailers that have significant sales to Connecticut residents. Retailers were given two options: Begin collecting sales tax from Connecticut customers going forward and send that money to the state, or turn over the records.
Kranz said he believes that companies did not have to comply with the state’s demands but that the letters have invited further discussion about the prickly question of trying to assess state sales tax on online purchases.
“I do think it’s an overreach, but the discussion we have every day with clients is how much risk are you willing to take?” he said. “If you want to tell Connecticut to go pound sand, we can do that. If you want to have a discussion about when to begin collecting tax on your terms, we can do that as well.”
Some customers who received the letters said the amount the state said they spent did not match up with their own records and others questioned whether the state’s approach was an invasion of privacy. “It feels seedy,” said one Newegg customer who received a tax bill and asked not to be identified.
“The state is sending the message to businesses that if they don’t charge sales tax, they will go after the businesses’ customers. And they will require the business to provide the information necessary to do so,” he said.
Another customer who received a bill said he was upset that Newegg did not disclose it turned over records to the state and did not notify Connecticut customers of the requirement to pay the use tax. The website does single out customers from four states — Colorado, Louisiana, Vermont and Rhode Island — notifying them that “although Newegg is not obligated to and does not collect your state’s sales tax, this purchase is subject to your state’s sales tax unless specifically exempt from taxation.”
Newegg did not respond to a request for comment.
The issue of imposing sales tax on out-of-state purchases ultimately may be settled by the Supreme Court.
In a 1992 case dealing with a mail-order office supply company, the court ruled that states could not require companies that did not have a physical presence in their state to collect sales tax. But last year, South Dakota passed a law requiring out-of-state retailers to collect the sales tax, arguing that failing to do so harmed local, brick-and-mortar stores. Last month, the Supreme Court agreed to hear a challenge to the South Dakota law.
“It is a straight out shot at asking the Supreme Court to reconsider and overturn the [previous] decision,” Sullivan said. “This is a matter of fundamental fairness.”
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