Modernizing the Sales Tax to Capture Online Sales: Options for Connecticut

Back • Publication Date: March 23rd, 2011

Authors: Clay George and Eric Mitzenmacher

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Connecticut’s sales tax currently does not apply to online sales into the state by a company without a physical presence in the state. An equivalent use tax is technically due from buyers on all such purchases, but compliance by purchasers is spotty. This means that roughly $50 million in tax revenue is lost annually in Connecticut, and an inadvertent competitive advantage is granted to “remote sellers” over in-state retailers.

As e-commerce has grown to make up an ever-increasing share of our nation’s economy, states have taken notice of the sales tax problem associated with online retailers. Court decisions have imposed a physical presence (“nexus”) requirement before states may tax sales. This stands in the way of the “ideal” solution, applying sales taxes to all online sales. As a result, California, Illinois, Hawaii, New Mexico, Minnesota, and Vermont have introduced legislation this year exploring a range of policy alternatives to collect at least some of the lost revenue. This brief provides background information on the current problem and summarizes a number of options to address it.