July 24, 2017 Connecticut DRS mails notices to out-of-state online retailers demanding sales records, legislature subsequently enacts penalty provisions for failure to comply The Connecticut Department of Revenue Services (DRS) recently mailed notices to several unregistered online retailers demanding electronic sales records for all individual sales made to customers with Connecticut addresses over the past three years. In lieu of providing sales records, the DRS offers the option of voluntarily registering for Connecticut sales and use tax purposes and prospectively collecting and remitting tax on Connecticut sales. While the notices require the recipient to respond within a specific deadline, they do not address potential penalties or other consequences of failing to respond. On July 7, 2017, however, Governor Dannel Malloy signed Public Act No. 17-147 into law, which gives the Commissioner authority to impose a civil penalty of $500 per day for failing to comply with these type of information requests, effective July 1, 2017. Connecticut's "reporting statute" The notices state the DRS's position that its authority to demand sales records is set out in Conn. Gen. Stat. Section 12-426(4) and (5). Conn. Gen. Stat. Section 12-426(4) contains common statutory language authorizing the Commissioner to examine books and records of companies selling services or tangible personal property in order to verify the accuracy of returns and payments made. Conn. Gen. Stat. Section 12-426(5) was enacted to assist the DRS "in administration of the use tax" and authorizes the Commissioner to require the filing of information reports containing "the names and addresses of purchasers of the services or tangible personal property, the sales price of the services or property, the date of sale and such other information as the [C]ommissioner may require." These provisions were initially enacted in 1989. The intent behind the notice Connecticut's "anti-Bellas Hess" statute, Conn. Gen. Stat. Section 12-407(15)(A)(V), was enacted in 1988, and defines "engaged in business in the state" to include engaging in regular or systematic solicitation of sales of tangible personal property within the state, through print, radio, television, computer, etc., provided that a business makes 100 or more sales to Connecticut customers during a 12-month period. Though the statute remains on the books, the state was effectively enjoined from enforcing the provision following the 1992 US Supreme Court decision in Quill Corp. v. North Dakota.1 Given the state's persistent fiscal woes and the nationwide trends around economic nexus, however, it appears the DRS may be giving the statute a fresh look. In March, Commissioner of Revenue Kevin Sullivan announced in a press release2 that the state will be "stepping up its effort to collect sales taxes not paid by on-line and other out-of-state retailers with a significant volume of sales into Connecticut." In a July 13, 2017 article in Bloomberg BNA, "Connecticut Digging for Sales Data From Remote Retailers," Commissioner Sullivan indicated that the state "is attempting to recover an estimated $75 million to $100 million in tax revenue annually that isn't being remitted to the state by out-of-state online businesses selling into Connecticut." The Commissioner was also quoted as saying, "'There has been a dramatic change in the marketplace, and we are reacting to that change,' … have a right to ask companies to disclose whether they have a tax liability, to disclose the sales you have made in our state.'" The notice3 the DRS has sent to unregistered online retailers states: "Specifically, DRS is requiring you to provide electronic sales records for all individual sales shipped to Connecticut addresses for calendar years 2014, 2015, and 2016. Please refer to the attachment to this letter for details about the electronic records that must be submitted. In lieu of sending your records for sales into Connecticut, DRS will afford [COMPANY] the option of voluntarily registering for prospective collection and remittance of Connecticut Sales and Use Tax. You can do this by completing the enclosed REG-7 registration application." Implications Whether the DRS has the authority to demand sales records from out-of-state companies, or impose penalties for failure to comply, remains a contentious issue under current Constitutional jurisprudence. Since 1992, the US Supreme Court's decision in Quill has stood for the proposition that states are prohibited under the dormant Commerce Clause from imposing a sales or use tax collection obligation on a taxpayer that does not have a physical presence in that state. The US Supreme Court has not since revisited the legality of requiring an out-of-state vendor to collect sales or use tax, but the Court has addressed Quill's applicability in the context of a Colorado law imposing a reporting responsibility on remote retailers selling into the state, denying certiorari in a case allowing the state to require out-of-state vendors to provide information about its sales to customers within the state. Similar to Conn. Gen. Stat. Section 12-426(5), a 2010 Colorado law requires, among other things, out-of-state retailers to send the Colorado Department of Revenue (Department) an annual "customer information report" listing their customers' names, addresses and total amounts spent. Direct Marketing Association (DMA), a trade group, filed a lawsuit in federal district court on June 30, 2010, challenging the constitutionality of the law. After a long procedural battle, the Tenth Circuit ultimately held in Direct Marketing Association v. Brohl4 that the reporting requirement was not discriminatory and did not unduly burden interstate commerce. The Court reasoned that Quill applies narrowly to the collection of sales and use taxes, and does not control, since Colorado's notification and reporting requirements do not impose a collection requirement upon companies. The US Supreme Court declined to hear the case on appeal, effectively ending the litigation process and rendering the appellate court's opinion non-binding on other state or federal courts outside the Tenth Circuit. Nevertheless, DMA would be persuasive to a state or federal judge hearing a challenge to the Connecticut reporting law. As stated, although notices initially mailed to companies in June 2017 did not contain language imposing a penalty for failure to comply, the state has since enacted a law, which, effective July 1, 2017, authorizes the Commissioner to impose a $500 per day penalty for failing to comply by the deadline stated on the notice. It remains unknown whether this penalty provision will be enforced against notices that were issued prior to the effective date of the statute. In light of the new potential penalties associated with failure to comply, companies should consider their procedural options, including the following: — Consider providing the state with basic sales records, with customer names and addresses redacted if the company has concerns around disclosing customer-specific information. While this should satisfy the DRS's initial information request, companies should anticipate receiving a follow-up notice requesting that they "voluntarily" register due to having more than 100 transactions to Connecticut destinations. Further, this may put the company at risk that the DRS will assert economic nexus for the past three years (or more) — assuming that there have been 100 transactions in each of those years. It is unknown at present how the DRS will respond to companies that refuse to further comply with its requests. — Voluntarily register for prospective compliance. Before contacting the DRS, however, we recommend companies first consult with a tax advisor to discuss procedural options regarding potential liability for past periods and allow proper lead time to ensure systems are in place to properly collect Connecticut tax from customers. ———————————————
——————————————— 1 Quill v. North Dakota, 504 U.S. 298 (1992). 2 Conn. Dept. of Rev. Serv., Media Release "Connecticut Pursues Sales Tax Not Paid By On-Line Retailers" (March 28, 2017). 3 A copy of the letter is available in the Bloomberg BNA Daily Tax Report article, "Connecticut Digging for Sales Data From Remote Retailers" (July 13, 2017). 4 Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016). | |||||||
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