If you are selling goods or products online and some of your customers are located in Connecticut, you need to be aware of the state’s Internet sales tax rules. Collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means having:
The corollary to the physical-presence rule is that if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
Example 1: You are on online retailer located in Jonesboro, Arkansas and make a sale through your website to a customer in Stamford, Connecticut—a state where your business has no physical presence: You are not required to collect sales tax from the Stamford customer (with the exception of sellers who fall under Connecticut’s Amazon law).
Example 2: You are an online retailer with an office in Bridgeport, Connecticut and make a sale through your website to a customer in Hartford, Connecticut: You are required to collect sales tax from the Springdale customer.
Example 3: After several years of operating solely out of a store in Jonesboro, Arkansas, you open a one-room satellite office just outside of New Haven, Connecticut—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Hartford, Connecticut: You are required to collect sales tax from the Hartford customer.
In 2011, the Connecticut legislature amended the definition of retailer in Section 12-407(12) of the state’s sales tax statute. The new law added language that requires larger Internet retailers with no physical presence in Connecticut to collect and pay sales tax under certain conditions. More specifically, an out-of-state retailer must collect sales tax from Connecticut customers if that retailer:
Similar laws have been enacted in other states; they are commonly referred to as Amazon Laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws are enacted to try to reduce this loss.
For more specific guidance on how physical presence is defined specifically under Connecticut’s law, refer to the definition of retailer and engaged in business in the state in Connecticut’s sales and use tax law. Retailer and engaged in business in the state are defined, respectively, at Section 12-407(12) and Section 12-407(15)(A) of the statute. Except for Connecticut’s Amazon law, the definitions generally follow the Quill physical presence rule. This fact is implied in guidance published by Connecticut Department of Revenue Services (DRS), which indicates that if a “business does not have any physical presence in Connecticut,” registering to collect tax is voluntary.
Unlike many other states, the DRS does not often mention nexus--a term used by the Supreme Court in the Quillcase in discussing connections (possibly more broad than physical presence) between a business and a state. One DRS webpage provides a very brief definition, and another DRS webpage contains a link to email questions about nexus.
Some items sold via the Internet to Connecticut customers may be exempt from sales tax under Connecticut law. For example, under Section 12-412(102) of the sales tax law, bicycle helmets are exempt from sales tax. The DRS has a helpful, readable webpage listing many of the most important items exempt from state sales tax.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. The DRS does not provide much online information about the use tax and the available online information is not current. However, you may want to check the DRS’s Q&A webpage on the use tax for businesses and professions.
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most small online businesses, it is the long established physical presence rule that will apply. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Connecticut Department of Revenue Services to see if the rules have changed.
Updated: April 27, 2016