You asked several questions concerning SB 806, An Act Concerning the Definition of “Retailer” for Purposes of the Sales and Use Tax. Each question and answer is listed separately below.

SB 806 presumes a company is a retailer with sales tax nexus in Connecticut if it sells more than $2,000 worth of taxable items or services annually in Connecticut through certain agreements with Connecticut residents. The agreements must provide that, in return for the resident referring potential customers to the company, he or she will receive a commission or other compensation from that company. Under the bill, the referrals can be direct or indirect and can be made by any means, including a link on an Internet website. By extending Connecticut sales tax nexus to companies that have such agreements, the bill requires them to collect Connecticut sales tax on all their taxable sales in Connecticut, not just on items sold through the referrals.

The bill would likely impact retailers that (1) are not currently registered to collect sales taxes on sales of tangible personal property or services that are subject to taxation under the Connecticut sales tax law and (2) enter into affiliate agreements with a Connecticut resident under which the resident, for a commission or other consideration, refers potential customers to the retailer, whether by a link on an Internet web site or otherwise. Some examples of retailers that have affiliate agreements that may be subject to the provisions of SB 806 are Amazon.com, Overstock.com, and Newegg.com.

The Maryland bill (SB 1071) died when the Maryland General Assembly adjourned its regular session on April 13, 2009. The California bill (AB 178) has been held back in the Revenue and Taxation Committee and is apparently dead for the current legislative session.

The Maryland fiscal note states that passage of the bill could increase that state's General Fund revenue by approximately $7.4 million beginning in FY 2014. The note also states: “To the extent that Internet sellers, such as Amazon.com and Overstock.com, reduce or eliminate Maryland affiliates, State revenues will be less than estimated. In addition, to the extent the bill is challenged in court (as was done in New York), the timing of when revenues begin to be collected will be affected.” A copy of the Maryland fiscal note is attached. 

It appears that no state agency or organization collects information about schools that use online shopping fundraisers, according to the State Department of Education and the Connecticut Association of Boards of Education. 

Boxtops4education allows people to send coupons from certain products they buy to a school. The school then redeems the coupons for a payment of 10 cents per coupon from boxtops4education.

On its website, boxtops4education lists 1,087 Connecticut public and private schools as participants in its online fundraisers. The website does not allow us to print the entire list of schools by municipality, so Table 1 below shows a sample of 80 schools that participate, according to the website. We also attach a list of the types of products people can buy

to raise funds for a school through boxtops4education. Some of the products, such as food and beverages, are ordinarily exempt from Connecticut sales tax, while others, such as personal care items, are taxable.

Table 1: Sample of 80 Schools Participating in Boxtops4education Fundraisers

There is no way to state, in the abstract, whether an out-of-state company would be considered to have sales tax nexus in Connecticut by providing online school fundraisers, either under SB 806 or the current law, according to the Department of Revenue Services (DRS). The question would be decided on the facts of the particular case, including exactly how the company sells its products through the schools, who sells them, and under what conditions, as well as how the out-of-state company structures itself when carrying out online sales.

A recent Superior Court decision illustrates some of the issues involved in such a determination. The case deals with an out-of-state company called Scholastic Books that sells books through teachers. DRS assessed the company for unpaid sales tax based on its contention that the teachers were, in effect, sales representatives for the company and, as such, gave the company enough of a “physical presence” in the state to generate nexus and require them to collect sales tax on their Connecticut sales. The court ruled that the teachers in the case were not acting as sales representatives but rather in loco parentis when they sold books to students and their parents and that Scholastic Books has no sales tax nexus in Connecticut (Scholastic Book Clubs, Inc. v. Commissioner of Revenue Services, No. CV 07-4013027S, April 9, 2009, copy enclosed). 

New York's law does not cover advertising companies. The Supreme Court of the State of New York specifically noted in its ruling on a challenge to New York's law that Amazon's claim that New York's law would bring within its ambit “simple advertising” by in-state advertisers, does no such thing. The court refuted this argument by saying the law imposes a tax collection system on sellers who contractually agree to compensate New York residents for business they generate and not simply for publicity (Amazon.com LLC v New York State Department of Taxation and Finance, Index No. 601247/08, January 12, 2009, copy enclosed).

In its complaint in the lawsuit against the New York statute, Amazon.com argued that it lacked the required "substantial nexus" with New York that would allow the state to require it to collect sale tax there. The U.S. Supreme Court has ruled that the U.S. Constitution's Commerce Clause allows a state to impose a tax obligation on a company if the “tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State” (Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977)).  Amazon argued that it has no physical presence in New York; does not own, lease, or otherwise occupy property in the state; and that none of its employees works or lives in New York.  It also contended that title to goods purchased from Amazon passes to purchasers at the shipment's point of origin, which is outside New York state. 

Finally, Amazon argued that it did not have any representatives in New York soliciting sales on the company's behalf.  Its affiliates program, which serves as the basis for the New York law, allows independent third parties to advertise Amazon.com on their own websites. Visitors to the affiliates' websites may “click through” from those sites to Amazon.com and purchase goods. Amazon asserted that this type of connection did not meet the Supreme Court's threshold for nexus.

In response to this argument, the New York court ruled that the “substantial nexus” test only requires the “slightest” physical presence, which can be imputed to the retailer through activities performed in the taxing state by the people or entities acting on the retailer's behalf. Based on this standard, the court found that the law “is carefully crafted to ensure that there is a sufficient basis for requiring collection of New York taxes and, if such a basis does not exist, it gives the seller an out… a tax-collection obligation will only be imposed based on an out-of-state seller's conscious decision to contract with in-state residents who collectively refer more than $10,000 of New York-based business.” Amazon, Ibid.)

The revenue estimate was developed after speaking with staff at New York's Department of Taxation and Finance. New York indicated that about 30 companies have registered with the state to collect sales taxes since passage of its law. It will collect $62 million in state and local sales taxes for FY 10 (New York's fiscal year began on April 1, 2009). This estimate was developed based on collection trends since the law was passed.

Based on this information the following assumptions/adjustments were made:

● A similar number of companies would register and collect sales taxes on purchases made to Connecticut residents.

● New York's estimate of $62 million was adjusted for population (Connecticut population is roughly 18% of New York's) and tax rate differences (8% vs. 6%).

The only state that has enacted a statute similar to SB 806 is New York.  According to a survey published by the Prime Marketing Association and reports in State Tax Notes, similar bills were considered, or are under consideration, in 2009 in the following states: California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, North Carolina, Tennessee, Wisconsin, and Virginia.

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