By Janet Novack. Forbes.com
Connecticut is on the verge of adopting a law designed to force online sellers such as Amazon.com and Overstock.com to collect sales tax on purchases shipped to Connecticut residentsâ€“ if those Internet sellers have marketing affiliates located within the state. Last month, Illinois Governor Pat Quinn signed a similar requirement in his state and other states, including California, have been debating such legislation, often referred to as an â€œAmazon taxâ€.
On Thursday, over Republican opposition, the Connecticut General Assemblyâ€™s finance committee approved 32-20 a two year budget deal leaders of the Democratic controlled legislature reached earlier this week with Gov. Dan Malloy, also a Democrat. The package would raise an additional $1.5 billion in income taxes and $700 million in sales taxes over two years through a laundry list of tax changes, including a few that explicitly target the rich. An additional $45 million would be raised by reducing Connecticutâ€™s estate tax exemptionâ€“the amount that can pass to non-spousal heirs untaxedâ€“ from $3.5 million to $2 million. The tax increases, a somewhat modified version of those originally proposed by Malloy in February, now head to the full state House of Representatives and Senate for passage.
According to the legislatureâ€™s fiscal analysis here, retroactive to January 1, 2011, the deal would raise the marginal income tax rate for couples with more than $500,000 in taxable income to 6.7%. It is now 5% on income of between $20,000 and $1 million per couple, and 6.5% above that. Not so rich couples with taxable income above $100,000 would also face increases, although more modest ones. For example, the marginal rate on income between $100,000 and $200,000 would go from 5% to 5.5%. Plus, two sneaky recapture provision would take away the benefits of lower tax rates for upper income folks, a provision that apparently would leave income between $500,000 and $700,000 per couple taxed at the highest effective rate.
The sales tax changes, in addition to the Amazon tax, include an increase in the basic sales tax from 6% to 6.25%; an extension of the sales tax to non-prescription drugs and all clothing purchases (previously shoes and clothes below $50 were exempt) and to yoga instruction, spa services, manicures, pedicures, car towing and chauffeur services; and a new higher 7% sales tax on â€œluxuryâ€ goods. (Call it a Rolex tax or a Prada tax. Take your pick. The luxury levy would hit clothing, handbags or watches selling for more than $1,000, as well as motor vehicles costing more than $50,000, boats costing more than $100,000, and jewelry going for more than $5,000. It would be applied to the full sales price of such items.)
Compared to the income and general sales tax hikes, the Amazon levy is penny ante stuff. But it has nationwide significance as the Internet giant faces a variety of efforts by cash strapped states to force it to collect sales taxes from their residents. The Connecticut legislatureâ€™s number crunchers project the Amazon law will raise â€œup toâ€ $9.4 million a year for the stateâ€”but only if the big online companies donâ€™t terminate their in-state affiliates. (Analysis here, look for HB 6624.) In fact, Amazon and Overstock will almost surely do just that.
Under a 1992 U.S. Supreme Court ruling, only sellers with a physical presence (â€œnexusâ€ in taxspeak) in a state are required to collect that stateâ€™s sales taxes. Just shipping into a state by say, FedEx or UPS, isnâ€™t enough to establish nexus. Consumers buying online still owe â€œuseâ€ (meaning sales) tax to their states, but few bother to pay, even though a growing number of states ask them to report their use taxes owed on their state income tax forms.
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