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No matter where in the world you are.
by: Robert Lyon 2018-02-13
If you're a Connecticut resident, chances are you've been shortchanging the State Treasury each year when you file your state income tax return, most likely without even realizing it. With the increasing ubiquity of the online marketplace and the convenience that online shopping offers, many have turned to the internet to buy all manner of goods and services. The fact that many online retailers do not charge sales tax on purchases is seen by many to be an extra incentive to shop online. However, what many do not realize is that just because your go-to online store doesn't charge you sales tax doesn't mean that you're off the hook for paying taxes. Connecticut law requires you to self-report the purchase and pay use tax in lieu of sales tax. For years, many have flouted this requirement with little to no consequence, as means of effective enforcement simply did not exist. However, this week the Connecticut DRS made waves by sending out use tax assessments for prior years to customers of at least one online retailer: Newegg.com.
The State of Connecticut Department of Revenue Services (DRS) apparently began an initiative to strong-arm online retailers without a presence in Connecticut into disclosing customer purchase data, which the DRS could then use to make assessments against taxpayers who failed to report and pay use tax of their own volition. Newegg appears to have relented, handing over a list of purchases shipped to Connecticut residents in the past few years. From this, the Connecticut DRS appears to have generated automated use tax bills that are have left many Connecticut taxpayers feeling confused, angry, and violated.
Generally speaking, the use tax mirrors the rate of sales tax paid on in-state purchases. Out-of-state purchases (and in-state purchases for that matter) for which no sales tax was collected by the merchant are subject to use tax if the item is to be used in the state of Connecticut. The idea is to balance the playing field between in-state retailers and out-of state retailers. Because the Supreme Court has held that states cannot impose the obligation of collecting sales tax on retailers without a physical presence in the state, the use tax provisions shift this burden onto the purchaser themselves. Use tax is most commonly reported annually on your CT-1040, but may also be reported on an OP-186 (for example if you don't have an income tax filling obligation).
DRS FAQ on Individual Use Tax: http://www.ct.gov/drs/cwp/view.asp?A=1510&Q=587460
The answer is yes, the notices are legitimate. With the increasing frequency and sophistication of phishing scams whereby miscreants of all stripes pose as a tax revenue agency in an attempt to solicit money or private information from their victim, many of the recipients of these notices have expressed doubt about the notices' legitimacy. While oddities such as the notices' request that the recipient provide the DRS with their Social Security Number and instructions for the recipient to call a number that the DRS has not listed publicly fueled doubts about the notices' authenticity, the DRS has confirmed that the notices were sent by them and are a legitimate request for payment on proposed use tax assessments.
Connecticut is desperate for tax revenue right now and has been sending out mass collection notices for the past few months (especially for the business entity tax, including for periods that are over a decade old at this point) and auditing businesses for missing tax revenues in the state since last year. In its haste to collect as much as possible as quickly as possible, mistakes and oversights have undoubtedly been made. Taxpayers are reporting that they received bills even when they accurately accounted for and paid their use taxes. Others are reporting they personally received proposed assessments for purchases that were actually made by their businesses and reported as such. So there is a chance your bill is incorrect.
The notice offers you the opportunity to have the proposed penalties wiped out if you sign a statement agreeing that the assessment accurately reflects the amount of purchases you made from Newegg in the specified years. However, we've heard reports from taxpayers that the CT DRS's numbers haven't always matched up with their own purchase history from Newegg. As the acknowledgement is signed under penalties of perjury, if you're not absolutely certain that the number on the DRS notice accurately represents your use tax liability, it may not be in your best interest to sign the statement included with the notice. You'd be better off reaching out to the DRS and attempting to reach some sort of settlement with a representative there. Because of the typically low rate of use tax (6.35%), and the fact that assessments appear to have only been sent out for purchases from one retailer, most of the assessments are for relatively low amounts, where it may not be worth the time, cost, and headache to formally contest the assessments. However, the DRS knows this, and probably doesn't want its agents spending lots of time going back and forth with taxpayers over the assessments. For this reason, it may be worthwhile to reach out to the DRS and see if they're willing to accept better terms than what's proposed in the notices.
While the assessments being proposed against most individual taxpayers are likely small enough to not warrant hiring a tax professional to contest the proposed assessments, there are undoubtedly numerous CT businesses that have heavily patronized Newegg to support their IT and office equipment needs. These businesses have likely received painfully large bills from the state of Connecticut. If you are an owner or agent of such a business and would like to know what your options are to contest or verify the validity of the DRS's proposed assessment against your business, please reach out to us to discuss your unique situation and the options you have not only to put this behind you, but to make sure it never happens again.
With Connecticut's financial solvency at its most dire state in recent (and perhaps distant) memory, and an ever-expanding toolset at the DRS's disposal, the crackdowns on non-compliance are only likely to become more frequent and more severe. If you want to be sure your taxes are done right the first time, please contact us to discuss tax preparation services
Whatever you decide to do, don't ignore this notice if you receive one. If the DRS does not receive payment or a response from you, they're likely to formally make the assessments they're proposing. Failure to act to rectify the situation can lead to painful and embarrassing consequences such as wage garnishments and bank levies.
For a thoughtful article on the constitutional concerns of Connecticut's aggressive tactics against out-of-state retailers, click here.