Sales Tax Collection Measure Could Cost Businesses Millions

Issues & Policies

Hidden among the Finance, Revenue, and Bonding Committee’s recently approved tax package is a section on automated sales tax collection and remittance with potential cost implications for Connecticut businesses.

Although SB 877‘s final language is not yet available, budget summaries discussed during the meeting to approve the package noted a section that “requires certain sales tax payers to enter into agreements with electronic payment processing companies for automated sales tax collection and remittance.”

That means any individual or business that collect sales tax on the products or services they sell.

The same document estimates that this will result in an additional $20 million in annual revenue for the state in fiscal years 2020 and 2021.

Before taking final action on the bill, committee members supporting the proposal noted they believe this measure helps collect delinquent sales tax revenue by requiring merchants to pay on a daily or real-time basis rather than monthly.

If this bill is enacted, Connecticut would be the first state to require businesses to pay sales tax on a real-time basis.

No New Revenue?

However, organizations like the Council on State Taxation dispute whether such a policy change would result in additional revenue to the state.

In testimony on similar bills in previous years, including one from the 2017 legislative session, COST explained that “by receiving sales tax revenue earlier, Connecticut will experience a one-time revenue boost, accelerating 13 months of revenue into a 12-month fiscal period.”

COST noted this is purely a “timing” difference as no new sales tax revenue will be collected.

COST further explained “if revenue acceleration is truly the goal of this legislation, the General Assembly could simply follow the lead of other states that have required an estimated prepayment.”

Implementation will require significant changes in existing payment processing systems, requiring retailers, financial institutions, and payment processors to make substantial investments.

A policy of estimated prepayments would achieve the same one-time benefit without forcing businesses to invest in system changes.

While the committee is relying on this one-time revenue boost to help balance the budget, it could have huge cost implications for Connecticut businesses.

A study conducted in 2017 by the State Tax Research Institute looked at the potential costs of a similar proposal in Massachusetts.

The study concluded that “implementation of such a system would require significant changes in the existing payment processing systems, requiring retailers, financial institutions, and payment processors to make substantial investments in new technology and personnel.”

Cost to Business

The study estimated it would cost Massachusetts’ 70,000 retail establishments and 700 third-party payment processors approximately $1.2 billion in one-time, non-recurring costs and an additional $28 million in annual recurring costs.

In other words, if the bill is implemented, Connecticut businesses that collect sales tax will incur the costs of new technology, as well as enter into potentially expensive service contracts with one of several third-party electronic payment processors, to ensure sales tax is remitted to the state on a real-time basis.

If COST is correct, these expenses incurred by businesses would not result in more state revenue.

Rather, it would simply increase the speed by which the revenue is collected.

If the bill is enacted, the state will get its money quicker and one of the third-party payment processors will get a lucrative state contract.

And businesses will be left paying the bills.

For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede


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