Pressure from the Taxman

December 16, 2013

Under pressure is how many small Connecticut business men and women are feeling lately. Especially, the ones who are learning about a controversial new policy change from the state’s tax department.

Beginning this New Year, the sales and withholding taxes collected by business taxpayers will have to be filed electronically. Though this sounds good on the face of it – this change is a mandate and short sided which is why I did not support it.

The idea was recommended by the Governor and enacted by some the legislature in the most recent budget for an annual savings of half a million dollars. The savings are associated with printing, postage and data entry costs that will no longer have to be an expense of the state.

The problem is not every business is geared up for such a leap in technology. Many contractors who have run a business for decades still do old fashioned book keeping and are not equipped to file electronically. Many do not have time to learn how to e-file, or extra money to pay a book keeper because they are just scraping by and trying to earn a living.

While electronic filing might be more cost-effective for larger companies, small companies might not be able to make this transition without significant costs to their bottom line. It is unfortunate that this change is a mandate and not a choice. It undoubtedly will be another check in Connecticut’s ongoing list of unfriendly business practices.

For tax periods that start on January 1, 2014, the following taxes must be filed and paid electronically:

  • Sales & Use Tax
  • Income Tax Withholding
  • Corporate Income Tax
  • Composite Income Tax
  • Business Use Tax
  • Room Occupancy Tax
  • Admissions & Dues Tax

The DRS Commissioner has said publically, “The business community has been asking for years that Connecticut move more quickly to electronic tax filing. Electronic filing saves taxpayers time and money while reducing state costs.”

But for small tax payers who may not have access to a computer, filing by phone or taking time out of their busy work day to visit a DRS computer kiosk in Bridgeport, Hartford, or Waterbury means money out of their pockets. There is no associated revenue gain for the state with this transition, so for little cost savings the negative impact to businesses could be far more severe.

In recent years, the state has enacted numerous initiatives all aimed at collecting taxes owed to the state. We have heard about a tax amnesty program, new Collections and Enforcement Scoring and Privatization System, Enhanced fraud detection of Personal Income Tax Returns, Withholding Sales Tax permits for those entities that owe back taxes, requiring delinquent Sales Tax payers to remit their tax payments electronically, a general increase in the use of audits.

Collecting taxes owed to the state is a laudable goal – these residents are after all delinquent. However, all of these efforts have taken place in the past three fiscal years proving that when the largest tax increase in state history will not support your spending habits, you need to go after revenue where ever you can find it.

At a time when our unemployment continues to hover around 8% and remains higher than the national average we cannot afford to hurt businesses any more. It was also recently reported that Connecticut’s economic recovery will be steady yet continue to lag behind that of the Northeast and the nation over the next four years.

The report was prepared by the New England Economic Partnership (NEEP) in cooperation with the Federal Reserve Bank. The NEEP partnership is – a nonprofit providing economic analysis for the region – also warned that federal budget cuts and the threat of a shutdown, coupled with higher federal payroll and income taxes, should keep 2013 job growth in the Nutmeg State at last year’s level.

Flat or no job growth is not something we should be striving for. It is the unfriendly tax policy of our state that continues to choke business and does not allow for stability. This mandatory e-filing will have a ripple effect.