CT tax department says it surpassed $75M collection target

July 17, 2015

Article as it appeared in the Connecticut Mirror

Thrown a last-minute challenge to collect an extra $75 million in revenue for the past fiscal year, state tax officials topped the mark, collecting nearly $86 million in miscellaneous receipts before the fiscal year ended on June 30.

Department of Revenue Services Commissioner Kevin B. Sullivan said his agency is confident the enhanced enforcement, outreach and negotiations that produced this bonus can be repeated year after year.

Sullivan noted Connecticut never granted tax amnesty — meaning it didn’t waive or reduce a specific tax bill after an obligation had been determined.

But just over one-third of the $85.8 million in receipts collected were preceded by negotiations during which multi-state corporations could dispute how much of their earnings were taxable in Connecticut. And a key Republican leader on the legislature’s tax-writing panel said lawmakers should take a closer look next year at this process.

“We asked for the opportunity to challenge Connecticut’s tax gap,” Sullivan said. “Governor (Dannel P.) Malloy gave us that challenge. …DRS is proud to have taken on this challenge and delivered as promised.”

The commissioner was referring to a last-minute hole the governor and legislators faced in May 2014 as they struggled to adopt a budget for the 2014-15 fiscal year.

Faced with a deficit of about $75 million, the governor and his fellow Democrats in the legislature’s majority agreed to assume this gap would be closed through miscellaneous tax receipts after Sullivan said his department had developed several new approaches to enhance collections.

Revenue officials found their single-largest pocket of collections, $34.3 million, by taking advantage of credit card sales data companies must report to the U.S. Internal Revenue Service — and that is now available for states to review.

Armed with this information, state tax officials could go back to Connecticut retailers who had underreported their sales tax obligations and collect the rest.

A, second complementary step involved modifying Connecticut’s approach toward renewal of permits that businesses need, for example, to collect sales or cigarette taxes.

Renewals generally had been granted automatically in the past. The department now reaches out to retailers in arrears and requires them to make overdue tax payments — or at least enter into an installment program to catch up – to get their permits renewed.

This change netted another $6.2 million.

The goal of the entire initiative, Sullivan said was to work with businesses as much as possible while trying to ensure that all taxpayers met their obligations.

“Nothing is gained when somebody is out of business,” he said. “We found the face-to-face really made a difference.”

Another large sum, about $31.6 million, was collected from corporations that do business in Connecticut and at least one other state.

Disagreements sometimes arise when companies assign earnings to an operation outside of Connecticut, particularly if that other state imposes a lower tax rate.

Sullivan said about 30 companies accepted DRS’s offer to come in and negotiate an agreement on how much of these contested earnings should be subject to taxation in Connecticut. Any agreement would remain in effect for at least five years, he said, adding that provided significant incentive for companies to participate.

“These companies had the value of avoiding the uncertainty of an audit,” Sullivan said, adding that this, in turn, could lead to disputed collections and ultimately litigation. “You could go on forever and ever and ever,” he said.

How much in contested earnings did DRS agree would be assigned to other states? Sullivan declined to provide that information. Because a relatively small number of companies participated, he said, releasing information – even in the aggregate – might violate these corporations’ tax privacy rights.

But state Sen. L. Scott Frantz of Greenwich, the ranking Republican senator on the legislature’s Finance, Revenue and Bonding Committee, said it’s important for lawmakers to know more about this process.

How much discretion did state tax officials’ exercise to reach the $75 million collection target built into the budget?

The department’s announcement “doesn’t tell us what we forfeited, and what that does to our reputation as a state,” Frantz said.

Sullivan said all of the department’s revenue collection initiatives were developed under existing statutory authority and didn’t require any special permission from the legislature.

And while some Republican lawmakers suggested the miscellaneous revenue collection plan was too convenient when approved last year, Sullivan said all of the collection initiatives had been developed or were in the planning stages at that time.

“That bothered us,” he said. “We did feel in some fashion our credibility was questioned.”

The final $13.7 million out of the $85.8 million in extra collections last fiscal year came simply from intensifying outreach efforts, Sullivan said, calling it “enhanced friendly visiting.” This largely involved reaching out to restaurants and bars, and also some other businesses, that had fallen behind in tax payments and urging them to begin making payments.

Though the legislature appropriated roughly $1 million to assist DRS, Sullivan said all of the initiatives his office undertook were performed largely with existing staff. The agency did retain a consultant to assist with the initiative involving multi-state companies, he said, adding that a small number of temporary workers also helped with the general outreach to delinquent taxpayers.