Crowell's Conversations: An Interview With Kevin Sullivan, Commissioner of the Connecticut Department of Revenue Services and President of the Federation of Tax Administrators

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Tax Policy

Crowell & Moring's Jeremy Abrams meets regularly with state tax commissioners and their counsel to bring Bloomberg BNA's readers candid and timely observations from the country's top state tax decision-makers. In this column, Connecticut Commissioner of Revenue Kevin Sullivan discusses the “Fresh Start” program, Connecticut's efforts to “Kill Quill,” cyber security and tax fraud.

Kevin Sullivan Jeremy Abrams

Kevin Sullivan, interview by Jeremy Abrams

Kevin Sullivan is the Connecticut Commissioner of Revenue Services. Jeremy Abrams is an attorney with Crowell & Moring LLP and can be reached at jabrams@crowell.com. For more information about Crowell's state tax practice, visit www.crowell.com/statetax.

Mayor of West Hartford
Abrams:

Many years ago, before you served as Connecticut's 106th Lieutenant Governor and before you were a state senator, you were mayor of your hometown West Hartford and you helped enact one of the first tax reforms in that city. Did you know then that you wanted to one day be DRS Commissioner?

Sullivan:

No. You know, the roads to becoming tax agency heads have become much more diverse in the last few years. There are folks like me who have come from other parts of state government, obviously folks who have come up through the tax agencies, folks who've come in through business. So, no. In fact, when Governor Malloy offered me this job it was not my first choice.

Abrams:

What was your first choice?

Sullivan:

The budget office.

A Budget, Finally
Abrams:

Funny you should mention that. When we spoke last week you had not yet seen the budget “framework” and you were skeptical about a budget being passed. Are you surprised the Governor signed a bipartisan budget bill this week? [Editor's note: Governor Malloy signed SB 1502 on Oct. 31, but vetoed the hospital tax provisions. Click here to see the Governor's signing and veto message.]

Sullivan:

No, I'm not surprised. I think they had reached a point of total budget fatigue. That's not necessarily a good place to act from but at least they acted. There are a lot of things that are in need of repair in what they did and there is time to do that when they come back in February but not with respect to the hospital tax. Somehow in the dark of night the hospital association managed to cut a deal which essentially allows them to receive payments without the assurance that there will be a federally approved tax, which is why the Governor has said over the number of years it's a billion dollar hole for Connecticut. Hopefully they will understand that we've provided them the correct language that had been in every version of every budget up until this one, so something happened in the senate perhaps in the republican leadership offices with the Connecticut hospital association where they essentially wrote the bill.

I'm just glad it's done. The Governor did the right thing to sign it, obviously did the right thing to do the line item veto which is very unusual. This is only the 2nd or 3rd time and probably the only time a line item veto has successfully been done.

Everyone has indicated that they understand they got it wrong. Some are surprised they got it wrong because I think they had it represented to them that they had it right. This is often what happens when a 900 page bill gets readjusted in the senate's case at midnight or 1 in the morning. I won't say it's not surprising. What is surprising in this case is it was really a kind of lobbyist end run on the whole process and then it got just lost in the shuffle. So I think they've all woken up, most all of them anyway. It's funny because the hospital association said it was done right, there's nothing wrong with it. Well of course they said that – it gives them what they want. So we'll fix that, and we'll await the legislature's return in February. But at least it gives us as an agency certainty. I can now get our forms out for tax season which we've been holding back on. We can get started on these collection programs that we are challenged and charged to do.

A Fresh Start for Corporate Taxpayers
Abrams:

You're referring to the “Fresh Start” amnesty program. What will that entail?

Sullivan:

For all tax types except for motor fuel this program will offer an opportunity to do a lookback and a look forward, it's not really an amnesty – we've done those. It's not as broad as that. But we needed the legislation to allow us to waive penalties and waive 50 percent of interest. We had an amnesty 5 years ago. Connecticut did very well, it was a $195 million uptick. And a lot of companies got their slate clean and got back to where they should be. That's sort of our goal. I'm not one of those people that's interested in chasing every dime for every body for every period. I would rather have people come back into compliance and stay in compliance going forward.

Abrams:

How can taxpayers take advantage of the fresh start program?

Sullivan:

The way this is primarily going to work is that we will actually be working on a universe of identified taxpayers that we will be communicating directly with to advise them of the opportunity. In addition, there will be a modest public campaign to get the word out which we hope to start in December if not in late November. It is a fairly targeted group, these are folks who have been nonfilers and nonremitters that we have been aware of by and large. If it's a case in audit or in collection already you're not eligible for this. It's a finite group that we will primarily do the job of identifying up front, so unlike the last amnesty which was quite broad and really did require a broad public information campaign, this is going to be a more narrow cast than the last time.

Federal Tax Matters Affecting Connecticut Taxpayers
Abrams:

Is there anything in this budget addressing partnership taxation in light of the new IRS partnership audit rules under the BBA?

Sullivan:

No, it's in the works. We will be filing legislation when the legislature comes back in February. We do need to change our state law to bring it into compliance with the new federal regime. I don't think we'll have trouble complying. But there's no way it will be in place in time for the federal legislation. We'll be fine. If not, we will implement our law in conformance with what the feds have done and then wait to get the actual changes.

Abrams::

Tax reform is the talk of the town in DC. You've been very critical of the proposal to scrap the state & local tax deduction. Why is that?

Sullivan:

It's changing every day. Eliminating the deductibility of state and local taxes is clearly directed at blue states which primarily have strong reliance on income and property taxes. It is a net tax increase for a substantial number of taxpayers in the state of Connecticut and will be a net tax increase in California, in New York, in all of the blue states, so it strikes me as a very political act. I trust that republican legislators in those states will not be amenable to doing this and that there will be a bipartisan effort to preserve it. Obviously the reason it's being done is to pay for the magnitude of the corporate tax reduction but it is an unfairness in many respects to middle income and upper middle income taxpayers and it's just an unfairness to discriminate this way against the states.

A Competitive Connecticut
Abrams:

Businesses are always seeking the best economic deal for expansion or relocation. How can Connecticut compete for these businesses?

Sullivan:

The competition is not easy for us. We have the advantage of being between Boston and New York. We have the disadvantage of competing with Boston and New York, not to mention the rest of the country. I'm not a huge believer in tax incentives. I think there's a role for them, we've done them. My concern and the Governor's concern has been, what can we do to baseline make the state more competitive for everybody so that we're attractive. And that's been a challenge given the fiscal situation we've had. Having said that, we have done a number of initiatives. The one that is going to go through the claw back phase is a test for the system to see whether the system really has integrity. We have been criticized often by folks who don't understand how important building the economy is for investing in these companies and then seeing the companies run and flee. So this will be a test to make sure that we are made whole on this particular deal that was done.

We are competing along with most everyone else for Amazon and I don't think it's a pipe dream. We're well positioned for that. There are a lot of similarities between Connecticut and Seattle. Amazon's an interesting company obviously to say the least and for them it will be an economic deal but it's also a cultural deal. They're a company that's very focused on the culture in the work place for their people so if it doesn't smell and feel like Seattle to some degree I think they're going to have a hard time choosing that location.

Kill ‘Quill'?
Abrams:

Does Connecticut support South Dakota's effort to overturn Quill?

Sullivan:

Connecticut did sign on to a multistate amicus brief. In fact, we'd probably be part of almost any suit that comes forward. I've been very frustrated as have all the other states by what I consider as an attorney to be the bizarre nature of the Quill decision and the Bellas Hess decision which essentially said that the Federal government gets to create a protectionist regime for online commerce in discriminating against in-state commerce and yet somehow that is supposed to be within the logic of the Commerce Clause. I don't understand that decision. Every time I read it, it makes less sense than the time before.

Here's what we're doing in Connecticut. First of all, starting with the top 500 companies we have identified those that are already collecting in Connecticut so obviously we are happy with them. We have notified the others that there is a reporting statute in Connecticut and we expect them to disclose to us for the past 2 years their Connecticut destined sales.

Abrams:

Sounds like Colorado's reporting regime that was challenged in DMA.

Sullivan:

This has been on the books forever.

Abrams:

Has anyone challenged it?

Sullivan:

No. It's never been used this way before. It's a broad statute, it gives us the ability to compel the production of records but you don't actually have to be a taxpayer. If we believe that you have economic activity in the state of Connecticut, that's enough to trigger the statute. And that's phase 1. We've had 22 companies just because of that say we're not fighting this, we're not challenging this, we'll register and collect for the transactions we are doing online. After that we also have a statute that creates a very broad series of criteria in terms of the direction of market activity to the state of Connecticut. Again we've had that on the books since 1989. At one point my agency did guidance saying they would never enforce that statute. I removed that guidance within a year of getting to the job, so we will use that as the second wedge. [Editor's note: See Connecticut Announcement, No 2013(9), Revocation of Special Notice 92(19), Effect of Quill Corp. v. North Dakota on the Collection of Use Tax by Retailers Who Engage in Business in Connecticut Only by Selling Items Through Mail Order Catalogs with Delivery by Common Carriers. Click here for the notice.] And then third, we will be putting out new regulations incorporating some of the cutting edge stuff that other states are doing including Massachusetts. I think Massachusetts is on to something. [Editor's note: Connecticut will pursue a “cookie” nexus regime requiring out-of-state internet vendors to collect state sales tax and use tax in early 2018 - similar to a first-of-its-kind regulation already in place in neighboring Massachusetts. Click here to see Bloomberg BNA's article on Connecticut's “cookie” nexus regime.] I think it's time to make that case. You have to go back and think about this. When Quill was decided, we're talking about delivery trucks and postal service. None of this existed. It wasn't the predominant force in the marketplace that it has become and it is time to figure out where it fits in regulation and taxation of businesses, not least of all for all the companies that they compete with to ensure they compete on a level playing field . So that's what we'll be doing. We'll be watching the other states going forward.

And I should make it very clear – the alternative for these companies in our communications is a voluntary disclosure. If you don't want to be fined $500/day for not filing the data with us, if you don't want to go through all this, let's do a VDA and get it over with and move forward and we will not look back.

Cyber Security and Tax Fraud
Abrams:

What is Connecticut doing in terms of cyber security to protect taxpayer information?

Sullivan:

We have dramatically in the last year revisited our data security and significantly upgraded the protection of taxpayer information as well as taxpayer identity information. I don't think anyone on earth could say to anyone on earth these days that our system is infallible because I am not sure there is such a thing as an infallible system. If people can hack into the Pentagon, and hack into the IRS, and hack into some of these other major companies, everybody is vulnerable. But we have gotten high marks from the Feds in the past on review of our systems, so I think I'm comfortable there, knock on wood, that we've done as good a job as we can possibly do. We have been therefore shifting more resources over the last few years to taxpayer fraud and we are now probably in the range of $50 million per year of stopping or intercepting particularly federal income tax refund fraud, and we are shifting our emphasis, as all the other states are, not just to the claimant but to the preparers as well. There is strong evidence that the new front line for income tax fraud is in the preparer community.

Abrams:

There is fraud in the sales tax space as well. How big of an issue is zapper software?

Sullivan:

The California folks led the way in exploring this area of tax evasion. As in all areas of tax evasion, you don't know what you don't know so it's hard to estimate what's out there without knowing what's out there. We do know that these systems that adjust the receipt of payments are widely available, downloadable from online, and can be actually built into the system at the point of purchasing a POS registry system. They are clearly illegal in Connecticut as they are in most states. We just made our first arrest and the person pleaded guilty so there's no question as to where that is going to go. Someone who essentially established a restaurant for the sole purpose of tax evasion put in one of these systems. Luckily through some detection work we were able to spot it and bring it forward. I'm sure it's happening right now other places in the state of Connecticut, and it will be a growing issue. It's one of the problems of the internet; it's hard to police. Why this product is legally saleable I have no idea. That's a federal question; the feds could really help here by making it a federal crime to even sell these on the internet or anywhere else.

Tax Administration
Abrams:

You're also the president of the FTA. Can you tell us about that?

Sullivan:

It's a great honor to lead the FTA. FTA is the organization for all of the state agencies, D.C and 2 cities that are members. Obviously many of us are not political appointees, I am, but others are not, so we don't lobby as such. We do inform debate in Washington. We mostly inform each other which is what's really useful about the group. There are four associations around the country that meet periodically as well as part of FTA. It's a chance to compare and contrast, catch up, and actually get some bright ideas. It's a little soulless once in a while. The first one I went to we were just beginning a budget slide in Connecticut during the first deficit and I was feeling very – Why did I take this? What could be worse than this? The person sitting next to me from Vermont, Mary Peterson, laid out what they were going through and it was so much worse than Connecticut and I felt great.

Abrams:

What else would you like to say to Connecticut taxpayers?

Sullivan:

I'd summarize by saying one should not presume an adversarial relationship between the tax collection world and the profit making world. We understand that it is important to have a system of taxation which is fair, equitable, understandable, and as simple as possible. That's probably not what we all have but it is a shared goal. The one thing I've always found interesting is having a conversation sometimes with business representatives who talk about fairness, equity, and simplicity and then propose the most convoluted exceptions to the rule that will benefit their particular entity. So hopefully though we do have an understanding that taxation has a role in economic competitiveness and I think that's one of the responsibilities of people like me, not just our economic development folks.

Abrams:

Thanks, Kevin. It's always good to talk to you.

Sullivan:

Likewise, Jeremy.

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