Hartford - Consciously or not, many of Connecticut's online shoppers are tax cheats.

State law requires that when residents buy electronics, books, pricey clothing and other goods over the Internet and aren't automatically charged the 6 percent Connecticut sales tax, they must self-report and pay that sales tax on their annual income tax returns.

State governments lack the authority to force all online retailers to levy the sales tax at checkout. So, unsurprisingly, most shoppers don't pay unless they're compelled to upfront.

Now for the second consecutive year, Connecticut lawmakers have proposed a way to recoup a portion of the online sales tax revenue that it's missing. Last year's effort ultimately withered in the legislature, but now the governor is on board.

Connecticut is estimated to lose nearly $57 million in unpaid online sales tax this year, according to a University of Tennessee report. The National Conference of State Legislatures expects states nationwide to lose $11.3 billion in 2012.

To recover that money, the bill in the General Assembly targets out-of-state Internet retailers who don't have a bricks-and-mortar presence in the state but use Connecticut-based affiliates.

These affiliates are generally website operators who link to the retailers and receive a small percentage of the referral sales. So, for example, if a person clicks on an Amazon ad on a locally operated website and makes a purchase, the local operator gets a cut.

The proposed legislation, modeled on a 2008 New York law, says that these retailers indeed have a firm presence or "nexus" in Connecticut by way of the affiliates. That point is crucial as a result of a 1992 U.S. Supreme Court ruling that forbid states from compelling sellers to collect sales taxes if the sellers lack an in-state physical presence.

Four more states since New York have adopted similar laws: Rhode Island, North Carolina, Illinois and Colorado. Like Connecticut, a handful of other states, including Massachusetts, are considering such sales tax measures.

The Connecticut legislature's Finance, Revenue, and Bonding Committee voted 38-14 on April 7 to move forward the sales tax bill, which is now on the House calendar. Gov. Dannel P. Malloy is banking on it passing. The latest version of his biennial budget plan anticipates $9.4 million in new annual revenue from the so-called "Amazon tax."

Amazon cuts ties

Proponents of nexus laws argue that they help level the playing field between actual shops, which must collect sales tax, and online retail giants such as Amazon, which oftentimes don't have to and can therefore offer discounts that Main Street stores can't. The bills also offer cash-strapped state governments the possibility of more sales tax revenue.

But there is a catch. In every state but one where the laws have passed, Amazon and other online retailers have responded by cutting ties with the affiliate marketers to avoid collection.

Amazon threatened to do just that in Connecticut last year when legislators debated a similar sales-tax bill. The finance committee also moved forward that bill, although the legislature didn't take it up. Representatives were fearful the bill could harm some businesses.

Rebecca Madigan, executive director of Performance Marketing Association, a trade group representing online affiliate marketers, said her organization observed that affiliates lose 25 percent to 35 percent of their revenue base when states pass a sales tax nexus law that retailers then react to.

The association estimates Connecticut has 2,800 online affiliate marketers.

"This legislation is supposed to try and gain new sales revenue for the state, but at the end of the day it doesn't at all because the out-of-state retailers simply stop advertising on affiliate websites in the state - therefore they don't have to collect sales tax, and the state collects no money," said Madigan, whose organization opposes such bills. "It happens everywhere, and there's no reason to think that it's not going to happen in Connecticut."

The one exception is New York. Amazon sued the state's department of taxation over the 2008 law, the first to invoke the nexus claim. The case, which compelled Amazon to keep its New York affiliates, is now in appeals court, and some regulators speculate that it could reach the U.S. Supreme Court.

Last month Illinois became the latest state to enact an Internet sales-tax law. Hours after Gov. Pat Quinn signed the bill into law, Amazon severed relations with thousands of its Illinois marketing affiliates, some of whom have since announced plans to leave the state.

In North Carolina two years ago, Amazon began cutting off affiliates a few weeks before the sales tax law was enacted, said Canaan Huie, general counsel for the state's department of revenue. Despite the initial setback, he said the state estimates it is now collecting about $10 million more each year because of the sales-tax law.

Huie said North Carolina expects to lose up to $190 million this year in unpaid online sales tax, "so the $10 million is not an insignificant amount - it's a start."

Not just Amazon

Kevin Sullivan, commissioner of Connecticut's Department of Revenue Services, said state legislators need to be aware that the sales tax bill will likely result in collateral damage to marketing businesses.

He does not think Connecticut will gain any significant revenue if the measure becomes law, "at least in the near term," as retailers respond by dropping affiliates.

The National Conference of State Legislatures also has concerns about the state-by-state approach to online sales tax collection legislation.

"Our concern is that when this bill goes before state legislatures, legislators have a misunderstanding that this deals with the problem," said Neal Osten, director of the conference's Washington office. "It's only a small amount of the revenue - it's only online sales that have affiliates in the state."

Altogether Connecticut collected $3.2 billion in sales tax last fiscal year. The amount from online retail wasn't calculated, as the Department of Revenue Services does not collect information on whether an item was purchased from the Internet.

The Office of Fiscal Analysis estimated that the 2010 sales tax bill would have raised $8.4 million to $9.3 million in revenue for Connecticut in the current fiscal year - as long as retailers wouldn't cut off affiliates.

Malloy's new budget anticipates $9.4 million in fiscal year 2012 and 2013 on the assumption that the bill will finally pass.

It remains a question whether the governor's projections can withstand an Amazon-led retailer retaliation.

"I hope that they don't do that - they may well - in which case we will make up the revenue by having those sales occur through others who are prepared to pick up the slack on a tax basis," said Benjamin Barnes, the governor's budget chief.

As the world's largest online retailer, Amazon received the most attention during this year's committee meetings on the bill. But online marketing advocates are more worried about smaller Internet retailers cutting affiliate ties.

"To our industry, it's not just Amazon, but it's the hundreds and hundreds of other retailers," Madigan said.

Tom Caporaso, president and chief operations officer of Middletown-based Clarus Marketing Group, testified last month before the finance committee in opposition to the bill.

He said in an interview that his company, which has advertising relationships with hundreds of retailers, would lose significant business if the bill passed and retailers severed ties with his firm.

"A couple of representatives said, 'We have to make a stand,' and that's hard for me to swallow," Caporaso said, whose company employees 22 people and hopes to hire three more this quarter.

A federal solution

State Rep. Elissa Wright, D-Groton, a vice chairwoman of the Finance Committee, voted in favor of the sales tax measure. She noted that the 1992 U.S. Supreme Court case that restricts states' ability to collect sales tax predates the era of Internet retailing.

"We need to modernize our sales tax systems to reflect the enormous growth of e-commerce," Wright said in an interview. "Common sense would dictate that if someone buys a product online, the same sales tax should be collected as if the sale had occurred in a store, in person."

Twenty-four states - but not Connecticut - have passed legislation that conforms their sales tax structure to the Streamlined Sales and Use Tax Agreement, which calls for simplified and unified state sales tax laws.

Scott Peterson, executive director of the Streamlined Sales Tax Governing Board Inc., said the project would support a federal measure that could give states that have simplified their sales tax structure more authority to collect the tax from Internet retailers.

"If you don't have the federal solution - a congressional solution - then you have the kind of solution you're seeing today: individual states who are going off and doing whatever they can think of in order to fix what they see is a problem," Peterson said.

U.S. Sen. Dick Durbin, D-Ill., has said he will soon introduce the Main Street Fairness Act that would force online retailers to collect sales tax in all states. Similar legislation was introduced last summer in the House of Representatives.

Barnes, the governor's budget chief, said he expects federal action on the sales tax issue in the next year or two.

"I hope that that's the case, and our efforts are ultimately rendered moot," he said of Connecticut's stab at ending the online sales tax holiday.

j.reindl@theday.com

Online sales tax

$9.3 million: The sales tax Connecticut could have collected in 2010.

$9.4 million: What Gov. Malloy's new budget anticipates collecting in 2012 and 2013.

- State Office of Fiscal Analysis