In Directive 17-1, the Massachusetts Commissioner of Revenue (“Commissioner”) adopts an administrative bright line rule requiring out-of-state Internet vendors to register, collect, and remit Massachusetts sales and use tax if the vendor meets certain economic threshold requirements. Similar to economic nexus legislation in other states for remote sellers, the new Massachusetts Directive requires Internet vendors that meet the following requirements to have the same tax collection duties as an in-state vendor: (i) for July 1, 2017 to December 31, 2017, if during the preceding 12 months it had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions; and (ii) for calendar years 2018 and after, if during the preceding calendar year it had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions.
In implementing its new bright line rule, the Commissioner defended its policy by distinguishing it from the precedent left by Quill Corp. v. North Dakota (“Quill”).1 The Directive argues that Internet vendors with significant Massachusetts sales are exploiting the state’s retail sales market through computer networks and other communication mediums. Further, such vendors have “purposefully availed themselves of the benefits of the state’s economic market” through its “continuous and widespread solicitation.” Internet vendors were not at issue in Quill, but rather mail-order businesses using common carriers for delivery into the state. The Internet was a mere concept in its infancy when Quill was decided in 1992. Citing to Justice Kennedy’s concurring opinion in Direct Marketing Assn. v. Brohl,2 the Commissioner contends that modern-day Internet vendors with a large amount of in-state sales have one or more contacts with Massachusetts that will create nexus. Such contacts include: (i) in-state software, browser, or web-based apps on customers phones and other personal devices, where customers order, shop, and review; (ii) enhancing customer sales through use of text data files or “cookies” which are stored locally on customers’ communication devices; (iii) use of content distribution networks (CDNs) which use local servers to enhance speed of websites; (iv) use of online marketplaces which offer a range of potential services for the benefit of the customer-vendor relationship; and (v) use of delivery services that exceed the common carrier delivery methods discussed in Quill, such as logistics services, order fulfillment, storage, returned sales processing, and order management.
Massachusetts joins several other states that have taken recent steps to enforce tax collection by remote sellers. Please see these earlier Ryan tax developments for further discussion on this topic: Hawaii Introduces Legislation to Enforce Collection by Remote Sellers, South Carolina and Minnesota Introduce Legislation in an Effort to Enforce Tax Collection by Remote Sellers, and New and Updated Information on States’ Legislative Efforts to Enforce Tax Collection by Remote Sellers.
Massachusetts, unlike the other states previously mentioned, has taken an administrative approach as opposed to a legislative approach in its attempt to diminish the reach of Quill. What is especially interesting about Massachusetts’ approach is its argument relating to web-based applications and cookies located on personal devices within the state. Such broad application would reach almost any modern-day Internet vendor. However, Massachusetts justifies this approach by balancing the nexus requirement with the sales amount and transaction amount threshold. It will be interesting to see if any other states follow this logic and/or approach. Ryan will continue to monitor e-commerce activity and will provide updates as developments occur.
1 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
2 Direct Marketing Assn. v. Brohl, 575 U.S. (2015); 135 S. Ct. 1124 (2015).