Massachusetts Rules That Wayfair Cannot Be Applied Retroactively

As reported earlier, the Massachusetts Supreme Judicial Court agreed to a direct review of U.S. Auto Parts Network, Inc. v. Commissioner¹ to determine the application of the state’s “cookie nexus” regulation, which was in effect for two years from October 1, 2017 until October 1, 2019. The state’s economic nexus statute modeled on the Wayfair² decision became effective on that ending date, replacing the regulation.

Last year, the Massachusetts Appellate Tax Board (ATB) overturned the Department of Revenue’s (“the Department’s”) decision in U.S. Auto Parts, requiring the collection of sales tax for tax periods prior to the Supreme Court’s Wayfair decision. Previously, the Department ruled that placing cookies and apps on Massachusetts customers’ computers and using third-party content delivery networks with servers in Massachusetts created sales tax nexus for U.S. Auto Parts under Massachusetts’ “cookie nexus” standard. The ATB, however, disagreed with the Department and concluded that despite the complexity involved in defining physical presence, the cookies, apps, and content delivery networks in the state did not constitute physical presence nexus. The ATB also ruled that the Wayfair decision would not be applied retroactively to the tax periods at issue. The Department appealed the case to the Massachusetts Court of Appeals, and U.S. Auto Parts then applied for direct review by the Massachusetts Supreme Judicial Court. 

This week, the Supreme Judicial Court issued its ruling concluding that the Commissioner of Revenue could not apply the new nexus rules instituted after Wayfair to apply retroactively to the years at issue in this case. The Court further concluded that what the Commissioner described as “electrons” in the Commonwealth does not satisfy the applicable physical presence test to require collection of sales and use tax. 

It should be noted that the Court’s decision only addressed the tax years between October 2017 and October 2019, before new regulations were in place to follow the Wayfair decision.

¹ MA Ct App. No. 2022-P-0194.

² South Dakota v. Wayfair Inc. 138 S. Ct. 2080 (2018). 

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