Massachusetts has joined the growing number of states that have implemented a sales tax collection obligation for out-of-state retailers. On April 3, 2017, the Massachusetts Department of Revenue issued a directive announcing that the Department is adopting an “administrative bright-line rule” for sales tax collection requirements for Internet vendors (Directive 17-1). Effective July 1, 2017, an Internet vendor with a principal place of business located outside of Massachusetts is required to collect the state’s sales tax if it had in excess of $500,000 in Massachusetts sales or 100 or more transactions with Massachusetts customers in the preceding 12 months.
On its face, the Directive appears to continue the trend of requiring remote sellers to collect sales tax merely due to a certain threshold of in-state sales being met. Besides Massachusetts, the most recent state to adopt a bright-line “economic nexus” standard for sales tax collection is Wyoming, where Gov. Matt Mead signed a bill establishing a sales tax collection threshold of $100,000 of annual sales or more than 200 sales to Wyoming customers. Similar rules have been passed in Alabama, South Dakota, and Tennessee, with the South Dakota rule likely headed to the state’s highest court.
However, Massachusetts’ strategy appears to be slightly different from the others states. Legislation passed in the other states require sales tax collection by retailers with no in-state physical presence, which is clearly at odds with the nexus standard established by the U.S. Supreme Court in the 1992 case of Quill Corporation v. North Dakota. The presumed strategy of the states enacting such provisions is to have the issue taken up by the courts in light of the failed attempts by Congress to address the issue through federal legislation.
Rather than attacking Quill head on, Massachusetts is attempting to distinguish what constitutes a physical presence for a mail order retailer as opposed to an Internet retailer. The ruling in Quill addressed the sales tax collection obligation of a mail order retailer, and concluded that the court’s bright-line “physical presence” standard was not met by a retailer whose only connection with customers in a taxing state is by common carrier or the United States mail. The Massachusetts Directive reasons that the business activities of Internet retailers are factually distinguishable from the business of mail order retailers because Internet retailers do not limit their contacts with the state to mail and common carriers. The directive concludes that Internet retailers have a physical presence in Massachusetts because (1) retailer-owned software is affirmatively downloaded through the use of “native” or “mobile” apps or downloaded by a customer’s general use of the retailer’s website; and (2) retailer-owner proprietary cookies are placed on their customers’ computers and devices.
The troubling nature of the Directive is it seems to ignore that the Quill decision concluded that a sufficient physical presence was not established through mailings made into the state that were owned by the retailers. The in-state mailings did establish some existence of a physical presence for the mail order retailer, but it was not sufficient in the eyes of the Court. Any software and cookies that are downloaded by an in-state customer seemingly serve the same purpose as a mailed catalog. The analogous nature of mailed catalogs and downloaded software arguably should result in the same non-sufficient physical presence as concluded in Quill. Whether online retailers abide by this directive is yet to be seen. If the developments in other states are any indication, the issue of remote seller sales tax collection could very well be litigated in Massachusetts in the near future. It seems that it is only a matter of time before the U.S. Supreme Court will be forced to address the issue again.
If you have any questions regarding your sales tax collection obligations, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.