Massachusetts: Department of Revenue proceeds with proposed nexus regulation

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On Aug. 24, 2017, the Massachusetts Department of Revenue held a public hearing on a proposed regulation titled Vendors Making Internet Sales. This is intended to replace Directive 17-1, which the department issued on April 3, 2017, and subsequently revoked, via Directive 17-2, for lack of compliance with the standard rule-making process, and more particularly, the public notice requirement.

Directive 17-1 was controversial in part because it subjected internet retailers to taxation even when they do not have the standard physical presence in the state, if they made in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions. But the directive went a step further by subjecting these remote retailers to the state’s tax laws when they installed in-state software, also referred to as “apps,” and ancillary data, including cookies, on in-state customers’ devices.

The general rule with respect to sales volume and number of delivery transactions remains the same in the new proposed regulation. Likewise, the software provision remains intact, despite the Dormant Commerce Clause doctrine of the U.S. Constitution, on the grounds that “Internet vendors with a large volume of in-state sales invariably have… contacts with the state that function to facilitate or enhance the vendor’s in-state sales and constitute the requisite in-state physical presence.”

Cookies are defined as the following:

[T]ext data files generally used by an Internet vendor to enhance its customer sales [that are] stored locally on computers and physical communications devices of the customers of an Internet vendor when such customers visit the vendor’s website for the first time and act to identify the customer on each subsequent visit.

The “contacts with the state” in the proposed regulation that trigger nexus are:

  1. Property interests in the above-mentioned apps and cookies.
  2. Contracts and/or other relationships with content distribution networks resulting in the use of in-state servers and/or the receipt of other related in-state services.
  3. Contracts and/or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services.

The Vendors Making Internet Sales rule is set to take effect on Oct. 1, 2017.

In a comment on its website about the new proposed regulation, the Retailers Association of Massachusetts characterizes the state’s remote nexus provision as a “unique approach” to satisfying the physical presence requirement. The group approves, noting that is has “long advocated for the Department of Revenue to take a more aggressive approach in going after online sellers that fail to collect and remit” sales and use taxes.

On the other hand, entities representing internet sellers, like Netchoice and the American Catalog Mailers Association (ACMA), oppose remote nexus laws like this one. To this end, the ACMA has established a Quill Defense Action Fund, named for the 1992 Supreme Court case Quill Corp. v. North Dakota. Featuring an out-of-state mail-order vendor as the plaintiff, Quill held that a remote seller without a physical presence in North Dakota is not subject to the state’s use tax collection duty. The ACMA’s Quill Defense Action Fund asserts that it “challenges rogue states attempting to unilaterally rewrite exiting Supreme Court precedent by suing state governments seeking to unilaterally (and unlawfully) impose tax liabilities on companies that have no physical presence.” 

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