United States: Massachusetts DOR Announces Bright-Line Sales Tax Nexus Standard For Remote Internet Vendors

On April 3, 2017, the Massachusetts Department of Revenue issued a directive advising taxpayers that it has adopted an administrative bright-line rule that will require out-of-state Internet vendors to collect sales or use tax if they meet certain sales and transaction thresholds.1 Under the rule, which is effective July 1, 2017, an Internet vendor with a principal place of business located outside Massachusetts will be required to register, collect and remit sales or use tax on its Massachusetts sales if during the preceding year it had over $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in at least 100 transactions.

Bright-Line Nexus Standard

Directive 17-1 provides guidance on how the Massachusetts general sales and use tax jurisdictional standard2 applies to Internet vendors, and how such application complies with the Due Process and Commerce Clauses of the U.S. Constitution. In the Directive, the Department explains that, in lieu of applying the state's sales and use tax collection requirements on a case-by-case basis, it has chosen to adopt, for clarity and administrative simplicity, an administrative bright-line rule.

Economic Presence

Under the administrative bright-line rule, an Internet vendor with a principal place of business located outside Massachusetts is required to register, collect and remit Massachusetts sales or use tax on its Massachusetts sales3 as follows:

  • For the six-month period, July 1, 2017 to December 31, 2017, if during the preceding 12 months, July 1, 2016 to June 30, 2017, it had in excess of $500,000
  • in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions.
  • For each calendar year beginning with 2018, 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.

After establishing this rule, the remainder of the Directive explains how the rule complies with both state law and the requirements of the Due Process Clause and the Commerce Clause as provided by the U.S. Supreme Court in Quill Corp. v. North Dakota.4

Constitutionality of Bright-Line Standard

The Directive identifies two criteria that an out-of-state Internet vendor must meet in order to be subject to a sales or use tax collection duty in Massachusetts. Specifically, a vendor that is engaged in making taxable sales in Massachusetts or that sells taxable products for use in Massachusetts will be subject to a sales or use tax collection duty in the state if it is "engaged in business in the commonwealth" as defined under Massachusetts law and meets the constitutional standards set forth in Quill.

Engaged in Business in the Commonwealth

A Massachusetts statute lists a series of activities that will cause a vendor to be "engaged in business in the commonwealth" for purposes of the state's sales or use tax collection requirements.5 Under this statute, a vendor is "engaged in business in the commonwealth" if it "regularly or systematically solicit[s] orders for the sale of services to be performed within the commonwealth or for the sale of tangible personal property for delivery to destinations in the commonwealth" or "otherwise exploit[s] the retail sales market in the commonwealth through any means whatsoever, including, but not limited to, salesmen, solicitors or representatives in the commonwealth . . . [and] computer networks or . . . any other communications medium." Relying on this definition, the Directive explains that an Internet vendor with significant Massachusetts sales is "engaged in business in the commonwealth" because it exploits the state's retail sales market through "computer networks" and "other communications medium."

Quill Corp. v. North Dakota

Turning to the second criteria, the Directive explains that, under Quill, a sales or use tax collection duty imposed upon a mail order vendor will be valid if it meets the requirements of both the Due Process Clause and the Commerce Clause.

For due process purposes, under Quill, the state sales or use tax jurisdictional standard is met when a vendor "purposefully avails itself of the benefits of an economic market in the forum State." This requirement is satisfied when a vendor is "engaged in continuous and widespread solicitation of business within a State." The Directive explains that an Internet vendor with significant Massachusetts sales has "purposefully availed itself of the benefits of the state's economic market" by engaging in "continuous and widespread solicitation of business" in the state.

Turning its focus to the Commerce Clause, the Directive explains that the foundation of the Quill decision rested on National Bellas Hess, Inc. v. Department of Revenue,6 which held that a mail order vendor could not be made subject to a state's sales or use tax collection duty when it limited its in-state contacts to mail and a common carrier. According to the Directive, the decision in Quill to re-affirm Bellas Hess was driven by the doctrine of stare decisis. Mail order vendors had relied on the Bellas Hess decision, and according to the Directive, stare decisis "applies with greater force when a taxpayer has reasonably relied upon a prior Supreme Court precedent."

Following its Quill analysis, the Directive draws a clear distinction between the mail order vendors found in Quill and Internet vendors, noting that Internet vendors were not the subject of Quill and Internet commerce was an unknown phenomenon at the time of the case. The Directive notes that while Quill addressed the physical presence standard in the context of mail order vendors, it did not otherwise define "physical presence." According to the Directive, Quill stands for the proposition that the existence of a vendor's in-state physical presence is to be evaluated on a case-by-case basis, as "informed by the Supreme Court's precedent." The Directive explains that Quill made clear that physical presence includes situations where a vendor owns, leases or licenses in-state property, or relies upon one or more in-state representatives "to establish and maintain a market" in the state for its sales.

Activities Establishing Physical Presence

Applying its Quill analysis to Internet vendors, the Directive explains that large Internet vendors7 will have contacts with the state, beyond mail and common carrier, which will constitute an in-state physical presence. The Directive identifies several activities that create in-state physical presence.

First, large Internet vendors have software that is downloaded on an in-state customer's computer to make shopping easier. Under Massachusetts sales tax laws, software is considered tangible personal property.8 Furthermore, this software resides pervasively on nearly all in-state customers' computers or devices and is crucial to the vendor's in-state business activities. Given that Quill held that title to a few floppy diskettes represented "slightest presence,"9 the Directive reasons that a large Internet vendor's ownership of in-state software "would apparently" result in in-state physical presence under Quill.

The Directive also notes that large Internet vendors utilize cookies that are stored on their customers' computers and communication devices when the customers visit the vendor's Web site. These cookies are not software but serve a similar purpose, which is to enhance and facilitate sales. The Department explains that the ownership and use of these in-state cookies by a vendor constitutes in-state business activity that, like the in-state software, distinguishes such vendors from the mail order vendors found in Quill.

The Department also noted that large Internet vendors contract with providers of content distribution networks (CDNs) to use local servers to accelerate the delivery of their Web pages to their customers. According to the Directive, these CDNs perform activities for the vendor that "are significantly associated with the [vendor's] ability to establish and maintain a market" for its sales and, as a result, establish an in-state physical presence on behalf of the vendor. The Directive also addresses how the use of online marketplaces and delivery services by a large Internet vendor constitutes an in-state physical presence for the vendor.


With this Directive, Massachusetts follows the state trend of challenging the physical presence requirement of Quill, in the absence of more recent court decisions evaluating Quill or federal legislation on the subject. Following the lead of Wyoming,10 South Dakota,11 Vermont,12 Tennessee13 and Alabama,14 Massachusetts relies upon a bright-line standard to impose a sales tax collection requirement on certain remote sellers. However, this bright-line approach to sales tax nexus remains controversial and its constitutionality is being challenged. A South Dakota court has held that the state's bright-line standard in its sales tax nexus law is unconstitutional.15 Also, the Tennessee Chancery Court recently suspended enforcement of the state's bright-line nexus rule.16

The Directive is an interesting and novel approach that substantially differs from the methods used by the other states to implement a bright-line standard. Rather than promulgating new regulations or enacting legislation, Massachusetts has chosen to interpret existing law in a way that purportedly complies with the constitutional requirements set forth in Quill. The Directive is essentially a roadmap that provides the Department's reasoning for implementing an economic nexus standard. The Department's argument hinges on the premise that the business and activities of Internet vendors are factually and legally distinguishable from those of the mail order vendors found in Quill. By distinguishing itself from Quill in this manner, Massachusetts provides support for the supposed constitutionality of its bright-line test which relies on a large Internet vendor's use of "computer networks" and "other communications medium" to establish physical presence. It should be said, however, that while the Department's policy in this area has now been published, it is uncertain as to how much revenue this policy will bring to the state if such policy ultimately survives the constitutional challenges already being faced in other states dealing with this issue.

The Department points to a large Internet vendor's use of cookies as a rationale to establish physical presence. However, the problem that arises with this argument is that cookies are not software and the Department readily acknowledges this in the Directive.17 When the state began taxing electronically transferred software/software as a service (SaaS), e-software was placed in the same category as tangible software (e.g. CDs), with the state indicating that both formats would be considered tangible property. It appears that the Department is utilizing the same type of reasoning with cookies in order to conclude that the physical presence standard may be reached merely through the prevalent use of cookies. As cookies are not tangible property, however, using that isolated connection to Massachusetts to proclaim that physical presence has been met appears likely to be challenged.

Another issue to consider is whether the Massachusetts bright-line test contained in the Directive may violate the Internet Tax Freedom Act (ITFA).18 The ITFA places restrictions on the ability of states to tax Internet access or impose multiple or discriminatory taxes on electronic commerce.19 Illinois addressed the potential applicability of the ITFA in this situation in 2014 when it amended its sales and use tax click-through nexus statutes20 after the Illinois Supreme Court invalidated the original statutes due to the federal prohibition against discriminatory state taxes on electronic commerce contained in the ITFA.21 Specifically, under the original statute, electronic commerce transactions were treated differently than transactions that were not conducted electronically.

It is too early to tell whether the language of the Directive violates the ITFA. Under the ITFA, a "discriminatory tax" includes "any tax imposed by a State or political subdivision thereof on electronic commerce that-- . . . imposes an obligation to collect or pay the tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means."22 Thus, if it can be shown that the Directive treats transactions performed by Internet vendors differently than other vendors, then the Directive may violate the ITFA. According to the Department, Directives "concern current Department policy, practice or interpretation, and provide details or supplementary information, clarify ambiguities, resolve inconsistencies or explain and elaborate on issues."23 If the Directive is an interpretation of underlying law as applied to one specific type of vendor, Internet vendors, it is possible that the underlying law may treat Internet vendors differently from other vendors.


1 Directive 17-1, Massachusetts Department of Revenue, April 3, 2017. According to the Massachusetts Department of Revenue's Web site, a "Directive states the official policy of the Department, has the status of precedent unless revoked or modified, and may be relied upon by taxpayers in situations where the facts, circumstances and issues presented are substantially similar to those in the Directive." Note that the Directive terms this bright-line nexus standard as a "rule," but it is not an official administrative rule or regulation.

2 The sales and use tax nexus standards are provided by MASS. GEN. LAWS ch. 64H and 64I.

3 For purposes of the Directive, "Massachusetts sales" is defined as all sales made by the vendor of tangible personal property or services delivered into the state, however consummated. 

4 504 U.S. 298 (1992).

5 MASS. GEN. LAWS ch. 64H, § 1. 

6 386 U.S. 753 (1967).

7 The Directive defines "large Internet vendors" as modern-day Internet vendors with a large volume of in-state sales.

8 See the definition of "tangible personal property" in MASS. GEN. LAWS ch. 64H, § 1.

9 "Quill recognized that 'title to a few floppy diskettes present in a State might constitute some minimal nexus' but concluded that 'the existence in [a state] of a few floppy diskettes to which [the vendor] holds title' does not result in nexus because it would represent a mere de minimis or 'slightest presence.'" Citing Quill, 504 U.S. at 315 n.8. 

10 Ch. 85 (H.B. 19), Laws 2017.

11 S.D. CODIFIED LAWS §§ 10-64-1 to 10-64-9, as enacted by S.B. 106, Laws 2016. For a discussion of this legislation, see GT SALT Alert: South Dakota Enacts Legislation Challenging Quill's

12 H. 873, Laws 2016. For a discussion of the Vermont legislation, see GT SALT Alert: Vermont

13 TENN. COMP. R. & REGS. 1320-05-01-.129.

14 ALA. ADMIN. CODE R. 810-6-2-.90.03. For a discussion of this regulation, see GT SALT Alert:

15 South Dakota v. Wayfair, Inc., No. 32CIV16-000092 (S.D. 6th Cir. Ct.), order granting defendants' motion for summary judgment, March 6, 2017. For a discussion of this case, see GT SALT Alert:

16 American Catalog Mailers Ass'n v. Tennessee Department of Revenue, Tennessee Chancery Court, No. 17- forcement of Rule 129, April 10, 2017.

17 the state and serve to facilitate such vendor's in-state sales."

18 Pub. L. Nos. 105-277, 114-125.

19 For a discussion of the ITFA, see GT SALT Alert: President Obama Signs Legislation Making

20 P.A. 98-1089 (S.B. 352), Laws 2014, effective Jan. 1, 2015.

21 Performance Marketing Association, Inc. v. Hamer, 998 N.E.2d 54 (Ill. 2013). See also GT SALT Alert:

22 114-125.

23 Massachusetts Department of Revenue's Web site. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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