United States: Massachusetts Issues Proposed Regulation Imposing Sales Or Use Tax Obligations On "Internet Vendors" Beginning October 1

On July 28, the Massachusetts Department of Revenue (the "Department") issued Proposed Regulation 64H.1.7 (the "proposed regulation") that, if adopted, would require "internet vendors" to collect and remit sales tax on sales to customers in Massachusetts.  The proposed regulation comes in the wake of the Department's revocation of Directive 17-1.  See Directive 17-2 (June 28, 2017).  Directive 17-1 imposed obligations on internet vendors similar to those imposed by the proposed regulation, but did so outside of the formal regulatory process. A public hearing on the proposed regulation is scheduled for August 24, 2017.

"Internet vendor" is broadly defined in the proposed regulation to include vendors making sales over the internet, whether through the vendor's own website or through the website of a third party. The proposed regulation is yet another example of state efforts to enforce their sales and use tax laws in spite of the "physical presence" rule affirmed by the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  Unlike other state laws and regulations that directly attack Quill's physical presence rule, the proposed regulation asserts that internet vendors satisfy the physical presence rule by, among other things, owning or using software or cookies located on customer computers in the state.

Tax Imposed on Internet Vendors

The proposed regulation requires an "internet vendor" to collect and remit Massachusetts sales tax for its sales to Massachusetts customers if two conditions are satisfied during the prior calendar year:

  1. The internet vendor made $500,000 or more in sales to Massachusetts customers completed over the internet; and
  2. The internet vendor completed 100 or more transactions that were delivered to Massachusetts.

"Internet vendor" is broadly defined to include vendors making sales to Massachusetts customers over the internet, regardless of whether the sales were made through the vendor's website or through the website of a third party, such as a "marketplace facilitator." A "marketplace facilitator" "facilitates sales . . . through a physical or electronic marketplace" it operates. Earlier this year, both Minnesota and Washington enacted legislation imposing sales tax obligations on online marketplaces. Most recently, one chamber of the Pennsylvania Legislature passed legislation that would also impose sales tax obligations on online marketplaces.

Killing Quill or Within its Scope?

Massachusetts has taken a markedly different approach from the states attempting to "kill" Quill through laws or regulations openly defying the U.S. Supreme Court's "physical presence" rule. Instead of attacking Quill head-on, the Department asserts the proposed regulation does not violate Quill's physical presence rule. Rather, the Department asserts the proposed regulation falls within the scope of Quill, arguing that internet vendors are physically present in Massachusetts because they typically:

  1. Own or use software and "cookies" located on customer computers in Massachusetts;
  2. Have contracts or relationships with content distribution networks that use in-state servers or otherwise provide services in Massachusetts; and/or
  3. Make sales through marketplace facilitators or sales involving delivery companies that provide payment processing or fulfillment services.

When these contacts are considered, it appears that the Department's nexus theory derives, at least in part, from the United States Supreme Court decision in Tyler Pipe Industries v. Washington Department of Revenue, 483 U.S. 232 (1987).  Under Tyler Pipe, an out-of-state taxpayer can have nexus in a state if it hires a third party to engage in activities in the state that "establish or maintain a market" for the taxpayer's sales in the state.  Id. at 250.

The Department's interpretation of Quill and Tyler Pipe, although stated matter-of-factly, is not clearly constitutional. For example, the Department's assertion that ownership or use of software, including "cookies," distributed to and stored on computers of the vendor's Massachusetts' customers creates nexus, appears to ignore the fact that in Quill, the vendor owned software in North Dakota that was used by its customers. Although there was no question that the software was owned by the vendor, the U.S. Supreme Court held that its presence did not constitute "substantial nexus" under the Commerce Clause. In its hearing notice for the proposed regulation, the Department argues that there is a difference in scale between the software found to be present in North Dakota in Quill and the software that a large internet vendor may own or use in a state today.

Even assuming an internet vendor owning or using its own software in Massachusetts creates physical presence, the Department's nexus theory raises constitutional concerns. What if software used to make the sale belongs to a marketplace facilitator? The marketplace facilitator—not the internet vendor—has property in the state, and the proposed regulation would have the effect of imputing the marketplace facilitator's physical presence to the internet vendor. Or what if a Massachusetts resident customer is outside of Massachusetts when he or she places an order with a vendor through the marketplace facilitator's website or mobile application? In this scenario, the marketplace facilitator's software is not used in Massachusetts, but the proposed regulation would nevertheless impose a Massachusetts sales tax collection obligation of the vendor.

Broader Reach than Directive 17-1?

The proposed regulation appears have a slightly broader scope than Directive 17-1. The Directive asserted that "ownership and use" of software in Massachusetts constituted physical presence in Massachusetts. In contrast, the proposed regulation seems to go further by asserting that a vendor could have Massachusetts nexus based merely on having a "property interest" or "use" of software in Massachusetts. Thus, even if an internet vendor does not actually own or have a property interest in software (including cookies) located on a computer in Massachusetts, it could still have nexus as a result of the use of software owned by others on a computer located in Massachusetts.

The Internet Tax Freedom Act

In addition to addressing the Commerce Clause issues implicated by the proposed regulation, the Department asserts that the proposed regulation does not violate the Internet Tax Freedom Act ("ITFA").  P.L. 105-277 (1998).  ITFA prohibits the states from enacting "discriminatory" taxes on internet commerce. A "discriminatory tax" is defined in several ways, including as a tax on transactions consummated in e-commerce that is not imposed on equivalent transactions consummated through traditional commerce. The Department asserts the proposed regulation does not violate ITFA because the same transactions would be subject to tax regardless of whether they were consummated through e-commerce or traditional commerce. It seems likely that the Department included the discussion of the application of the standards set forth in the proposed regulation to traditional commerce in response to the declaratory action filed against Directive 17-1, which asserted that the Directive violated ITFA. In any event, the Department has made an ITFA challenge to the proposed regulations more difficult by expressly finding that the nexus standard set forth in the proposed regulation applies to non-internet vendors. However, there are very few cases (both at the state and federal level) adjudicating claims under ITFA, thus making it difficult to predict how a court would apply ITFA to the proposed regulation.

What's Next?

The Department's proposed regulation is markedly different from the "kill-Quill" legislation, and regulations adopted in other states, like South Dakota and Alabama. Whereas the laws and regulations adopted by other states have been premised on Quill's physical presence rule supposedly being outdated, the Department has taken a different approach by asserting that the proposed regulation is permissible because most large internet vendors have an in-state presence that satisfies Quill's physical presence rule. We expect other states may consider following the same approach as Massachusetts in justifying new legislation or regulation aimed at taxing internet vendors. In addition, with the rise of laws and regulations addressing online marketplaces, we expect future litigation to address restrictions on state taxing authority beyond the Commerce Clause, including ITFA and the Due Process Clause of the United States Constitution.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.