On September 13, Massachusetts issued a final regulation that
will require many "internet vendors" without traditional
"physical presence" in Massachusetts to collect and remit
sales and use tax, effective beginning October 1.1
Despite numerous comments and objections to the draft, the final
regulation is substantially similar to the proposed regulation
issued in July, and Directive 17-1 that was withdrawn in June. The
regulation represents yet another attempt by a state to work around
the U.S. Supreme Court's decision in Quill Corp v. North
Dakota, and to require remote sellers to collect tax from
sales to in-state customers.
A new Massachusetts regulation, effective October 1, takes the
position that many internet vendors have already created physical
presence in Massachusetts through the use of software, advertising
cookies, and other third-party contacts in the state, and can be
required to collect and remit Massachusetts sales tax without
overturning the "physical presence" requirement
reaffirmed by the U.S. Supreme Court in Quill.2
The regulation is sure to see immediate challenges, and remote
sellers that are not collecting Massachusetts sales and use tax
should follow those developments closely. If South Dakota's
litigation directly challenging Quill fails, the
"Massachusetts approach" could be the next method states
latch onto in their unsuccessful (thus far) decades-long quest to
remove the "physical presence" requirement for sales tax
collection.
On July 28, 2017, the Department issued Proposed Regulation 830
CMR 64H.1.7 (the "proposed regulation") that would
require "internet vendors" to collect and remit sales tax
on sales to customers in Massachusetts.5 The proposed
regulation largely tracked the Directive.6
The Department accepted written comments to the proposed
regulation, and held a public hearing August 24.7 In its
response to
public comments issued simultaneously with the final
regulation, the Department deferred to its analysis set forth in
the Directive as supporting its legal analysis as to the
regulation's validity. The Department also rejected comments
that it would be unrealistic for the Department to expect vendors
to be ready to collect and remit Massachusetts sales and use tax by
the October 1 effective date for the proposed regulation.
Tax obligations imposed on "Internet Vendors" with
sufficient contacts with Massachusetts
The regulation asserts that most internet vendors have physical
presence in Massachusetts through their own contacts or those of a
representative. Specifically, the following contacts can create
physical presence under Quill:
- In-state software
- In-state cookies
- Contracts with a content distribution
network ("CDN")
- In-state representatives
- Provision of additional services
beyond delivery
Any vendor that has the contacts with Massachusetts outlined in
the regulation would be required to collect and remit Massachusetts
sales tax for its sales to Massachusetts customers if two
conditions are satisfied during the prior calendar
year:8
- The internet vendor made $500,000 or
more in sales to Massachusetts customers completed over the
internet
- The internet vendor completed 100 or
more transactions that were delivered to Massachusetts
The approach taken by the Department in drafting the Directive
and the regulations that followed differs significantly from the
approach taken by other states, like South Dakota, that have
enacted "Kill Quill" bills. The Department of
Revenue takes the position that most remote internet vendors
already have sufficient contacts with Massachusetts to satisfy the
physical presence requirement under Quill, and are
obligated to collect Massachusetts sales tax regardless of whether
Quill is overturned.
By taking the position that most remote internet vendors already
have sufficient contacts with the Commonwealth to satisfy the
physical presence requirement of Quill, the
Department's approach reflected in the final regulations
potentially represents an even greater threat to remote sellers
than the "Kill Quill" statutes enacted by other
states because (1) its effectiveness is not contingent on the U.S.
Supreme Court actually granting certiorari in a nexus case and
deciding it in a manner that would overturn Quill; and (2)
it could mire any vendor seeking to challenge the constitutionality
of the regulation "as applied" in extensive discovery and
litigation, without resulting in an outcome that would provide
meaningful guidance for other vendors.
What's next?
While the Department has likely cured the administrative defects
of the Directive by promulgating the final regulation in accordance
the regulatory notice and comment requirements of the Massachusetts
APA, we still expect that some internet vendors (or organizations
representing such vendors) will challenge the final regulation as
violating the Commerce Clause, the Internet Tax Freedom
Act9 and the Due Process Clause of the United States
Constitution. It may take some time before these challenges make
their way through the Massachusetts administrative appeal process
to the courts. In the meantime, internet vendors will continue to
watch
South Dakota v. Wayfair, Inc., the case challenging that
state's "Kill Quill"
legislation.10
Footnotes
1 830 CMR 64H.1.7. Although the regulation was released
September 13, it will be unofficial until published in the
Massachusetts Register September 22.
2 504 U.S. 298 (1992).
3 Directive 17-1 (Apr. 3, 2017); Directive 17-2 (June 28,
2017). Following the publication of Directive 17-1, a suit was
brought by the American Catalog Mailers Association and NetChoice
in the Superior Court of Suffolk County alleging, among other
things, that the Directive violated the Massachusetts
Administrative Procedure Act ("Massachusetts APA") as a
regulation issued without the required notice and comment period.
On June 28, 2017, the same day that Directive 17-1 was withdrawn,
the Superior Court issued a memorandum of decision and order
granting summary judgment on the plaintiffs' claim that
Directive 17-1 was promulgated in a manner that violated the
Massachusetts APA. American Catalog Mailers Association and
NetChoice v. Heffernan, Superior Court Civil Action No.
2017-1772 BLS1 (June 28, 2017).
4 Directive 17-2 (June 28, 2017).
5 Proposed 830 CMR 64H.1.7.
6 See Notice of Public Hearing, August 24, 2017,
regarding 830 CMR 64H.1.7: Vendors Making Internet Sales available
here.
7 See Notice of Public Hearing, August 24, 2017,
regarding 830 CMR 64H.1.7: Vendors Making Internet
Sales.
8 For the period October 1, 2017 through December 31,
2017, the 12-month period October 1, 2016 through September 30,
2017 is used in lieu of the prior calendar year.
9 P.L. 105-277 (1998).
10 The Supreme Court of South Dakota issued a decision
September 14, 2017, striking down that state's "Kill
Quill" legislation. The state will likely appeal the
decision to the Supreme Court of the United States before the end
of the year. See our client alert on the
decision.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
