Massachusetts Cookie Nexus Challenged

In the US Supreme Court decision, South Dakota v. Wayfair, it was made clear that taxing sales from out-of-state sellers cannot be applied retroactively and electronic cookies do not constitute physical presence according to the Massachusetts Appellate Tax Board in a recent ruling. The Massachusetts Department of Revenue (DOR) recently attempted to impose a use tax remittance and collection responsibility in the form of an assessment on U.S. Auto Parts relating to taxability under its cookie nexus regulation (Internet Vendor Rule) for the periods prior to June 2018. U.S. Auto Parts is a California based company that did business in Massachusetts prior to the Wayfair decision. However, their business in the state was “limited to the placement of “cookies” and “apps” on the computers and portable devices of its Massachusetts customers.” The State DOR argued the presence of such cookies and apps created physical presence. The Massachusetts Appellate Tax Board ruled in favor of U.S. Auto Parts and granted the company an abatement in the amount of $60,139.81 citing affirmation for Wayfair and Quill.

The Massachusetts Appellate Tax Board’s decision should be noted for companies who were making sales to Massachusetts customers prior to Wayfair and who may have been subject to imposition of the cookie nexus rule as they should consider their facts and whether pursuing a refund is warranted. (Massachusetts Appellate Tax Board, U.S. AUTO PARTS NETWORK, INC. v. COMMISSIONER OF REVENUE, December 7, 2021)


UPDATE: Massachusetts Supreme Judicial Court agreed to review a state tax board decision that nullified a sales tax nexus rule retroactively applied by the state tax agency that predates the precedent-setting Supreme Court’s Wayfair ruling. On Thursday, May 12, 2022, Appellee U.S. Auto Parts Network, Inc requested the Supreme Judicial Court for direct appellate review of the Appellate Tax Board’s ruling in its favor. In March 2022, the Department of Revenue (Department) filed an appeal with the state Appellate Tax Board which overturned a $60,000 use tax assessment issued under the department’s “cookie nexus” rule. The Board agreed with U.S. Auto Parts that the company’s cookies, apps, and use of third-party delivery network in Massachusetts did not qualify nor constitute physical presence under the Supreme Court’s 1992 decision in Quill v. North Dakota, which upheld the physical presence threshold that Wayfair had defied. The justices left “no doubt” that an internet retailer’s virtual presence was not a physical presence in a state, therefore the Department could not apply its regulation for tax periods before Wayfair, according to the Board. The head of the Department argued before the Board that Wayfair’s elimination of the physical presence threshold allowed Massachusetts to pursue retroactive tax assessments. The Board, however, was skeptical of those allegations, emphasizing the judge’s emphasis on South Dakota Law. Stated in the Board Decision, “it clearly articulated that an out-of-state Internet ATB 2021-409 vendor’s virtual presence does not satisfy the Quill physical presence rule and, therefore, it overruled Quill and allowed states, on a prospective basis, to impose a collection and remittance obligation on such vendors.” For the reasons stated above, the Board ruled in favor of the appellant and granted a $60,139.81 abatement plus statutory additions. (COMMONWEALTH OF MASSACHUSETTS APPELLATE TAX BOARD, Board Decision, effective May 12,  2022)

Posted on June 13, 2022