On April 3, 2017, the Massachusetts Department of Revenue issued a directive with economic nexus provisions for out-of-state internet sellers. It adopts an administrative bright line rule, instead of applying sales and use tax collection requirements on a case by case basis. Per the directive, an internet seller with a principal place of business located outside the state is required to register, collect and remit Massachusetts sales or use tax on sales into the state as follows:
The directive discusses Quill Corp. v. North Dakota and states that internet sellers with significant Massachusetts sales meets the statutory and constitutional standards that apply for purposes of the imposition of the commonwealth’s sales or use tax collection duty. In its discussion of what constitutes substantial physical presence under the Commerce Clause, the Directive distinguishes Large Internet Vendors from mail order vendors. Specifically, it considers software, apps and cookies that are typically used by internet sellers to be tangible personal property owned by the seller as substantial physical presence in the state. In addition, they consider Content Distribution Networks (CDN) providers that may be located in the state of Massachusetts to be performing local activities “on behalf of the vendor that are significantly associated with the vendor’s ability to establish and maintain a market” for its sales. When that activity takes place in Massachusetts it establishes an instate physical presence on behalf of such vendor.
Large Internet vendors may also utilize other persons as instate representatives that result in the creation of an instate physical presence. For example, large Internet vendors commonly sell goods through “online marketplaces.” These online marketplaces, which offer a range of potential services through employees or other contract personnel, benefit the client/vendor by, among other things, enhancing its name recognition and creating consumer confidence with respect to its products. These arrangements may vary in form. Many of these agreements allow the Internet vendor to post goods for sale on a website operated by the online marketplace, with orders and payment then processed through that website (with subsequent order fulfillment completed by the individual Internet vendor). Other agreements may provide for increased services by the employees or other personnel of the online marketplace, which may include order fulfillment, return processing, access to the online marketplace’s customer service team, and the preparation of sales reports or other analytics. In either instance, although the website maintained by the online marketplace on which the vendor’s products are sold is “virtual” some of the various services provided by the online marketplace in connection with the sale of the vendor’s products will be physical in nature. Because these latter, physical services operate to establish and maintain the Internet vendor’s market, these services, when performed in the state, will result in an Instate physical presence on the part of such vendor.
Also, large Internet vendors may utilize delivery services that exceed the type of delivery services that were evaluated by Quill. Quill held that a state could not impose a sales or use tax collection duty on vendors that limit their contacts with the state to the contacts of mail and common carrier. In contrast, large Internet vendors may utilize delivery services that provide not merely product delivery, but additional services that may include logistics, order fulfillment, storage, return processing and order management. In general, these additional services operate to enhance the vendor’s sales. Therefore, these services, when performed in the state, will result in an instate physical presence on the part of such vendor.
This is an expansive definition of substantial physical presence defined not through the legislative process but through a Department of Revenue Directive. The Department is making this a prospective position. It is very likely this will be challenged as economic nexus provisions in other states. We will monitor and update this news items with developments. (Directive 17-1: Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax, April 3, 2017)
UPDATE:The trade associations NetChoice and American Catalog Mailers Association have filed a motion for a preliminary injunction to enjoin the enforcement of Directive 17-1. NetChoice and the American Catalog Mailers Association are challenging the directive as being in violation of the Commerce Clause of the U.S. Constitution as interpreted by the Supreme Court in Quill v. North Dakota. They also claim that the directive is in violation of the Administrative Procedure Act and is barred by the Internet Tax Freedom Act. We will continue to monitor for developments. (American Catalog Mailers Association and NetChoice v. Michael J. Heffernan, in his capacity as the Commissioner of the Massachusetts Department of Revenue)
UPDATE: On June 28, 2017, the Massachusetts Department of Revenue issued Directive 17-2, which revokes Directive 17-1: Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax, effective immediately. The Department of Revenue anticipates proposing regulations which would require large Internet vendors to collect Massachusetts sales and use tax on a prospective basis under standards similar to those in Directive 17-1. The regulatory proposal will be based upon legal rationale similar to that in Directive 17-1. (Directive 17-2: Revocation of DD 17-1 In Anticipation of a Proposed Regulation)