Supreme Judicial Court of Massachusetts Issues Ruling on Cookie Nexus

The Supreme Judicial Court of Massachusetts has issued a ruling in favor of the taxpayer in relation to 830 Code Mass Regs § 64H.1.7, a state rule regarding vendors making internet sales which would allow the Massachusetts Commissioner of Revenue to consider the use of cookies, apps, and content delivery networks (CDNs) while deciding whether a vendor was in or out of the State of Massachusetts- particularly important as this standard would be able to establish the Quill v North Dakota requirement of physical presence to impose tax responsibilities.

The Commissioner of Revenue argued that cookies, downloadable apps, and CDNs created the physical presence in Massachusetts required to enforce taxation laws under the Quill v. North Dakota standard. By using this standard, the audit division of the DOR sought to require US Auto Parts to register for, collect, and remit sales tax in Massachusetts. To further cement this claim, the Commissioner argued that the standard established by Wayfair v. South Dakota could be interpreted to retroactively require the enforcement of 830 Code Mass Regs § 64H.1.7 when it is applied to out of state vendors.

The Supreme Judicial Court first declined this interpretation of the Wayfair standard, highlighting that while the Wayfair decision was being considered, many states, including Massachusetts, submitted briefs received favorably by US Supreme Court claiming tax laws would not be applied retroactively.

The Supreme Judicial Court then considered if the cookies, apps, and CDNs themselves could create nexus under Quill v. North Dakota, which established a “bright-line” test for physical presence in the state. The Court noted that US Auto Parts had no physical presence in Massachusetts, only the digital ties, which the Appellate Tax Board found did not create sufficient presence. The Massachusetts Supreme Judicial Court deferred to the Appellate Tax Board, pointing to the fact that the Board is the expert on tax administration in the Commonwealth, and that the Court could only overturn the Board’s conclusion if it was unreasonable.

In judging the reasonableness of the Board’s decision, the Court then turned to the US Supreme Court, which had considered very similar circumstances while initially ruling on Quill, which determined that the minimal nexus created by licensed software did not create the physical presence which was required to establish nexus. Though the US Supreme Court did not specifically include cookies and similar digital ties in the Wayfair ruling, the Massachusetts Supreme Judicial Court notes the Supreme Court did strongly suggest cookies would not create the required nexus for taxation.

As a result, the Supreme Judicial Court of Massachusetts ruled for US Auto Parts, and against the Tax Commissioner, highlighting the Board had “correctly resolved the ambiguity in favor of the taxpayer”. (Supreme Judicial Court of Massachusetts, SJC- U.S. Auto Parts Network, Inc. vs. Commissioner of Revenue November 4, 2022- December 22, 2022. Opinion by Wendlandt, J)

UPDATE: Massachusetts has not appealed the decision in U.S. Auto Parts Network, Inc. vs. Commissioner of Revenue to the U.S. Supreme Court. As such, the decision in favor of U.S. Auto Parts is now final.

Posted on December 29, 2022