An internet seller based in Virginia is suing Massachusetts for attempting to tax its sales activities in the Bay State. Massachusetts maintains Crutchfield Corp. is liable for tax on its sales into the commonwealth under Massachusetts Department of Revenue (MDOR) regulation 830 CMR 64H.1.7, which took effect Oct. 1, 2017. Crutchfield disagrees and is suing the department rather than comply.
The regulation requires an out-of-state internet vendor not otherwise subject to tax to register, collect, and remit Massachusetts sales or use tax if:
- The vendor made $500,000 or more in internet sales into Massachusetts during the preceding 12 months; and
- The vendor made at least 100 separate sales for delivery into Massachusetts.
According to the complaint, in mid-September MDOR Commissioner Christopher C. Harding sent Crutchfield a letter asserting the company was required, by Oct. 1, 2017, “to register for, collect, and remit Massachusetts sales and use tax under the rule set forth in the Massachusetts Regulation.” Should Crutchfield fail to register and collect as required, it would be subject to penalties and interest “in addition to liability for the sales and use tax on such transactions.”
Crutchfield asserts the regulation “runs afoul of the Commerce Clause physical presence standard as set forth in Quill.” According to the United States Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a state can only impose a tax obligation on a business with a significant physical connection to (i.e., physical presence in) the state.
Physical presence redefined
Massachusetts acknowledges this conflict in the regulation but insists internet sales are substantially different from the catalog sales involved in the Quill case. For example, internet sellers:
- Have relationships with online marketplace facilitators and/or delivery companies that result in in-state services (e.g., order fulfillment, payment processing, returns assistance);
- Store ancillary data (e.g., cookies) and in-state software (e.g., “apps”) on computers, laptops, and handheld devices owned by Massachusetts residents; and/or
- Use in-state servers or other computer hardware.
Anticipating conflict, the regulation further maintains that it doesn’t conflict with the dormant Commerce Clause of the United States Constitution. Nor is it prohibited by the Internet Tax Freedom Act (ITFA), because “it asserts jurisdiction over all vendors,” not merely internet sellers.
Constitutionality, enforceability, and validity challenged
Rather than comply with the request to register and collect tax on its Massachusetts sales, Crutchfield Corp. is “challenging the validity, enforceability, and constitutionality of MDOR Regulation 830 CMR 64H.1.7” in court. It asserts the regulation creates an undue burden on interstate commerce, is preempted by the ITFA, and violates restraints on state authority under the federal dormant commerce clause as interpreted by Quill.
The suit also maintains Section 8.01-184.1(A) of the Code of Virginia entitles Crutchfield to “obtain a declaration in Circuit Court as to whether the requirement of another state imposing upon the business an obligation to collect and remit sales or use tax to that state constitutes an undue burden on interstate commerce in violation of the Commerce Clause of the United States Constitution.”
Massachusetts regulation widely disputed
Crutchfield isn’t the only retailer up in arms over the Massachusetts regulation, though it is the first to file suit against it. It may not be the last. The American Catalog Mailers Association (ACMA), which is dedicated in part to “fending off intrusive sales tax legislation,” has been working to raise funds from members to challenge the policy itself. ACMA and NetChoice (an ecommerce trade association) successfully blocked Directive 17-1, an earlier attempt by Massachusetts to tax sales by out-of-state internet vendors.
A level playing field needed
MDOR insists the regulation “has a firm legal basis” and is needed “to provide a level playing field for Massachusetts retailers.” As it’s working in concert with the Massachusetts Attorney General to defend its regulation, it’s offering no further comment at this time (Bloomberg BNA).
Massachusetts isn’t the only state striving to tax remote sales, though it was the first to base a tax obligation on the presence of web cookies. After the Bay State introduced Directive 17-1, Ohio and Rhode Island established similar policies. Many other states are working to tax remote sales via affiliate, click-through, and economic nexus laws.
Read What Economic Nexus Means for Your Remote Sales to learn more about state attempts to tax remote sellers.
For detailed information, the case is Crutchfield Corp. v. Harding, Va. Cir. Ct., No. CL17001145-00, filed Oct. 24, 2017, in the Albemarle County Circuit. Hat tip to Internet Retailer for providing the text of the complaint.