Massachusetts may soon require remote vendors and marketplace facilitators to collect sales tax

Update 2.27.2019: Two bills seeking to impose a sales tax collection obligation on marketplace facilitators are under consideration in the Massachusetts Legislature, SD 1701 and SD 2030.  The first sets an economic nexus threshold of $100,000 in the current or previous calendar year; SD 2030 sets a threshold of $250,000 during the prior 12-month period.

Massachusetts Governor Charlie Baker has unveiled a plan to “modernize” sales tax in the Bay State. It would require remote retailers with substantial economic activity in the state to collect and remit sales tax, and marketplace facilitators to collect and remit sales tax on behalf of their third-party vendors. The proposal would also shorten the time between collection and remittance for some vendors, and allow certain non-collecting vendors to register and collect on a prospective basis only, without penalty.

The governor says these changes will streamline revenue collection and level the playing field for “‘Main Street’ retailers across Massachusetts.”

Economic nexus

Until recently, all states lacked the authority to impose a sales tax collection obligation on businesses with no physical presence in the state. However, on June 21, 2018, the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. The court found a business’s “economic and virtual contacts” with a state to be a sufficient basis for nexus. Basing a sales tax collection obligation on economic activity is known as economic nexus.

More than 30 states have adopted economic nexus since the Wayfair ruling, and Massachusetts seeks to do the same with House 1 (section 36). It would impose economic nexus on remote retailers whose sales into the state “exceed a threshold set by the commissioner.” The measure doesn’t specify the Massachusetts sales threshold other than to say it “shall not be less than $100,000,” and it doesn’t provide an effective date.

Tax collection obligation for marketplace facilitators

To ensure sales tax is collected on all marketplace sales in the Commonwealth, H1 (sections 34 and 36–39) would impose a sales tax collection obligation on platform providers, aka marketplace facilitators.

A growing number of states are adopting marketplace facilitator sales tax laws because many marketplace sales go untaxed under existing sales tax laws, even new economic nexus laws. Though some marketplace facilitators do collect and remit tax on behalf of third-party sellers, others don’t; the latter insist they’re not responsible for sales tax collection on these transactions because they’re not the actual seller.

Not all marketplace facilitators would be required to collect and remit Massachusetts sales tax on behalf of their sellers; the obligation would apply only to marketplace facilitators whose sales into the state “exceed a threshold set by the Commissioner of the Department of Revenue.” As with the economic nexus provision, the exact amount and effective date are to be determined.

Registration program (and free pass) for remote vendors

Section 69 of H1 authorizes the Department of Revenue to establish a registration program for non-collecting remote vendors with less than $500,000 in Massachusetts sales in the previous 12 months, provided their only physical tie to Massachusetts in the previous 36 months was through:

• Inventory stored in the state in facilities owned or operated by a marketplace facilitator; or
• Internet sales made to Massachusetts customers (due to the state’s cookie nexus law).

Such vendors who register with the department and commence the collection and remittance of Massachusetts sales tax, on a prospective basis, by a yet-to-be-determined date, would not be held liable for sales tax liability incurred prior to registration. In short, it’s a free pass from past sales tax liability (not future liability).

This program would be closed to non-collecting vendors that:

• Had a physical presence in the commonwealth in the 36 calendar months immediately preceding the effective date of H1
• Had at least $500,000 in total retail sales (taxable or exempt) to Massachusetts customers during the prior 12-month period
• Were previously registered to collect sales and use tax in Massachusetts
• Have previously collected but not remitted Massachusetts sales or use tax
• Have “engaged in fraud or willful avoidance of tax” in Massachusetts

Relief from past income tax liability

As an additional perk, the commissioner “may authorize prospective registration and filing for personal income tax and corporate excise for qualifying vendors in the sales and use tax program, provided that any such personal income tax or corporate excise liability derives solely from the sales to which the sales and use tax registration program applies.” In other words, the commissioner wouldn’t go after those businesses for past income or corporate excise tax liability.

Sales tax modernization

Finally, H1 (sections 25–26) would shorten the time between the collection and remittance of sales tax. This would give Massachusetts a one-time revenue boost in the 2020 fiscal year.

Section 25 of the bill allows the Massachusetts Department of Revenue to require vendors to file returns for sales and use tax, local option meals excise tax, and room occupancy tax within 30 days. The bill originally called for returns to be filed within 20 days, but then more time was allowed.

Section 26 allows the department to require vendors to remit, within a prescribed period of time, an initial payment of sales and use tax, local option meals excise tax, and room occupancy tax. Failure to remit as required would lead to a penalty of 5 percent of the underpayment.

The early payments imposed by section 26 wouldn’t apply to vendors that remitted $100,000 or less in the applicable taxes in the previous 12-month period. Gov. Baker has proposed daily sales tax remittance in the past, to no avail.

H1 was referred to the House Ways and Means Committee on January 24, 2019.

Cookie nexus

Massachusetts already taxes sales by remote internet vendors with more than $500,000 in Massachusetts sales and at least 100 transactions for delivery into Massachusetts during the preceding calendar year. The threshold includes both taxable and exempt sales, as well as sales made through a website operated by a third-party (e.g., marketplace transactions). This so-called cookie nexus requirement took effect October 1, 2017. See the Massachusetts Department of Revenue for additional details.

It’s becoming increasingly difficult to keep up with states’ remote sales tax requirements. Avalara’s state-by-state guide to sales tax nexus can help you determine where you may be at risk for developing a sales tax collection obligation.