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Massachusetts new internet seller tax challenged


 Massachusetts is being sued over its new requirement that large out-of-state vendors collect sales or use tax.

Just weeks before it is set to take effect, a Massachusetts Department of Revenue directive requiring large internet retailers to collect and remit Massachusetts sales and use tax is being challenged by NetChoice and the American Catalog Mailers Association (ACMA), industry associations of ecommerce businesses and catalog marketers, respectively.

The directive

Department of Revenue Directive 17-1 taxes sales by out-of-state internet vendors that sell more than $500,000 worth of taxable goods in Massachusetts annually in at least 100 transactions. It asserts that online sales are different from catalog, mail-order, and phone sales, in part because of the “almost instant access” to retailers the internet provides. Because of the internet, “a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.”

With this policy, Massachusetts believes it is working within the framework upheld by the Supreme Court of the United States in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Quill held that a state cannot impose a tax obligation on a business unless it has a substantial connection to the state (nexus), defined as a physical presence. The directive capitalizes on the fact that Quill preceded the birth of ecommerce. Specifically, it posits that large internet vendors have a physical presence in Massachusetts because they:

  • Often own software that’s downloaded and used by in-state customers on their computers and communications devices
    • Software is subject to sales tax in Massachusetts
  • Enhance their customer sales through the complementary use of text data files, or “cookies,” which:
    • Are stored on customers’ computers and communication devices when they visit the vendor’s website
    • Facilitate in-state sales
  • Routinely contract with content distribution network (CDN) providers and use local servers to accelerate content delivery
  • May have a presence in Massachusetts through in-state representatives or online marketplaces
  • May utilize delivery services not evaluated by Quill, such as order fulfillment or return processing

The argument against the Massachusetts policy

ACMA and NetChoice claim the directive is “invalid and unenforceable” because it violates the following:

  • The Administrative Procedure Act (it was published with no advance notice)
  • The federal Internet Tax Freedom Act (it discriminates against internet sellers)
  • The limits on state taxing authority under the U.S. Constitution, including the Due Process Clause, and the Commerce Clause as interpreted by the Supreme Court in Quill v. North Dakota (it taxes out-of-state sellers without a physical presence in Massachusetts)

Steve DelBianco, executive director of NetChoice, says he hopes the lawsuit will “expose the legal flaws and unintended consequences” of the policy. NetChoice and ACMA are asking the Superior Court to enjoin the enforcement of Directive 17-1. For more details, read the Plaintiff’s Memorandum of Law in Support of their Motion for a Preliminary Injunction.

“The Department of Revenue believes the directive has a firm legal and regulatory basis, and it is important in providing a level playing field for Massachusetts retailers,” according to Department of Revenue spokeswoman Nicole St. Peter Mac Dermott. The state intends to defend Directive 17-1.

Massachusetts is one of many states looking to challenge the physical presence precedent upheld in Quill. Learn more about this issue in Kill Quill: What’s the fallout for sellers if states succeed?


Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.