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Massachusetts internet cookie tax will be fully baked on October 1


 Massachusetts to tax internet vendors that place cookies on in-state devices.

Massachusetts has had a new sales and use tax policy in the oven for months. It’s now fully baked and set to take effect Oct. 1, 2017.

Last April, the Massachusetts Department of Revenue (DOR) released Directive 17-1, which required out-of-state internet vendors with significant Massachusetts sales to collect sales or use tax. It was challenged and revoked after the Superior Court found the directive to be invalid. Justice Mitchell H. Kaplan noted the purpose of a DOR directive is to clarify ambiguities and resolve inconsistencies with existing policies, not announce “an abrupt change in policy.”

The state then issued Directive 17-2, revoking Directive 17-1 and announcing the DOR’s intention to propose a new regulation that would “require large internet vendors to collect Massachusetts sales and use tax on a prospective basis under standards similar to those described in Directive 17-1.” On July 28, the DOR did just that in 830 CMR 64H.1.7.

Internet vendors are different from catalog vendors

As with rescinded Directive 17-1, the new regulation holds that vendors making internet sales of taxable goods or services in Massachusetts are “engaged in business in the commonwealth” and therefore “subject to a sales or use tax collection duty.”

However, taxing businesses that lack a physical connection to a state is at odds with precedent upheld by the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the seminal decision that’s used as a benchmark whenever a state moves to tax an out-of-state business. Quill maintains the connection between a business and a state must be physical in nature: The state did not have the right to tax an out-of-state mail-order vendor that delivered catalogs and goods to consumers in North Dakota via common carrier.

Massachusetts acknowledges Quill and the physical presence precedent. Yet the regulation maintains that internet vendors differ from mail-order vendors in key ways. Notably, large internet vendors:

  • Store in-state software (e.g., “apps”) and ancillary data (e.g., “cookies”) on the computers, laptops, and handheld devices of in-state customers;
  • Have “contracts or other relationships with content distribution networks resulting in the use of in-state servers and other computer hardware”; and/or
  • Have “contracts or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services” (e.g., payment processing and order fulfillment, order management, returns processing or assistance, etc.).

Comments for and against the new regulation

The DOR requested public comment on all aspects of its proposed regulation in July, and earlier this month it responded to the comments it received.

Only Technet, a national, bipartisan network of technology companies that promotes “the growth of the innovation economy,” spoke out against the new regulation. It called the state’s approach unprecedented and requested the DOR delay implementation, either “indefinitely or until at least 2019.” It reasoned a delay would:

  • Ease compliance burdens
  • Forestall litigation in opposition to the rule
  • Allow time to obtain court rulings in other states that could bring greater clarity to the general constitutional issues
  • Allow the state to establish similar uniform rules with other states

The DOR received many statements in support of the proposed regulation, and it found those by the Retailers Association of Massachusetts (RAM) and the Retail Industry Leaders Association (RILA) to be most compelling because of “their membership’s first-hand experience.” Both associations said that “the rule would close an unjustifiable ‘loophole’ that has operated inequitably to benefit large internet vendors at the expense of Massachusetts retailers, large and small.”

Massachusetts moves forward with new regulation

After weighing all comments, the department concluded that “no significant compliance burden exists, and that no postponement of the regulation is appropriate.”

Therefore, as of Oct. 1, 2017, “an internet vendor with a principal place of business located outside the state that is not otherwise subject to tax is required to register, collect and remit Massachusetts sales or use tax with respect to its Massachusetts sales” if it meets both of the following criteria:

  • The vendor made more than $500,000 in Massachusetts internet sales during the preceding 12 months
  • The vendor made at least 100 separate sales for delivery into Massachusetts

However, an out-of-state internet vendor is not required to comply with the regulation “if the vendor’s only contacts with Massachusetts are that in-state customers may access a site on the vendor’s out-of-state computer server.” More details are available from the Massachusetts Department of Revenue.

Massachusetts is the first state to posit that online vendors have a physical presence in a state through the software or internet cookies they place on computers and handheld devices. Since it released its first Directive, Ohio and Rhode Island have followed suit.

Visit the Avalara Resource Center to learn more about state attempts to tax out-of-state vendors.


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.