Massachusetts is looking to join a growing list of states asserting that internet vendors that lack traditional “physical presence” in a state must still collect sales tax if they have sufficient economic contacts. But unlike states that have passed “Kill Quill” statutes that challenge Quill directly, Massachusetts takes a more nuanced approach that potentially presents a more difficult challenge for internet vendors. Rather than attacking Quill directly, Massachusetts argues that the nature of almost any major internet vendor’s business requires them to have sufficient “physical presence” with the state to satisfy Quill. The Massachusetts approach argues that the nature of these businesses is different than those of the catalog companies in Quill, and when combined with sufficient economic presence, results in sufficient presence in Massachusetts to permit the state to require the internet vendor to collect sales and use tax. For example, the Department argues that the ownership or use of “cookie” can constitute sufficient in-state presences to create a sales tax obligation for an internet vendor. The Department’s theory is currently part of a draft regulation and a public hearing regarding the regulation is scheduled for August 24 in Boston. Background Massachusetts initially attempted to enforce its nexus theory through Directive 17-1. However, in light of litigation challenging that Directive and Massachusetts’ authority to implement this change in position through a Directive, the Department revoked Directive 17-1 shortly before it was to go into effect. See Directive 17-2 (June 28, 2017). Then, on July 28, the Massachusetts Department of Revenue (the “Department”) issued Proposed Regulation 64H.1.7 (the “proposed regulation”) that, if adopted, would require “internet vendors” to collect and remit sales tax on sales to customers in Massachusetts. Killing Quill or Within its Scope? Instead of attacking Quill head-on, the Department asserts the proposed regulation does not violate Quill’s physical presence rule. Rather, the Department asserts the proposed regulation falls within the scope of Quill, arguing that internet vendors are physically present in Massachusetts because they typically:
- Own or use software and “cookies” located on customer computers in Massachusetts;
- Have contracts or relationships with content distribution networks that use in-state servers or otherwise provide services in Massachusetts; and/or
- Make sales through marketplace facilitators or sales involving delivery companies that provide payment processing or fulfillment services.
- The internet vendor made $500,000 or more in sales to Massachusetts customers completed over the internet; and
- The internet vendor completed 100 or more transactions that were delivered to Massachusetts.