On April 3, 2017, Massachusetts became the sixth state to formally adopt an economic nexus position with respect to out-of-state sellers and sales and use taxes. The new Massachusetts sales and use tax economic nexus position is effective beginning on and after July 1, 2017.
In Directive 17-1 (April 3, 2017), the Massachusetts Department of Revenue (the “Department”) adopted an “administrative bright line rule” for out-of-state Internet vendors. Under the Directive, an out-of-state Internet vendor that, for a preceding 12-month period, had in excess of $500,000 in sales to Massachusetts customers and made sales for delivery into Massachusetts in 100 or more transactions will be deemed to be “engaged in business in the commonwealth” and required to collect Massachusetts sales or use tax from its customers.
Pursuant to Mass. Gen. Laws ch. 64H, § 1, a vendor is considered “engaged in business in the commonwealth” when it regularly or systematically solicits orders for sales of services to be performed in Massachusetts or for sales of tangible personal property for delivery to destinations in Massachusetts, or otherwise exploits the Massachusetts retail market “through any means whatsoever, including but not limited to, . . . computer networks or . . . any other communications medium.” Based on § 1, Directive 17-1 concludes that an out-of-state Internet vendor is engaged in business in Massachusetts by using “computer networks” and “other communications mediums” to solicit Massachusetts customers and make sales.
The Directive also distinguishes Internet vendors from more traditional mail order or catalogue vendors. On the basis of their factual distinctions, the Department reasons that the physical presence requirement for substantial nexus of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), does not apply to an Internet vendor. Further, notwithstanding the Department’s restricted view of Quill, the Directive alleges that Internet vendors, especially “large Internet vendors” according to the Directive, routinely will have a physical presence with a state because of the in-state presence of software, applets, and/or “cookies” downloaded by their customers. In addition, the Directive points to content distribution networks, online marketplaces, and delivery services operated by third parties pursuant to agreements with Internet vendors as creating an in-state physical presence on behalf of an out-of-state Internet vendor.
As a result, Directive 17-1 imposes Massachusetts sales and use tax collection obligations on out-of-state Internet vendors under the following circumstances:
- For the six month period from July 1, 2017, to December 31, 2017, if during the preceding 12 months (July 1, 2016 to June 30, 2017), the Internet vendor had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions, then the Internet vendor is required to register, collect, and remit Massachusetts sales or use tax with respect to all of its Massachusetts sales.
- For each calendar year beginning with 2018, if during the preceding calendar year the Internet vendor had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions, then the Internet vendor is required to register, collect, and remit Massachusetts sales or use tax with respect to all of its Massachusetts sales.
- Internet vendors with a place of business outside Massachusetts and no physical presence in Massachusetts, but with Massachusetts sales in excess of $500,000 between July 1, 2016, and June 30, 2017, must immediately evaluate the impact Directive 17-1 will have on their Massachusetts sales and use tax compliance.
- Massachusetts is only the most recent state to adopt a sales and use tax economic nexus rule with respect to out-of-state vendors, and joins Alabama, South Dakota, Tennessee, Vermont, and Wyoming, which are the other states that have adopted such a rule. At least eight other states currently have similar sales and use tax economic nexus statutes or administrative rules pending.