Ecommerce Sellers: Massachusetts may have found a way to have its cake and tax it too - Taxify
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Ecommerce Sellers: Massachusetts may have found a way to have its cake and tax it too


When it comes to nexus, Massachusetts may have found a way to have its cake and tax it too.

A recent directive from the Massachusetts Department of Revenue (DOR) may have serious sales tax implications for online sellers. In particular, you will likely have an obligation to collect and pay sales tax on sales in Massachusetts if you:

  1. License software to Massachusetts residents or companies
  2. Deposit small data files (i.e. cookies) on the computers or mobile devices belonging to Massachusetts residents or companies
  3. Utilize third party Content Distribution Networks, Online Marketplaces, or enhanced delivery providers based in Massachusetts

What’s in the Directive?

On April 3, 2017, the DOR issued Directive 17-1The Directive’s intent is to explain when sales tax obligations apply to online sellers. However, it ends up creating a much looser standard for online sellers.

Initially, the Directive states that online sellers will be required to register, collect, and remit sales tax to Massachusetts when they have sales of more than $500,000 or 100 or more transactions in the state per year. In this regard, the Directive resembles many other states’ attempts to expand the standard for when sales tax obligations arise (Alabama, South Dakota, Tennessee, Vermont, and Wyoming have all enacted similar rules).

The threshold of 100 or more transactions is in particular not very large, and one that many online sellers of all sizes could easily reach. Therefore, it is important for all online sellers to pay attention to these changes in sales tax policies.

But the Directive doesn’t stop with these thresholds. Instead it goes on to explain that, in fact, the activities online sellers utilize create a physical presence in the state. This physical presence, or “nexus,” then inherently establishes a sales tax obligation. Notably, the Directive asserts this novel view of nexus is valid under the current rules for establishing sales tax obligations and, while possibly bending the 1992 Quill ruling, does not break it.

What’s the Quill ruling, again?

The prevailing standard for when states can impose sales tax obligations was established a quarter century ago in the famous — or infamous — Quill decision. The U.S. Supreme Court ruled North Dakota could not impose sales tax obligations on a mail-order vendor merely because of the vendor’s use of the mail and common carriers.

Instead, the vendor would need to have some sufficient physical presence (“nexus”) in the state. Ever since then, out-of-state sellers — and online sellers in particular — have relied on Quill to contest sales tax obligations.

However, Quill was decided back when the Internet was essentially made up of Usenet groups. Since then e-commerce has exploded into a worldwide market worth trillions of dollars — much of it, arguably, sales tax-free. States, in response, have sought out ways to expand their abilities to collect tax on online sales.

Many have resorted to straightforward attacks on Quill (like in Alabama or South Dakota), or have found a way to not technically require remittance of sales tax, but instead impose onerous reporting requirements unless the business remits sales tax (like in Colorado). The first approach still faces difficult legal challenges, while the latter has been ruled to stand just far enough outside the scope of Quill to be legitimate.

The Massachusetts approach, though, is novel in that it doesn’t attempt to dismantle or subvert Quill, but instead defines certain online activities so they fit into Quill. This does not necessarily mean the Directive will hold up — it is almost certain to face a legal challenge. But by carefully balancing the focus of the Directive, Massachusetts may have found a way to have its cake and tax it too.

How does the Directive affect my nexus in Massachusetts?

The Directive points out three common online activities that establish physical nexus in Massachusetts, and therefore has sales tax obligations in the state:

Licensed Software

It’s a universal rule that owning property creates nexus in the state, including leased and rented property. Most states also hold that software is tangible property: It’s not merely the knowledge transmitted in the software, but the physical recording of that knowledge, which takes up space on discs or hard drives.

The Directive notes when vendors sell software, they typically do not transfer ownership, but instead license operation of the software by the purchaser. The seller still retains some ownership of the software, contained on the resident’s device. The logical leap, then, is that by licensing software, the seller owns a physical property in the state — even if it is just ones and zeros — thereby establishing nexus.


Online sales typically involve the deposit of small data files (“cookies”) on purchasers’ devices by vendors. These are used for data tracking, simplifying log-ins, customizing sales experiences, and maintaining shopping carts.

The Directive notes that these cookies, like licensed software, are bits of physical property owned by the online sellers, which are present on devices located in Massachusetts. Therefore, just like licensing software, the use of cookies establishes nexus.

Content Distribution Networks, Online Marketplaces, and Delivery Providers

There are numerous services online vendors use to facilitate their sales in a state. The Directive highlights three of these as establishing the online seller’s nexus:

  1. Contracting with technology providers (content distribution networks) to connect the online seller’s site with potential local customers.
  2. Using “online marketplaces” to facilitate order processing, payment management, fulfillment and customer service.
  3. Using local delivery providers for aid in managing logistics, order fulfillment, storage and return processing.

Under the Directive, when the third-party provider offers these services in Massachusetts, it would be helping the online seller establish a market presence in Massachusetts, thereby establishing nexus. This resembles the “click-through” nexus rules enacted by New York in 2008, under which in-state third parties act as agents in a market transaction, creating the needed local presence.

What does all of this mean for me?

As of now, all online sellers need to do is to pay attention and stay informed on developments in Massachusetts. While the Directive establishes the policies the state wants to enforce, these policies have yet to withstand the test of an inevitable legal challenge. Some of these activities seem particularly ripe for challenge.

For instance, a cookie is such an infinitesimal amount of “property” it could be seen as well below the threshold for creating physical presence. Similarly, it seems a bit attenuated to claim that an arms-length agreement for services between an online seller and a content distribution network really establishes the agency relationship that legitimizes “click-through” nexus.

However, “ripe for challenge” is far from any likelihood of a successful challenge. Certainly, many other novel, contestable policies (including “click-through” nexus) have held up to scrutiny.

So you should absolutely take a serious and clear-eyed approach to your potential sales tax obligations going forward in Massachusetts. First, review the level of your sales in the state. Are you below the $500,000 or 100 or more transactions threshold? If so, you could be off the hook. Second, review your online sales activities. Do you license software, deposit cookies, and/or utilize third-party support in Massachusetts? If not, again, you could be in the clear.

However, the economic thresholds are not particularly high, and the online activities are extremely common. So it is likely that a great many online sellers will be held to the Directive’s standards. Further, if the Directive does withstand legal challenges, it’s almost certain that other states will adopt similar approaches, meaning you should pay attention to how things develop across the country.

As such, in this rapidly changing regulatory environment, only those organizations that take a strategic approach to compliance and deploy nimble technology solutions will be positioned to succeed.

We also recommend regularly checking this blog, as we will be sure to post more information on Massachusetts’ new approach — and many more sales tax issues — as things develop.

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