State Spotlight Series: How the Cookie Nexus Crumbles in Massachusetts - Taxify

State Spotlight Series: How the Cookie Nexus Crumbles in Massachusetts


To even the most casual observer of sales and use tax policy, it is clear that states are putting a lot of effort into expanding their tax collections. While the (currently pending) South Dakota v. Wayfair case has taken up most of the oxygen these days, states are doing everything they can to bring in more sales tax revenue even without the Supreme Court’s help.

As such, for our third State Spotlight Series (read up on Texas and Louisiana!), we thought to look at a state on the cutting edge when it comes to establishing rules that require more businesses to collect sales tax: Massachusetts.


Bay State Basics

When it comes to the basic rules regarding sales tax, Massachusetts is actually pretty boring.

The state applies a 6.25% sales tax, which is on the higher end, but not at all remarkable. When you note that Massachusetts does not permit local sale taxes, meaning that 6.25% is as much as a seller in the state will ever have to assess, it becomes down right tepid.

Having a single, statewide rate, as opposed to also permitting scads of county, city, and special district taxes, Massachusetts makes sales tax calculations relatively simple.

When you also take into account the generally straightforward licensing process (all online, no fee, roughly two-day turnaround), it seems like there’s not much to talk about with Massachusetts and sales tax. Of course, there are always more details to check on, like tax holidays and exemptions, but those are exceptions to the rule, which you only really need to be aware of if you’re dealing with that specific topic.

Where Massachusetts gets complicated is in its recent efforts to expand the meaning of that old bugaboo of sales tax regulation: nexus.


How The Cookie Crumbles

Nexus, in a word, is the condition by which a state has sufficient contact with a business enabling the state to require the business to collect and remit sales tax on sales made in the state. Currently, the standard for what constitutes nexus is “physical presence” (it’s this standard that’s at issue in the Wayfair case).

At root, this “physical presence” has meant owning property or conducting extensive business operations (i.e. having employees) in a state. But over the years, states have worked to stretch and distort what that actually means.

For instance, many states impose what’s called “affiliate” nexus, wherein a business has nexus in a state if it affiliates or contracts with an instate person to help manage the business’s operations in the state. Similarly, many states also have what’s called “click-through” nexus, which deems that a business has nexus in a state if it uses instate services that direct customers to the business’s online store (such as through banner ads).

In 2017, Massachusetts went a step further and instituted a novel policy that is being called “cookie” nexus. The purpose of this policy is to impose a sales tax requirement on internet vendors making more than $500,000 worth of sales over at least 100 separate transactions in the state in a year, regardless of where those internet vendors were based.

Initially this may sound like the South Dakota bill being challenged in the courts. But, Massachusetts added certain other conditions to when it could require sales tax collection from internet vendors, including using instate content distribution networks or local logistics services, or if they established a property connection to the state by installing software or ancillary data packets (“cookies”) on instate computers.

The first two conditions are not terribly out of the ordinary, and seem to resemble other states’ affiliate and click-through nexus rules. It’s the later, however, that is out of the ordinary, as the state is essentially saying that cookies are property owned by the business which, when installed on Massachusetts computers, creates a nexus connection.

This is rather novel, and could have a big impact on internet sellers. Cookies are both incredibly tiny (only a few kilobytes of data) and nearly ubiquitous for online sellers. They act as something like bookmarks for e-retailers, letting them quickly recognize the computers they are engaging with from past experiences. They thus enable things such as saving items in open shopping carts, remembering customer information, and recommending future purchases.

By establishing cookie nexus, Massachusetts has essentially imposed nexus on the entire Internet, only mitigated by the $500,000 annual sales threshold.

The provenance of cookie nexus rules has a moderately interesting history, with an abortive attempt to impose the rule in early 2017, followed by a reversal days before the rule would come into effect due to a poor rulemaking process. But by the fall, the state had gotten its act together and followed the correct process for establishing the rule, which became effective on October 1, 2017.

If more states choose to follow Massachusetts’ lead, which again seemingly avoids the problems that are at issue in Wayfair, then the Internet’s sales tax burden could explode.


Of Course We Have To Talk About Amazon

In 2017, Massachusetts also took steps to go after internet vendors who use the Amazon Marketplace. Specifically, in September, a Massachusetts judge ordered the eCommerce giant to provide information on Marketplace sellers who were part of the Fulfillment by Amazon (FBA) service and who stored inventory in the state at an Amazon fulfillment location.

Under the current doctrine of physical presence nexus, businesses storing inventory in a state have nexus in that state and thus are required to collect sales tax on sales made in the state. This is the case even if the storage is done by a third party who controls where the inventory without any input from the business. (The inventory is considered the business’s property until it is sold; the third-party storage is a red herring to the states.)

Therefore, the purpose of Massachusetts’ demand on Amazon was to determine who all was storing inventory in instate Amazon warehouses, and therefore had nexus in the state. Amazon has chosen to comply with the state’s demand (and similar requests in Rhode Island and Connecticut). What impact this has had on FBA sellers so far is unknown. The state is likely still processing these data, though, so it’s possible that it will issue demand letters in the future.

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