A New Massachusetts Sales Tax Directive and its Significant Impact on Internet Vendors

Recently, the Massachusetts Department of Revenue issued Directive 17-1, advising taxpayers on a newly adopted bright-line rule effecting out-of-state internet vendors. Effective July 1, 2017, a “large internet vendor” with a principal place of business outside of the State will be required to register, collect, and remit sales and use taxes on its Massachusetts sales if, in the preceding 12 month period of July 1, 2016 to June 30, 2017, it had:

  • Massachusetts sales in excess of $500,000, and
  • Made sales for delivery into Massachusetts in 100 or more transactions.

Beginning with calendar year 2018, large internet vendors are subject to the state’s sales and use tax collection requirements if the above thresholds are met during the preceding calendar year.

In Massachusetts, a vendor is subject to sales or use tax collection and remittance duties on taxable sales and purchases when it is engaged in business within the state. Massachusetts considers a retailer to be engaged in business within the state if it meets any of the following standards:

  • It has a physical location within the State;
  • It regularly or systematically solicits orders for the sale of services or property for delivery in the state or otherwise exploits the retail market through means of salespeople, representatives, and other means; or
  • It regularly engages in the delivery of property or the performance of services within the state.

Massachusetts makes the case that large internet vendors are engaged in business in the state because they exploit retail markets through the use of computer networks and software. The new bright-line standard triggers a filing requirement for online businesses that previously had no nexus with Massachusetts.

Massachusetts makes its case

In the 1992 case, Quill Corp v. North Dakota, the United States Supreme Court established constitutional limits that apply to a state’s imposing of sales or use tax collection requirements with respect to a mail order vendor whose only contact with the state was through mail or common carrier. This case concluded that sales or use tax collection duty is imposed on a vendor only if it meets the requirements of both the Due Process Clause and Commerce Clause.

The Quill case established that for a mail order vendor, the Due Process Clause is met when such a vendor “purposely avails itself of the benefits of an economic market” in the state. The Directive asserts that an internet vendor meets the Due Process Clause requirement because it has “purposely availed itself of the benefits of the state’s economic market… by engaging in continuous widespread solicitation of business” within the state.

In terms of the Commerce Clause, the Quill case references the 1967 Supreme Court decision, National Bellas Hess, Inc. v. Department of Revenue. This case determined that a mail order vendor “could not be made subject to a state’s sales or use tax collection duty when it limited its in-state contacts to mail and common carrier.” Quill, however, established a standard that a vendor can be required to collect sales or use tax if it has an “in-state” physical presence. As pointed out by the Directive, “in-state physical presence” has not been defined and must be determined on a case-by case basis.

The Directive, which analyzes the Quill case, draws a distinction between mail order vendors and internet vendors because their business activities are different. Internet vendors were not considered at the time the Quill decision was issued. Typically, internet vendors have exposure to the state beyond mail and common carriers. Massachusetts makes the case that the internet age has changed the determination of what establishes a physical presence.

Physical presence in the digital world

The State’s position is that internet vendors “invariably” own downloadable software that is used by Massachusetts customers on their computers and other devices. The State points to computer applications and platforms which enhance a customer’s ability to purchase a product or service and help facilitate sales. These include web browsers, and web-based shopping carts, which “permit customers to compare products and evaluate product reviews, and to track their customers’ preferences and locations.”

The State further points to the use of text data files, which are commonly referred to as “cookies.” Large internet vendors are able to store cookies on the customer’s computer locally the first time the customer visits the site and the cookies identify the customer on each subsequent visit.”

Although digital in nature, software generally is considered tangible personal property under Massachusetts sales tax law. The state has taken the position that both the Due Process Clause and the Commerce Clause are met when large internet vendors have software and cookies used by customers. Because the vendor owns both the software and the cookies (even if stored locally on a customer’s devices), when the devices are accessed by customers within Massachusetts, the State has determined this is sufficient in establishing a physical presence and therefore a sales or use tax filing requirement. The Due Process Clause is met because the vendor is purposely trying to exploit the State’s marketplace and the Commerce Clause is met because an in-state physical presence is created by the downloadable software.

The state also has expanded the physical-presence definition to include in-state online representatives and certain delivery services. For example, many large internet vendors sell their goods through third-party companies, such as Amazon, often referred to as “online marketplaces.” As the Directive points out, these third-party marketplaces may provide services such as “order fulfilment, return processing, customer service, and the preparation of sales reports or other analytics.” Massachusetts makes the case that although all of these functions may be done virtually through the online marketplace, some of the services may be physical in nature, and if done within the State, a physical presence is established.

Additionally, if a large internet vendor utilizes a delivery service that provides services and customer contact beyond the limited services evaluated by the Quill case (mail and common carrier), the third-party delivery service would give the vendor a physical presence in the State. For example, if a vendor’s delivery service processes returns, or provides storage, logistics, or other services within Massachusetts, the vendor will have sufficiently established a physical presence within the State.


In summary, online vendors who had sales for delivery into Massachusetts in 100 or more transactions and exceeded $500,000 in sales from July 1, 2016 to June 30, 2017, will need to register with the Massachusetts Department of Revenue to collect and remit sales or use tax. The filing requirement, which goes into effect July 1, 2017, will apply to all subsequent calendar years beginning in 2018, with the “look-back” period being the immediately preceding calendar year.

Massachusetts is not alone in taking this aggressive bright-line position. Alabama and South Dakota have implemented similar changes to target out-of-state internet retailers. More states will likely follow suit in the coming years to cash in on this growing trend. Both the Alabama and South Dakota economic nexus standards are facing legal challenges, and it is likely that the Massachusetts standards will be challenged at some point, too. Internet vendors should evaluate their activities in Massachusetts to determine whether this new Directive impacts them.

If you have any questions about Massachusetts Directive 17-1 and how it may affect your business, please contact Merrill Barter, BNN’s state and local tax practice leader, at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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