Massachusetts Online ‘Cookie’ Tax Rule Faces Legal Fight (CORRECTED)

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By Aaron Nicodemus

A Virginia-based online retailer has filed the first lawsuit against a new Massachusetts regulation requiring out-of-state internet vendors to collect state sales and use tax.

The lawsuit, filed Oct. 24 by Crutchfield Corp. in the Virginia Circuit Court for Albemarle County, “challenges the validity, enforceability, and constitutionality” of Massachusetts regulation 830 CMR 64H.1.7 ( Crutchfield Corp. v. Harding , Va. Cir. Ct., No. CL17001145-00, 10/24/17 ).

The lawsuit asserts that the regulation creates an undue burden on interstate commerce, is preempted by the International Tax Freedom Act, and violates restraints on state authority under the federal dormant commerce clause as interpreted by the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. That decision prohibits states from imposing sales and use tax collection obligations on vendors lacking an in-state physical presence.

The lawsuit also cites a Virginia law allowing a company to file suit against an official of another state that has asserted the company has a sales-and-use tax-collection obligation in the state.

Protecting Its Rights

Crutchfield, an online retailer for consumer electronics and automotive parts based in Charlottesville, Va., alleges it received a letter from the Massachusetts Department of Revenue on Sept. 14 ordering the company “to register for, collect, and remit Massachusetts sales and use tax under the rules set forth in the Massachusetts Regulation.”

“Although Crutchfield has no physical presence in Massachusetts, it has received repeated notices from Massachusetts officials asserting that it is required to collect and remit sales and use tax under the ‘economic nexus’ rules,” Matthew Schaefer, attorney at Brann & Isaacson in Lewiston, Maine, told Bloomberg Tax in an Oct. 25 email. “Crutchfield filed suit to protect its rights under the Commerce Clause and Quill, as well as under the federal Internet Tax Freedom Act, which prohibits state sales tax obligations that discriminate against electronic commerce, like the Massachusetts regulation.”

The regulation, which took effect Oct. 1, orders online vendors to collect Massachusetts sales tax if they have property interests in or use in-state apps and “cookies.” Vendors must collect sales tax if they make 100 or more individual transactions and exceed $500,000 worth of in-state sales in a year.

“The Department of Revenue believes that the Regulation has a firm legal basis, and in its importance to provide a level playing field for Massachusetts retailers,” a Massachusetts DOR spokeswoman told Bloomberg Tax on background in an Oct. 25 email. She said the DOR is working closely with the Attorney General’s Office and can’t comment further on pending litigation.

Industry Groups Applaud

The American Catalog Mailers Association, which filed a lawsuit that led the DOR to withdraw the first version of the regulation, Directive 17-1, applauded Crutchfield for “taking action to enforce its constitutional rights,” according to association president and executive director Hamilton Davison.

The lawsuit will “successfully prove that Virginia law rightfully protects this Charlottesville-based company from outside state tax collection efforts when such companies have no physical presence in such states as Massachusetts,” Davison told Bloomberg Tax in an Oct. 25 email.

The catalog mailers association and its e-commerce partner group NetChoice have been attempting to pull together $250,000 from their respective members and others to file their own lawsuit in Massachusetts against the new regulation.

Steve DelBianco, president and CEO of NetChoice, a lobbying group for e-commerce companies such as Inc., PayPal Inc., and eBay Inc., said the lawsuit “relies on an existing Virginia law designed to protect Virginia businesses from the reach of a tax collector from a state where the business has no physical presence whatsoever—which is exactly what Massachusetts is trying to do.”

“If the Virginia court finds that Crutchfield lacks physical presence in Massachusetts, all of us can re-focus on helping Congress to design appropriate national legislation to address sales tax on remote sellers,” he told Bloomberg Tax Oct. 25.

(Paragraph 11 has been corrected to reflect ACMA and NetChoice's ongoing campaign.)

To contact the reporter on this story: Aaron Nicodemus in Boston at

To contact the editor responsible for this story: Jennifer McLoughlin at

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