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The Massachusetts Department of Revenue has revoked its directive mandating that digital retailers begin collecting sales tax by July 1.
The move to revoke Directive 17-1 comes just a day after representatives of the state Attorney General’s office appeared in Suffolk Superior Court for a hearing on a request to stop the directive from going into effect. Two trade groups, the American Catalog Mailers Association (ACMA) and NetChoice, had requested the court issue a preliminary injunction delaying implementation of the directive pending a legal challenge over its validity ( Am. Catalog Mailers Ass’n v. Heffernan, Mass. Super. Ct., No. 1784-CV-01772 ).
Directive 17-1 would have ordered out-of-state online retailers to begin collecting the state’s 6.25 percent sales tax, starting July 1, if they had $500,000 worth of in-state sales and 100 individual sales within the past year. Directive 17-2, issued June 28, revokes Directive 17-1 with immediate effect.
The department says it expects to draft a regulation on the issue in the coming months. Directives can be issued by the department without public hearings or input—regulations require a public comment period and public hearings before being enacted.
Michael Heffernan, commissioner of the Department of Revenue, notified the court June 28 that the directive had been revoked. The notice also said the commissioner intends to serve a motion to dismiss the lawsuit on mootness grounds.
“We welcome the decision made by Commissioner Heffernan today and thank him for taking the time to reconsider the sales tax directive,” said Steve DelBianco, executive director of NetChoice. “Today’s actions will greatly benefit Massachusetts consumers as well as Bay State small businesses looking to sell across the country. We hope that other states take notice of today’s decision by Commissioner Heffernan and follow his lead.”
In a June 9 complaint, the ACMA and NetChoice asked the Massachusetts Superior Court to invalidate Directive 17-1 as unenforceable under several statutory and constitutional provisions. In addition to the preliminary injunction, the lawsuit also sought a permanent injunction barring the directive.
The directive had set forth various ways that internet vendors have in-state physical presence within the meaning of the U.S. Supreme Court’s rule under Quill Corp. v. North Dakota, which prohibits states from imposing sales and use tax collection obligations on vendors without an in-state physical presence. The directive included a somewhat novel standard among the growing state tax regimes in this area, saying cookies on a consumer’s computer or phone, or apps on a smartphone establish an in-state physical presence under Quill.
During the June 27 hearing, Massachusetts Superior Court Judge Mitchell H. Kaplan indicated that he disagreed with the Department of Revenue using a directive instead of a regulation. Kaplan questioned whether the move to compel e-retailers to collect the state’s sales tax should have been discussed in public,
The judge called the directive a “sea change” in the state’s policy regarding tax collection requirements for out-of-state sellers.
“It’s a brand-new policy. Retailers have never had to do this before,” he added.
One of the complaints made by ACMA and NetChoice in their lawsuit was that Directive 17-1 was drafted without public input. As a regulation, the department’s ideas for taxing digital sellers, and for what constitutes an in-state physical presence, will get a full public vetting.
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