Massachusetts Takes Second Bite at Digital Tax ‘Cookie Nexus’

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By Aaron Nicodemus

Online vendors selling to Massachusetts customers would have to collect and remit the state’s 6.25 percent sales tax under a proposed regulation from the Massachusetts Department of Revenue.

Released July 28, the proposed regulation 830 CMR 64H.1.7, which mirrors an earlier directive, provides that a vendor engaged “in making taxable sales in the commonwealth or that sells taxable tangible personal property or services for use in the commonwealth is subject to a sales or use tax collection duty when it is ‘engaged in business in the commonwealth’” under state law.

Like Directive 17-1, which the department issued in April and later withdrew in June, the proposed regulation says that online vendors have an in-state physical presence with software and ‘cookies’ that consumers download onto phones, tablets, and computers to buy merchandise online. The U.S. Supreme Court’s 1992 decision Quill Corp. v. North Dakota prohibits states from imposing sales and use tax collection obligations on vendors without an in-state physical presence.

“I reject the idea that an electron placed on someone’s computer constitutes physical presence,” Hamilton Davison, president and executive director of the American Catalog Mailers Association (ACMA), told Bloomberg BNA July 28. “Obviously, we will take a hard look at this. The dance continues.”

The proposed regulation also incorporates an “economic nexus” threshold, requiring sales tax collection from internet vendors with in-state annual sales exceeding $500,000 and 100 or more in-state transactions, which was the same language contained in Directive 17-1.

Legal Fight

The regulation comes on the heels of a legal fight over Directive 17-1. Two Washington-based trade groups—the ACMA and NetChoice—sued the state in June, attempting to halt the directive before its July 1 effective date.

Ruling on an injunction request, state Superior Court Judge Mitchell H. Kaplan held on June 28 that Directive 17-1 was null and void because the department didn’t follow state administrative law. The judge dismissed the other claims without prejudice and without offering an opinion on their merits.

The judge said the directive “established a new policy that substantially altered the rights and interests of the regulated parties” and should have been promulgated as a regulation under state law, not a directive.

On the same day, the Department of Revenue revoked Directive 17-1 with Directive 17-2, saying it would pursue its goals through a regulation. While directives can be issued by the department without public comment or input, regulations require a process including public comment and a public hearing.

Unresolved Concerns

The new regulation only addresses one of three main concerns laid out in the lawsuit, according to Davison.

Promulgation through a regulation, with a public hearing and public input, removes one objection, Davison said. But the proposal still runs afoul of physical presence under Quill, as well as provisions under the Internet Tax Freedom Act, he added.

The Massachusetts Department of Revenue will hold a public hearing on the new regulation at 10 a.m. on Aug. 24 at its office, located at 100 Cambridge St., 2nd floor, Room C, Boston.

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

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

For More Information

Text of the proposed regulation is at

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