Online Retailers Sue to Scorch Ohio’s ‘Cookie’ Sales Tax

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By Alex Ebert

Santa wasn’t the only one thinking about “cookies” this holiday season.

A trade group for interstate retailers sued the Ohio Department of Taxation Dec. 29 to block collection of sales tax that the companies say hinges upon an unconstitutional “cookie nexus” provision.

The law, placed in the 2018-19 state biennial budget bill, works by broadening Ohio’s statutory definition of “substantial nexus” with the state—extending sales tax to companies selling $500,000 in Ohio and who place “in-state software” on Ohio computers and phones or have servers located in Ohio.

An October Department of Taxation guidance document called these two provisions “in-state software nexus” and “network nexus.” The department said if a retailer places software on Ohio consumers’ devices or uses in-state server providers, the out-of-state retailers establish a physical presence in Ohio that passes U.S. constitutional muster. The state said these provisions pass scrutiny under Quill Corp. v. North Dakota, a 1992 U.S. Supreme Court decision that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state.

“This suit is not unexpected,” Matt Chafin, chief legal counsel for the Ohio Department of Taxation, told Bloomberg Tax in a Jan. 2 email. “State legislatures all over the country are passing laws trying to deal with the reality of remote sales and the industry is reacting.”

Lawsuits, Lawsuits Everywhere

Several states are directly challenging the nearly 26-year-old case in attempts to broaden state powers to tax internet transactions.

“The ACMA intends to demonstrate that Ohio’s software ‘cookie’ nexus standard for sales/use tax is in direct contravention of the extraterritorial limits on state tax authority under Quill v. North Dakota,” the American Catalog Mailers Association, the group bringing the lawsuit, said in a Dec. 29 statement. In the statement, Hamilton Davison, ACMA’s president and executive director, also said Ohio’s law was an “egregious assault on out of state companies seeking to sell to Ohio residents” and presented a barrier to “interstate commerce.”

The association is also behind lawsuits pending in Tennessee, Indiana, Alabama, and at the U.S. Supreme Court (related to a South Dakota law). It says the Ohio nexus provisions will only effect small to medium sized retailers that don’t already have a remittance agreement with Ohio. The group said that tax is collected on more than 80 percent of online sales made by the top 100 Internet retailers. But a retailer with $500,000 in sales to Ohio customers could have as little as $15 million in national sales, meaning the sales tax would now apply to small electronic retailers or catalog companies.

Different ‘Cookie’ Nexus Flavor?

Ohio’s law isn’t pure “cookie” nexus like the new Massachusetts regulation 830 CMR 64H.1.7, which orders online vendors to collect state sales tax if they use in-state apps and “cookies” on customers’ computers. That regulation is being challenged in a Virginia state court by Crutchfield Corp., a consumer electronics and automotive parts retailer.

Instead, the Department of Taxation is looking for something more than an Ohioan merely using a retailer’s website. The example the department gives in its guidance is an online retailer that allows customers to download a catalog app onto their phones or computers, from which the customers can make purchases.

“It is the presence of this software owned by Seller A in Ohio that is significantly associated with Seller A’s ability to establish and maintain its market and that meets the physical presence standard set forth in Quill,” the department said in the October guidance.

But Davison told Bloomberg Tax in a Jan. 2 email that this approach is similar to Massachusetts and is equally as unconstitutional. “Its reliance on bits of HTML or javascript coding and apps stored on computers and cell phones in the state clearly violates the Quill physical presence standard,” he said.

The ACMA filed a lawsuit that led the DOR to withdraw the first version of the Massachusetts regulation.

The association claimed in the Ohio complaint that a “content distribution network"—using a third-party server in Ohio to run or enhance a retailer’s website—also doesn’t count as “physical presence” under Quill.

The case is American Catalog Mailers Ass’n v. Testa , Franklin Cty., Ohio Ct. Com. Pl., No. 17 CV 11440, 12/29/17 .

To contact the reporter on this story: Alex Ebert in Columbus, Ohio at

To contact the editor responsible for this story: Ryan C. Tuck at

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