Sales Tax Slice: In Massachusetts, Internet ‘Cookies’ Overcome Quill to Create Nexus




Beware online sellers: if you place “cookies” on computers of customers in Massachusetts, be prepared to collect sales tax. The Bay State has adopted a unique and pioneering position in yet another state effort to “kill Quill.” In its novel 16-page directive issued April 3, 2017, the Massachusetts Department of Revenue outlines in detail the kinds of activities that will require out-of-state vendors to collect tax, including utilizing cookies.

Massachusetts describes its directive as adopting an “administrative bright line rule” regarding the imposition of sales and use tax collection obligations on internet vendors. Finding that internet sellers are “factually distinguishable” from the mail order vendors represented in the U.S. Supreme Court’s 1992 nexus decision in Quill v. North Dakota, the directive is aimed at “large [i]nternet vendors,” i.e., those making more than $500,000 in annual sales and at least 100 transactions in Massachusetts. Internet vendors’ contacts with the state, the Department of Revenue announces, go beyond just mail and common carrier. Accordingly, the activities of these vendors that are detailed in the directive create the physical presence nexus required by Quill.

Among the nexus-creating activities listed (including owning software and engaging in-state representatives) is placing internet cookies on the computers and other communications devices of Massachusetts residents who visit a vendor’s website. Briefly, a browser, internet, or web cookie, as defined on Wikipedia, is a data file “sent from a website and stored on the user’s computer by the user’s web browser while the user is browsing.” Some cookies are temporary “session cookies,” and others are permanent or “persistent cookies.” Cookies can be used to remember information about a user and to track a user’s browsing activity.

The Department of Revenue’s directive considers cookies—presumably both session and persistent cookies—to be proprietary to the sellers. It explains that cookies “facilitate sales” in the state and allow “a vendor to track [customer] behavior … and to deliver ads that are specific to each customer.” When stored on an in-state customer’s computer or device by a large internet vendor, “the ownership and use of these in-state cookies results in in-state business activity by such vendor that distinguishes such vendors from the mail order vendors that were evaluated by Quill.” The presence of cookies, then, requires such sellers to register and collect and remit Massachusetts sales and use tax.

Massachusetts is undoubtedly breaking new ground in the states’ efforts to overcome Quill’s limitations on their ability to require remote sellers to collect tax. No other state appears to have issued an explicit statement that using browser cookies in the state is enough to create nexus. The outcry is likely to be loud and the court challenges swift. Perhaps it is no coincidence that the Department’s directive reads a lot like a legal brief, complete with comprehensive footnotes citing major constitutional case law and law journal articles. Massachusetts has joined the ranks of states like Alabama and South Dakota in taking a bold, and in this instance, unprecedented approach to assert tax collection authority. (See Che Odom’s March 24, 2017, article noting the Alabama and South Dakota nexus litigation [subscription required].) It’s too soon to tell, but nexus-creating cookies may be the catalyst that spurs the Supreme Court to finally take another look at Quill.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What do you think of Massachusetts’ directive declaring that internet cookies can create nexus for remote vendors? What is the likelihood that the Supreme Court would grant certiorari in a matter challenging this directive?

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By René Y. Blocker