Sales Tax Slice: Massachusetts Internet Cookie Directive has Crumbled



On April 3, 2017, the Massachusetts Department of Revenue issued Directive 17-1, detailing circumstances in which an online-retailer located outside of Massachusetts and making sales within the Commonwealth may be required to collect and remit sales tax. In a nutshell, the directive adopted an economic nexus standard and added the placement of internet cookies by online retailers on computers and electronic devices of Massachusetts residents to the list of nexus-creating activities that would satisfy physical presence requirements established under Quill v. North Dakota. In either circumstance – whether the retailer has economic nexus with the state or physical presence in the state – the online retailer would be required to collect and remit sales tax.

As it turns out, the Commonwealth’s crafty effort to require online retailers to collect and remit sales tax may have been in vain. The directive was ruled[1] invalid by the Superior Court of the Commonwealth of Massachusetts because “it established a new policy that substantially altered the rights and interest of the regulated parties and therefore had to be promulgated pursuant to sections 2 or 3 of Chapter 30A[2] [of Massachusetts General Law]” as reported by Bloomberg BNA’s, Aaron Nicodemus. In short, although framed as a directive, the court seemed to be of the opinion that the directive was substantively a regulation. Now the Commonwealth must notify the public of the proposed changes, allow for comment, and hold a hearing before it can adopt the policy changes set forth in Directive 17-1.

Despite this setback, Massachusetts still plans to take steps to implement the policy change. On the same day the court issued its opinion, the Massachusetts Department of Revenue issued Directive 17-2 revoking its prior directive and indicating that proposed regulations to implement the policy changes previously adopted under Directive 17-1 are underway.

Even if the newly proposed regulations pass muster, it seems likely that the resulting rule(s) will still be challenged. Such challenges could include those previously raised in the complaint against the now revoked Directive 17-1. The challenges, which were not addressed by the commonwealth’s superior court, asserted that the directive was preempted by the federal Internet Tax Freedom Act[3], and that the new policy violated the Commerce Clause and the Due Process Clause of the United States Constitution.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think Massachusetts’ formal rule-making efforts will be successful?

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[1] Am. Catalog Mailers Ass'n v. Heffernan, Mass. Super. Ct., No. 1784-CV-01772.

[2] Massachusetts Administrative Procedure Act.

[3] 47 U.S.C. §151.