Sales Tax Slice: ‘Cookie’ Nexus Returns

Back in June, the concept of nexus by “cookie” (internet cookie, that is) was dealt a blow when a Massachusetts court invalidated on procedural grounds a Department of Revenue directive, Directive 17-1, instituting the concept. The Commonwealth’s tax agency immediately revoked Directive 17-1, but promised to return with a proposed regulation that would implement the state’s nexus rules through the rulemaking process demanded by the court. Within a month, the revenue department proposed amendments to its sales and use tax regulations describing the nexus-creating activities, including storing internet cookies on in-state customers’ computers and other devices, of “vendors making internet sales” to Massachusetts customers. And now, Massachusetts is not alone in asserting “cookie nexus” over certain remote sellers.

By the time Massachusetts announced its proposed regulation changes, Ohio Gov. John Kasich (R) had already signed a huge budget bill[1] that includes a provision establishing nexus for internet sellers based on the storage of “in-state software …  on property in [the] state” or the distribution of in-state software to facilitate sales in the state. It seems Ohio’s definition of “in-state software” includes internet cookies. (See Bloomberg BNA reporter Alex Ebert’s July 12, 2017, article, Ohio ‘Cookie Nexus’ for Online Sales Tax Likely to Crumble.”)

And last week, Rhode Island enacted a nexus standard that includes “using information or software, including cached files, cached software, or ‘cookies’ or other data tracking tools, that are stored on property in or distributed within” Rhode Island.[2] Reminiscent of statements found in Massachusetts’ now revoked directive, the Rhode Island general assembly declared in its legislative findings: “The existence and/or presence of a non-collecting retailer's, referrer's, or retail sale facilitator's in-state software on the devices of in-state customers constitutes physical presence of the non-collecting retailer, referrer, or retail sale facilitator in Rhode Island under Quill Corp. v. North Dakota. 504 U.S. 298 (U.S. 1992).” 

To be clear, none of these state provisions impose sales and use tax collection obligations on remote sellers based solely on storing internet cookies on in-state computers. Nexus is created only for sellers whose annual sales revenue or total number of transactions reach certain thresholds, in addition to having software like internet cookies located in the state. Acknowledging that “cookie nexus” may not constitute the “traditional” kind of physical presence, Rhode Island’s legislature noted that for remote retailers and others receiving significant sales revenue or making a significant volume of sales in the state, the use of in-state software “evidences an intent to establish and maintain a market” in the state. Under such circumstances, Rhode Island, along with Ohio and Massachusetts, has determined that there is sufficient basis to require these sellers to collect and remit sales tax.

With legislation like Ohio’s and Rhode Island’s gaining momentum, taxpayers may start likening the states to that loveable, big blue voracious Cookie Monster from Sesame Street—but perhaps without the loveable part. Nevertheless, as federal proposals to resolve the Quill nexus issue languish and the Supreme Court remains reluctant to grant certiorari in a case that would permit reconsideration of the 1992 decision, states facing stagnant or shrinking revenues are crafting innovative ways to bring in uncollected taxes. Nexus by internet cookie appears to be just the latest creative effort by states to overcome Quill.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will “cookie nexus” provisions pass constitutional muster?

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[1] Ohio’s budget bill, H.B. 49, enacted July 30, 2017, contains over 3,300 pages. We found the nexus language on pages 2305-07.


[2] Rhode Island Gov. Gina Raimondo (D) signed the 309-page appropriations bill, H.B. 5175, on Aug. 3, 2017. The legislation also adopts a notice and reporting requirement for “non-collecting retailers,” “retail sale facilitators,” and “referrers” who make a certain dollar amount or number of sales into the state.