Trade Groups Aim to Burn Massachusetts Online Cookie Tax Rule

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By Aaron Nicodemus

A pair of Washington-based trade organizations have sued the Massachusetts Department of Revenue to prevent the state from forcing out-of-state online retailers to collect state sales tax ( Am. Catalog Mailers Ass’n v. Heffernan , Mass. Super. Ct., complaint filed 6/9/17 ).

And a former congressman has already offered his support.

In a complaint filed June 9 against Massachusetts Commissioner of Revenue Michael Heffernan, the American Catalog Mailers Association (ACMA) and NetChoice ask the Massachusetts Superior Court to invalidate Directive 17-1 as unenforceable under several statutory and constitutional provisions. The lawsuit also seeks a preliminary and permanent injunction barring implementation of the directive.

The DOR issued Directive 17-1 on April 3, mandating that certain out-of-state online retailers collect the state’s 6.25 percent sales tax, specifically: those selling more than $500,000 annually in the state and making sales for in-state delivery in 100 or more transactions. The directive also sets forth the various ways that internet vendors have in-state physical presence within the meaning of the U.S. Supreme Court’s rule under Quill Corp. v. North Dakota, which prohibits states from imposing sales and use tax collection obligations on vendors without an in-state physical presence. The directive included a somewhat novel standard among the growing state tax regimes in this area, saying cookies on a consumer’s computer or phone, or apps on a smartphone establish an in-state physical presence under Quill.

NetChoice and ACMA claim the directive’s adoption violates the state’s Administrative Procedure Act, which has to do with public notice and input; the federal Internet Tax Freedom Act (ITFA) as a “discriminatory tax on electronic commerce"; and the limits on states’ taxing authority under Quill.

“The Massachusetts regulation blatantly violates Supreme Court precedent and the Internet Tax Freedom Act, a law Congress enacted specifically to stop states from imposing taxes that discriminate against the internet,” said Steve DelBianco, executive director of NetChoice, a trade association that represents companies like eBay and PayPal.

“The Supreme Court has said for more than a century that states can only force businesses with a physical presence in their state to collect their sales taxes,” he said June 9 in an emailed statement. “Massachusetts is claiming that an out-of-state business is effectively setting up shop in the computers and smartphones of residents who enter the website address of that business. One wonders why the state didn’t say the same thing about businesses with telephone numbers that were dialed by Massachusetts consumers over the last 75 years.”

Internet Tax Ban

Since the directive’s release, many practitioners have questioned its legitimacy under the ITFA, which prohibits states from levying discriminatory taxes on e-commerce.

According to the directive, Quill intended to reaffirm a prior case “in the context of a fact pattern pertaining to a mail order vendor.” Throughout the directive, the state distinguishes the business and activities of internet vendors from those of mail order vendors.

The directive’s argument is that the software, downloaded by a user in the state, “is generally considered to be tangible personal property.” The directive also concludes that “the ownership of in-state software by large Internet vendors would apparently constitute an in-state physical presence within the meaning of Quill.”

In an affidavit supporting NetChoice/ACMA’s request for injunctive relief, former U.S. Rep. Christopher Cox (R-Calif.) testified that, “as the author and principal sponsor of the ITFA, I can say without qualification that Directive 17-1 is precisely what the law was written to prevent.”

“By specifying uniquely Internet-related factors as the very criteria upon which the Massachusetts sales and use tax collection and reporting obligations are based, Directive 17-1 has made itself a prime example of what the ITFA was meant to prohibit,” Cox said. “Its enunciation of aspects unique to Internet commerce such as cookies, apps, CDNs, and online marketplaces offends the plain terms of the ITFA. The express intent of the legislation is that ‘electronic presence” or “economic presence” is not a sufficient basis to require an Internet vendor to submit to a state’s taxing regime.”

Growing ‘Quill’ Battle

The NetChoice/ACMA lawsuit adds to the bourgeoning battle over the melting pot of state statutes and regulations aimed at remote sales.

Legal challenges are moving in Alabama, South Dakota, and Tennessee over their “economic nexus” regimes that require out-of-state sellers satisfying a specified sales threshold to collect and remit sales tax. NetChoice and ACMA are parties in the South Dakota and Tennessee litigation.

During a March 21 panel at a Tax Executives Institute Inc. event, Michael Fatale, deputy general counsel for the Massachusetts DOR, announced that unlike the other states directly challenging Quill, Massachusetts’s approach was designed to be Quill-compliant.

NetChoice and ACMA dispute that characterization, arguing that “while the Directive acknowledges that Quill’s physical presence test requires that the physical presence of each vendor be determined on a case-by-case basis, the Directive eschews the approach mandated by the United States Supreme Court in favor of a ‘bright line rule’ that is easier for the Department to administer.”

“The Commissioner and the Department lack the authority to disregard the Supreme Court’s controlling precedent in Quill based on the conclusion that subsequent developments may have undermined it,” they add.

A representative for the Massachusetts Department of Revenue declined comment, citing a policy regarding pending litigation.

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

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

For More Information

Text of the complaint is at

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