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By Altus Group | January 2, 2018

By: Karen T. Syrylo, CPA

Are there computer “cookies” and “apps” that facilitate your multistate sales in states where you thought you had no sales tax nexus?  Please read further.  There’s a new approach to sales tax nexus: the states’ view that a vendor’s use of computer “cookies” in the state creates the presence that allows the state to enforce sales tax collection responsibility on the vendor.

The “cookies” approach is in addition to the states’ efforts at “economic nexus” theories, the rules that say if you sell a certain dollar value of goods to in-state residents you are required to charge the state sales tax to those customers – e.g. the South Dakota v. Wayfair case that the U.S. Supreme Court has been requested to review, in the states’ efforts to overturn the physical presence nexus rule articulated by the Court in its Quilldecision.  And it’s in addition to the “click-through” nexus provisions, imposing sales tax collection responsibility on vendors whose sales are facilitated by in-state affiliates with websites that help link the vendor and the customer – e.g. the “Amazon” law enacted in New York and other states, the challenge to which the U.S. Supreme Court declined to review.  Now comes the states’ policy that a vendor who uses apps and cookies in the state has nexus and sales tax collection responsibility.

Massachusetts originated the idea in regulations

Massachusetts regulation 830 CMR 64H.1.7  took effect October 1, 2017.  The regulation provides that the following activities constitute an in-state physical presence and thus nexus:

a. property interests in and/or the use of in-state software (e.g.,“apps”) and ancillary data (e.g.,“cookies”) which are distributed to or stored on the computers or other physical communications devices of a vendor’s in-state customers, and may enable the vendor’s use of such physical devices;
b.  contracts and/or other relationships with content distribution networks resulting in the use of in-state servers and other computer hardware and/or the receipt of server or hardware-related in-state services; and/or
c.  contracts and/or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services, including, but not limited to, payment processing and order fulfillment, order management, return processing or otherwise assisting with returns and exchanges, the preparation of sales reports or other analytics and consumer access to customer service.

Massachusetts believes that the provision withstands Constitutional scrutiny under the Commerce Clause analysis the Supreme Court used in the Quill decision.  The regulation specifically states: “Unlike the mail order vendor at issue in Quill, Internet vendors with a large volume of Massachusetts sales invariably have one or more of the following contacts with the state that function to facilitate or enhance such in-state sales and constitute the requisite in-state physical presence…”

Additionally, the Massachusetts regulation also provides a general economic nexus rule, similar to the challenged South Dakota rule and that of multiple other states:  An Internet vendor with a principal place of business outside of Massachusetts is required to register, collect and remit sales/use tax if during the preceding calendar year it had in excess of $500,000 in Massachusetts sales from transactions completed over the Internet and made sales resulting in a delivery into Massachusetts in 100 or more transactions.

Massachusetts regulation is challenged in litigation

On October 24, 2017, Crutchfield, Inc. a Virginia corporation, filed suit in Albemarle County, Virginia Circuit Court against the Massachusetts Department of Revenue challenging the validity of the regulation.  (Virginia law allows a Virginia business to file suit in Virginia court to prevent another state from collecting sales and use tax that constitutes an undue burden on interstate commerce.)

Crutchfield is a remote seller of electronic equipment.  The Company had received notification from Massachusetts of the state’s new nexus provision and direction from the Department of Revenue that the company begin charging and remitting the state sales tax.

Crutchfield’s suit is an action for declaratory judgement.  The company’s position is that the regulation is invalid and of no legal effect because:  1) it violates the U.S. Constitution’s Commerce Clause as interpreted by the U.S. Supreme Court in its Quill decision; 2) it constitutes an undue burden on interstate commerce; and 3) it is preempted by provisions of the Internet Tax Freedom Act.

The case should be added to the list of those worth watching.  Crutchfield Corp. v. Harding, Va. Cir. Ct., No. CL17001145-00, 10/24/17; you can see a copy of the complaint here

Connecticut announces it will use a Massachusetts approach

At the November 15, 2017 New England State and Local Tax Forum held in Massachusetts, Kevin Sullivan, commissioner of the Connecticut Department of Revenue Services, announced that Connecticut plans to adopt a “cookie” nexus provision similar to that in the Massachusetts regulation and promised that the Department would be issuing regulations in early 2018.

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All indications are that we should expect the likelihood that other states will follow the Massachusetts lead as more and more state efforts are made to secure additional sales tax collections from Internet vendors.

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