Internet vendors challenge Massachusetts “cookie” nexus regulation

Mar 12, 2019
Mar 12, 2019
0 min. read

On Dec. 21, 2018, a complaint was filed in Suffolk Superior Court in Boston, Massachusetts, which challenges the Massachusetts “cookie” nexus regulation. The complaint comes in the wake of the June 21, 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, which overruled the long-standing sales and use tax physical presence nexus standard established in Quill v. North Dakota. The plaintiffs that filed the complaint are several large online retailers.

The regulation 

Unlike the dozens of states that have adopted “Wayfair-styled” economic sales tax nexus thresholds in the last year, the Massachusetts “cookie” nexus regulation is not based solely on a concept of marketplace activity, but instead requires the remote seller to establish a physical presence. 

The regulation, which became effective on Oct. 1, 2017, (830 CMR 64H.1.7) requires “Internet Vendors” with a principal place of business outside of Massachusetts that are not otherwise subject to tax in the state to register, collect and remit Massachusetts sales or use tax when sales into the state exceed $500,000 in 100 or more transactions during the preceding 12 months. An Internet Vendor is defined as a vendor that derives sales from transactions consummated over the internet, whether such transactions are 1) completed on a website maintained or operated by the vendor itself, or a website maintained or operated by a related person or a person with which the vendor contracts, including a marketplace facilitator and/or 2) fulfilled by a related person or a person with which the vendor contracts.

In order to be subject to the registration, collection and remittance obligations, Internet Vendors that exceed the sales thresholds must also 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 1) property interest (e.g., cookies, apps, etc.) or 2) contracts or relationships with third parties that result in the use of in-state servers or services.

The complaint

The complaint challenges the use of the regulation by the Massachusetts Department of Revenue to enforce sales and use tax liabilities against remote sellers for tax not collected on sales to Massachusetts consumers prior to the Wayfair decision. The department has issued demands for each of the named retailers based on the position that the retailers had satisfied the nexus criteria laid out in the cookie nexus regulation.

The plaintiffs contend that the Massachusetts cookie nexus regulation is not constitutionally permissible as it violates the Commerce Clause of the U.S. Constiution because the regulation:

  1. requires remote sellers to incur significant liabilities for periods that predate the Wayfair decision, where the vendors opted not to collect tax based on then-existing constitutional standards and U.S. Supreme Court precedent
  2. lacks the elements (e.g., retroactivity) outlined by the Wayfair court that would protect against placing an undue burden on interstate commerce. Specifically, the compliant highlights that “The Supreme Court made clear in Wayfair that an essential element of a state law that does not discriminate against interstate commerce is a prohibition on retroactive enforcement for periods before the Court’s decision overruling the Quill physical presence standard”
  3. discriminates against interstate commerce by requiring remote sellers to incur significant liabilities for uncollected taxes based on then-existing constitutional standards, while Massachusetts vendors who collected tax on Massachusetts sales do not incur such liability
  4. allows for double taxation of interstate commerce by requiring remote sellers to incur significant liabilities on sales made to Massachusetts consumers who have reported or will report use tax on such transactions

In addition, the plaintiffs assert that the Massachusetts’ cookie nexus regulation violates the Internet Tax Freedom Act and the Supremacy Clause of the U.S. Constitution since the regulation’s “general rule” only applies to internet vendors and does not apply to other remote sellers, such as television or mail order vendors.

It is important to note that no court has validated the constitutionality of the Massachusetts cookie nexus regulation based upon the Quill physical presence standard or Wayfair economic nexus standards.


Remote sellers with sales into Massachusetts for periods that predate the Wayfair decision should monitor the outcome of this case, as it may determine whether remote sellers with Massachusetts sales will have liabilities for periods that predate the Wayfair decision, despite the fact that the regulation is based on Quill’s physical presence standard. Remote taxpayers should note that the regulation is also being challenged in Virginia.

This case also presents an opportunity for a state court to evaluate whether Wayfair style laws impose an undue burden on interstate commerce on grounds other than “substantial nexus.”  In addition, as the Wayfair decision did not establish constitutionally permissible economic nexus thresholds, this case may present an opportunity for a state court to opine on the constitutionality of such thresholds. However, it is unclear how the court will address these issues considering the differences in the law from that of the purely economic sales tax nexus law at issue in the Wayfair decision.