United States

Massachusetts revokes economic sales tax nexus policy


UPDATE (6/29/17): On June 28, 2017, the Massachusetts Department of Revenue released Directive 17-2, revoking Directive 17-1. Directive 17-1 would have established sales tax nexus for remote vendors making over $500,000 of sales in 100 or more transactions into the state, scheduled to become effective on July 1, 2017. Directive 17-2 indicates that the department anticipates establishing sales tax nexus regulations for large internet vendors through the rulemaking process rather than through a policy initiative. The revocation of Directive 17-1 is effective immediately. It has also been reported that litigation challenging Directive 17-1 will be withdrawn. Remote vendors selling into Massachusetts should expect economic sales tax nexus updates in the future and should speak to their tax advisors with questions.  

ORIGINAL (4/6/17): On April 3, 2017, the Massachusetts Department of Revenue released Directive 17-1, requiring out-of-state internet vendors making over $500,000 of sales into Massachusetts collect sales tax beginning July 1, 2017.

The policy

Internet vendors with a principal place of business outside of Massachusetts must register, collect and remit Massachusetts sales or use tax as specified according to the following periods:

  1. For the six-month period, July 1, 2017, to Dec. 31, 2017: the vendor makes in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions during the previous 12 months covering July 1, 2016, through June 30, 2017
  2. For periods after Dec. 31, 2017: the vendor makes in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions during the previous calendar year.

The rationale

The directive explains that a vendor makes taxable sales in Massachusetts when it is: (1) ‘engaged in business’ under the commonwealth’s taxing statutes, and (2) meets the constitutional requirements of the Due Process Clause and Commerce Clause of the U.S. Constitution as outlined in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

Engaged in business

Under Massachusetts law, engaging in business in the commonwealth includes exploiting the retail sales market through any means, including through computer networks and other communications medium. The directive concludes that internet vendors are engaged in business because those vendors exploit the state’s retail sales market through ‘computer networks’ and ‘other communications medium.’

U.S. Constitution requirements under Quill

Quill articulated that a remote vendor may be subject to a state’s sales or use tax collection obligation when it has an in-state physical presence. However, the directive explains that Quill did not define the term ‘physical presence.’ Instead, physical presence was to be determined on a case-by-case basis, and that physical presence includes either vendors owning, leasing or licensing in-state property, or vendors relying on one or more in-state representatives ‘to establish and maintain a market’ in the state for its sales.

In concluding that internet vendors meet the standards set out in Quill, the directive distinguishes the business activities of the mail-order vendors of Quill from those of internet vendors. Internet vendors do not limit their contacts with the state to common carriers as mail-order vendors do. Additionally, modern-day internet vendors with a large volume of in-state sales (labeled ‘large internet vendors’ by the directive) invariably have one or more contacts with the state that constitute an in-state presence.

The directive explains that large internet vendors own software, which is downloaded and used by in-state customers on their computers and mobile devices, that facilitates or enhances the vendor’s in-state presence and ability to make sales. This software may be affirmatively downloaded, as in the case of an app, or may be downloaded as the result of the user’s general exploration of the vendor’s website, as in the case of browser or web apps.

As in the case of software, large internet vendors also enhance their customer sales through the use of text data files, or cookies. Cookies are not software but are present in the state and serve to facilitate an internet vendor’s in-state sales. Large internet vendors store cookies on their customers’ computers and communication devices when the customers visit the vendor’s website. According to the directive, cookies facilitate sales by customizing the shopping experience and enabling a vendor to track their customers’ behavior over time and to deliver ads that are specific to each customer. The directive asserts that the ownership and use of these in-state cookies results in in-state business activity by the vendors, which distinguishes such vendors from those evaluated in Quill.

Additionally, the directive notes that large internet vendors routinely contract with content distribution networks (CDNs) to accelerate the delivery of their web pages to customers. By using CDNs, customers of the large internet vendors are less likely to exit the vendors’ web page without making a purchase and more likely to return for future business. When that activity takes place in the commonwealth, it establishes an in-state physical presence on behalf of the vendor.

Finally, large internet vendors may also enter into agreements with certain in-state representatives that establish an in-state physical presence, such as agreements with online marketplaces, e.g., Amazon.com. Although the website maintained by the online marketplace is virtual, some of the services provided by the marketplace may be physical in nature, such as order fulfillment, return processing, access to the online marketplace’s customer service team and the preparation of sales reports or other analytics. Those activities help establish and maintain the internet vendor’s market when performed in the commonwealth and will result in an in-state physical presence for the internet vendor.


It was previously reported that Massachusetts Gov. Baker would propose an internet vendor collection policy, projected to bring in $30 million of sales tax revenue on a yearly basis. Through this directive, Massachusetts becomes the sixth state to address economic sales tax nexus after Alabama, South Dakota, Tennessee and Wyoming. Vermont has also enacted an economic sales tax nexus law that only becomes effective the later of July 1, 2017, or beginning on the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement established by Quill.

Massachusetts is the first state to address economic sales tax nexus through a policy directive, and not through legislation or rulemaking. The directive, instead of directly challenging Quill’s physical presence standard, distinguishes internet retailer activity from mail-order catalogue activity. However, it is not entirely clear whether the directive’s interpretation of physical presence would withstand judicial scrutiny under Quill.

Although similar laws in Alabama, South Dakota and Tennessee are currently under litigation, remote internet vendors selling into Massachusetts should speak to their tax advisors about compliance with the new directive. Qualifying remote retailers must begin collection by July 1, 2017.

For a comprehensive overview of the current economic sales and use tax nexus landscape, please read our article, Economic sales and use tax nexus laws.


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