A couple of weeks ago we summarized Massachusetts’ Directive 17-1, a new piece of online sales tax legislation that redefined physical presence to include downloaded apps and internet ‘cookies’ – the data websites store on users’ computers and phones to track visits. While Directive 17-2, which repealed the prior directive, was announced at the end of June, the original law redefining physical presence (or nexus) was so distinctive that we wanted to take a closer look at the rule.
Massachusetts’ Online Sales Tax Directive 17-1
What made this state’s approach to online sales tax so uncommon? Sylvia Dion, our colleague and a principal at PrietoDion Consulting Partners, provides a nice summary in a recent blog post for SalesTaxSupport.com. I’ve included a few of her key points below, but the reason so many opposed it (including trade groups) is that it redefines nexus, twisting established precedent to justify collecting sales tax from internet vendors.
It’s worth noting that, unlike other states that have enacted online sales tax legislation, Directive 17-1 was established as an administrative policy from the Massachusetts Department of Revenue rather than the state legislature. Also, because the directive clearly targets “internet vendors,” there is a strong argument that it could be discriminatory.
The most interesting part of this directive, however, is the detailed discussion and justification accompanying it, contorting previous precedent and state law to increase the number of online retailers responsible for charging customers for state sales tax.
How Directive 17-1 Fits Within Current Massachusetts Sales Tax Law
The Department of Revenue starts by quoting the state’s sales tax law that establishes when a vendor makes taxable sales within the Commonwealth (or is “engaged in business in the Commonwealth”) and meets the Quill Corp. v. North Dakota requirements.
The directive goes on to explain that being “engaged in business within the Commonwealth” is defined as having a location inside the state or regularly/systematically soliciting services to be performed within the state. Then, it goes on to explain, “an internet vendor with significant Massachusetts sales meets the ‘engaged in business’ definition because, it is exploiting the state’s retail sales market through ‘computer networks’ and ‘other communications medium.'”
What about Quill Corp. v. North Dakota?
The directive goes on to explain that Quill was just reaffirming another Supreme Court case, National Bellas Hess, which also focused on mail order vendors that reached state residents through U.S. mail/common carrier. In reviewing these two cases, the language clarifies, “A vendor that limits its in-state contacts to those of mail or common carrier does not have an in-state physical presence.”
Massachusetts’ Directive 17-1 continues by pointing out how internet vendors’ businesses and activities are different from the mail order vendors, and physical presence is established through the sheer quantity of in-state sales as well as in-state contacts expanding beyond mail/common carrier.
The specific points the Department of Revenue lays out include:
- Mobile and Web Apps: Because the internet vendor owns the software downloaded by in-state customers, it constitutes physical property.
- Cookies: While internet “cookies” aren’t specifically software, they do reside on consumers’ computers and devices, also establishing physical presence.
- Content Distribution Networks: These “Accelerate the delivery of an internet vendor’s web pages to its customers, and, which in turn ensure that the vendors’ customers are less likely to exit the vendor’s site without making a purchase.” Because these networks “establish and maintain” a market in the state, the Department of Revenue claims it constitutes an in-state presence.
- Online Marketplaces and Delivery Providers: The directive notes yet again that, “These enhanced services provided by some delivery service providers help to enhance an internet vendor’s in-state sales and constitute an in-state presence.”
Our Thoughts on Directive 17-1
While we agree the online sales tax debate does need some sort of resolution, this isn’t it. The directive’s interpretations of precedent like Quill and Bellas Hess are a stretch, clearly created to target internet vendors.
We’re glad to see this directive wasn’t actually initiated, although it’s just the most recent in a long line of states creating their own solutions to the online sales tax debate. It will be interesting to see where it continues to go.
To find out more about the online sales tax debate, or to learn how it may impact your business, contact us today!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
