Avalara : It takes more than cookies on a computer to trigger nexus in Massachusetts

How physical do you have to get to establish physical presence nexus and an obligation to collect and remit sales tax in Massachusetts? The Massachusetts Appellate Tax Board has decided it takes more than putting cookies on computers in the state.

In a Findings of Fact and Report dated December 7, 2021 (not yet publicly available), the tax board decided the Massachusetts Department of Revenue (MDOR) could not impose a sales tax collection and remittance obligation on an out-of-state internet vendor based on cookies and apps placed on the computers and portable devices of its Massachusetts customers for the period from October 1, 2017, through December 31, 2017. This should put an end to a dispute that began October 7, 2021. But how did we get to this point?

Sales tax nexus was tied to physical presence until the Wayfair decision

Prior to June 21, 2018, when the Supreme Court of the United States issued the landmark decision on South Dakota v. Wayfair, Inc., states could require a business to collect and remit sales tax only if the business had a physical presence in the state. Out-of-state businesses with no physical tie to a state (i.e., remote vendors) could not be compelled to register for sales tax.

Exactly what constitutes physical presence for sales tax purposes varies a bit from state to state, but physical presence typically includes leasing or owning real estate in a state, having inventory in a state, or having employees in a state permanently or temporarily. For example, making deliveries in a company-owned vehicle could trigger physical presence nexus, as could sending a sales representative to a trade show in another state.

In 2017, frustrated by its inability to tax the growing number of remote internet sales, MDOR came up with an ingenious work-around to the physical presence constraint. Under Regulation 830 CMR 64H.1.7, physical presence nexus can be established through the software or ancillary data (e.g., apps or cookies) a remote seller places on computers and devices in Massachusetts to foster sales.

Massachusetts began enforcing cookie nexus October 1, 2017. Before a year had passed, the Supreme Court overturned the physical presence rule in South Dakota v. Wayfair, Inc.

Supreme Court acknowledges complexities of Cyber Age

Although the Supreme Court had upheld the physical presence rule in 1992 (Quill Corp. v. North Dakota), the Wayfair decision noted that:

• "Attempts to apply the physical presence rule to online retail sales have proved unworkable"
• States are "confronting the complexities of defining physical presence in the Cyber Age"

The high court then referenced the Massachusetts cookie nexus regulation and a similar standard adopted by Ohio.

The opinion reads, in part: "It is not clear why a single employee or a single warehouse should create a substantial nexus while 'physical' aspects of pervasive modern technology should not. For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers' computers. A website may leave cookies saved to the customers' hard drives, or customers may download the company's app onto their phones."

After the Supreme Court overturned the physical presence rule with Wayfair, states could base a sales tax obligation on a remote seller's economic activity in the state, or economic nexus.

Massachusetts adopts economic nexus but doesn't completely eliminate cookie nexus

Like every other state with a sales tax, Massachusetts adopted economic nexus in the wake of the Wayfair decision. It took effect in Massachusetts on October 1, 2019, the same date Massachusetts cookie nexus ceased to be in effect.

According to the repealed cookie nexus regulation, "the provisions of 830 CMR 64H.1.7 no longer apply as of October 1, 2019." In theory, then, MDOR could continue to base assessments on cookie nexus for the period from October 1, 2017, through October 1, 2019. And it has. MDOR has been locked in a dispute with one remote retailer over a $60,139.81 assessment (unpaid sales tax plus penalties and interest) that initially resulted from the Massachusetts cookie nexus regulation.

It was an existential battle, really: Did Massachusetts have the right to enforce cookie nexus for the period prior to the Wayfair decision? According to the Massachusetts Appellate Tax Board, it did not. See the Massachusetts Appellate Tax Board, Docket No. C339523, for more details.

Sales tax laws that are no longer in effect today can often create past tax liabilities for businesses, for the period when they were in effect. To learn more about cookie nexus, economic nexus, and other sales tax requirements, read Avalara Tax Changes 2022.