For Vendors Making Internet Sales to Massachusetts Customers-A New Proposed Regulation Expands the Definition of Tax Nexus

by M. Robinson & Company, P.C.
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A new regulation in Massachusetts, 830 CMR 64H.1.7, will expand the definition of tax nexus for out-of-state vendors making internet sales to Massachusetts customers.  The regulation will become effective on October 1, 2017.

Online sellers are subject to the new regulation if they meet the “Bright Line Rule” of  $500,000 in Massachusetts sales within the preceding twelve months, and if they accomplished those sales in 100 or more transactions with delivery into Massachusetts.  These vendors must register and begin to collect and pay over Massachusetts sales tax beginning on October 1, 2017.  Any online vendor who creates a physical presence on its customers’ computers or mobile devices using apps, cookies or other software will be subject to Massachusetts tax nexus—even if they have no brick-and-mortar stores, personnel, inventory or  other physical presence in the state.

The precise language of the regulation states the general rule as follows.  Some exceptions apply.

General Rule. An Internet vendor with a principal place of business located outside the state that is not otherwise subject to tax is required to register, collect and remit Massachusetts sales or use tax with respect to its Massachusetts sales as follows:

(a)  For the period beginning October 1, 2017 through December 31, 2017, if during the preceding 12 months, October 1, 2016 to September 30, 2017, 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.

(b)  For each calendar year beginning with 2018, 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.

Public Comments

A public hearing was held on August 24, 2017 in Boston.  The Massachusetts Department of Revenue received comments from two law professors, a practicing lawyer, and four organizations representing the retail industry and/or e-commerce businesses.

The Massachusetts Commissioner of Revenue, Christopher C. Harding, published his response to the public comments on September 8, 2017.  He made the following three conclusions, which were supported by a majority of the commenters:

  1. The regulation is consistent with the public policy of imposing Massachusetts sales tax equally on both brick-and-mortar stores located in Massachusetts and online vendors who sell to Massachusetts customers.
  2. The regulation is legal under the dormant commerce clause analysis of Quill v. North Dakota, 504 U.S. 298 (1992) and subsequent cases. The “physical presence” test established in Quill will be satisfied by online vendors who upload “apps” and “cookies” that Massachusetts consumers download into their phones, tablets and computers.
  3. Online retailers who meet the “Bright Line Rule” (see above) will, in most instances, have tax software in place that is readily adaptable to the imposition of sales tax in Massachusetts. Tax software providers can make the change for customers with any postal code corresponding to a Massachusetts address.  It should be possible to implement these changes within the next few weeks, according to Commissioner Harding.

Urgent Action Required

Therefore, online vendors who sell to Massachusetts customers but have not yet registered on MassTaxConnect should immediately consult a tax professional to evaluate whether they are required to register, collect and pay over sales taxes beginning on October 1, 2017.  The tax professional, in evaluating this question, should also consider whether the company was non compliant under the old law of nexus, and if so, suggest options, such as voluntary disclosure, to rectify the past noncompliance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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