Massachusetts to Move Forward With New “Cookie” Nexus Regulation Effective October 1

by Reed Smith

Reed Smith

On September 13, Massachusetts issued a final regulation that will require many “internet vendors” without traditional “physical presence” in Massachusetts to collect and remit sales and use tax, effective beginning October 1.1 Despite numerous comments and objections to the draft, the final regulation is substantially similar to the proposed regulation issued in July, and Directive 17-1 that was withdrawn in June. The regulation represents yet another attempt by a state to work around the U.S. Supreme Court’s decision in Quill Corp v. North Dakota, and to require remote sellers to collect tax from sales to in-state customers.


A new Massachusetts regulation, effective October 1, takes the position that many internet vendors have already created physical presence in Massachusetts through the use of software, advertising cookies, and other third-party contacts in the state, and can be required to collect and remit Massachusetts sales tax without overturning the “physical presence” requirement reaffirmed by the U.S. Supreme Court in Quill.2 The regulation is sure to see immediate challenges, and remote sellers that are not collecting Massachusetts sales and use tax should follow those developments closely. If South Dakota’s litigation directly challenging Quill fails, the “Massachusetts approach” could be the next method states latch onto in their unsuccessful (thus far) decades-long quest to remove the “physical presence” requirement for sales tax collection.


On April 3, 2017, the Department issued Directive 17-1 (the “Directive”), which would have imposed sales tax collection responsibilities on any vendor that had (i) more than 100 sales delivered into Massachusetts, and (ii) Massachusetts sales in excess of $500,000 during a 12-month period. The new collection and reporting requirements were scheduled to take effect July 1, 2017, but they were revoked by the Department prior to the effective date.3 In its notice revoking the Directive, the Department indicated that it would instead be proposing regulations that would seek to achieve the objectives laid out in Directive 17-1.4

On July 28, 2017, the Department issued Proposed Regulation 830 CMR 64H.1.7 (the “proposed regulation”) that would require “internet vendors” to collect and remit sales tax on sales to customers in Massachusetts.5 The proposed regulation largely tracked the Directive.6

The Department accepted written comments to the proposed regulation, and held a public hearing August 24.7 In its response to public comments issued simultaneously with the final regulation, the Department deferred to its analysis set forth in the Directive as supporting its legal analysis as to the regulation’s validity. The Department also rejected comments that it would be unrealistic for the Department to expect vendors to be ready to collect and remit Massachusetts sales and use tax by the October 1 effective date for the proposed regulation.

Tax obligations imposed on “Internet Vendors” with sufficient contacts with Massachusetts

The regulation asserts that most internet vendors have physical presence in Massachusetts through their own contacts or those of a representative. Specifically, the following contacts can create physical presence under Quill:

  • In-state software
  • In-state cookies
  • Contracts with a content distribution network (“CDN”)
  • In-state representatives
  • Provision of additional services beyond delivery

Any vendor that has the contacts with Massachusetts outlined in the regulation would be required to collect and remit Massachusetts sales tax for its sales to Massachusetts customers if two conditions are satisfied during the prior calendar year:8

  • The internet vendor made $500,000 or more in sales to Massachusetts customers completed over the internet
  • The internet vendor completed 100 or more transactions that were delivered to Massachusetts

The approach taken by the Department in drafting the Directive and the regulations that followed differs significantly from the approach taken by other states, like South Dakota, that have enacted “Kill Quill” bills. The Department of Revenue takes the position that most remote internet vendors already have sufficient contacts with Massachusetts to satisfy the physical presence requirement under Quill, and are obligated to collect Massachusetts sales tax regardless of whether Quill is overturned.

By taking the position that most remote internet vendors already have sufficient contacts with the Commonwealth to satisfy the physical presence requirement of Quill, the Department’s approach reflected in the final regulations potentially represents an even greater threat to remote sellers than the “Kill Quill” statutes enacted by other states because (1) its effectiveness is not contingent on the U.S. Supreme Court actually granting certiorari in a nexus case and deciding it in a manner that would overturn Quill; and (2) it could mire any vendor seeking to challenge the constitutionality of the regulation “as applied” in extensive discovery and litigation, without resulting in an outcome that would provide meaningful guidance for other vendors.

What’s next?

While the Department has likely cured the administrative defects of the Directive by promulgating the final regulation in accordance the regulatory notice and comment requirements of the Massachusetts APA, we still expect that some internet vendors (or organizations representing such vendors) will challenge the final regulation as violating the Commerce Clause, the Internet Tax Freedom Act9 and the Due Process Clause of the United States Constitution. It may take some time before these challenges make their way through the Massachusetts administrative appeal process to the courts. In the meantime, internet vendors will continue to watch South Dakota v. Wayfair, Inc., the case challenging that state’s “Kill Quill” legislation.10

  1. 830 CMR 64H.1.7. Although the regulation was released September 13, it will be unofficial until published in the Massachusetts Register September 22.
  2. 504 U.S. 298 (1992).
  3. Directive 17-1 (Apr. 3, 2017); Directive 17-2 (June 28, 2017). Following the publication of Directive 17-1, a suit was brought by the American Catalog Mailers Association and NetChoice in the Superior Court of Suffolk County alleging, among other things, that the Directive violated the Massachusetts Administrative Procedure Act (“Massachusetts APA”) as a regulation issued without the required notice and comment period. On June 28, 2017, the same day that Directive 17-1 was withdrawn, the Superior Court issued a memorandum of decision and order granting summary judgment on the plaintiffs’ claim that Directive 17-1 was promulgated in a manner that violated the Massachusetts APA. American Catalog Mailers Association and NetChoice v. Heffernan, Superior Court Civil Action No. 2017-1772 BLS1 (June 28, 2017).
  4. Directive 17-2 (June 28, 2017).
  5. Proposed 830 CMR 64H.1.7.
  6. See Notice of Public Hearing, August 24, 2017, regarding 830 CMR 64H.1.7: Vendors Making Internet Sales available here.
  7. See Notice of Public Hearing, August 24, 2017, regarding 830 CMR 64H.1.7: Vendors Making Internet Sales.
  8. For the period October 1, 2017 through December 31, 2017, the 12-month period October 1, 2016 through September 30, 2017 is used in lieu of the prior calendar year.
  9. P.L. 105-277 (1998).
  10. The Supreme Court of South Dakota issued a decision September 14, 2017, striking down that state’s “Kill Quill” legislation. The state will likely appeal the decision to the Supreme Court of the United States before the end of the year. See our client alert on the decision.

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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