United States

Massachusetts: Internet Retailers Meeting Bright-Line Receipts Test required to Collect Sales and Use Taxes

Apr 10, 2017
From KPMG TaxWatch

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The Massachusetts Department of Revenue recently issued Directive 17-1 outlining when it believes out-of-state Internet vendors are required to collect and remit Massachusetts sales or use tax. In the Directive, the Department adopts a bright-line rule based on the dollar amount of Massachusetts sales or number of Massachusetts transactions. In general, Internet retailers with over $500,000 of sales into Massachusetts, or 100 or more sales transactions delivered into Massachusetts are deemed to have a collection and remittance obligation. The measurement period is July 1, 2016 to June 30, 2017 for the six-month period from July 1, 2017 to December 31, 2017. For each calendar year beginning with 2018, the measurement period is the preceding calendar year.

Although it appears that Massachusetts is applying an economic nexus standard, the Directive takes the position that it is not doing so. Under Massachusetts law, engaged in business in the Commonwealth includes “exploiting” the state’s retail sales market through “computer networks” and “other communications medium.”  The Directive notes that, unlike the catalog vendors discussed in Quill, Internet retailers do not limit their contacts with the state to mail and common carrier.  Rather, in the Department’s view, modern-day Internet vendors will invariably have one or more contacts with the state that will constitute an in-state physical presence. The Directive first discusses software, noting that Internet retailers own software and apps that are downloaded and used by in-state customers on their computers and personal communication devices. The ownership of software, which is considered tangible personal property, in the state by large Internet vendors, constitutes an in-state physical presence within the meaning of Quill. As, the software is instrumental in the creation of the vendor’s in-state sales, it would not be considered de minimis. Large Internet vendors also enhance sales through the use of “cookies.” While cookies are not software, they are likewise present in the state on customers’ computers and devices and are used to facilitate and enhance the vendor’s sales. The Directive points out that the ownership and use of these in-state cookies also results in in-state business activity that distinguishes Internet vendors from the mail order vendors addressed in Quill. In addition to software and cookies, the Directive notes that large Internet retailers routinely contract with providers of content distribution networks (CDNs) to use local servers to accelerate the delivery of web pages to customers. These CDN servers, therefore, perform local activities on behalf of the Internet retailer that are significantly associated with the retailer’s ability to establish and maintain a market for sales. Finally, the Directive discusses other in-state contacts that large Internet retailers may have that may result in a Massachusetts physical presence, including use of “online marketplaces” to facilitate sales, and use of delivery services providers that perform additional services, such as logistics, order fulfillment, storage, return processing, and order management. Please contact Joe Senier at 617-988-1025 with questions on Directive 17-1.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.