Massachusetts Publishes Sales Tax Collection Regulation With Expansive View of Physical Presence

The Boston Tea Party is closely associated with the slogan “no taxation without representation” but the Commonwealth of Massachusetts appears to be just fine with requiring collection of taxes from the represented by those located outside the state who don’t get a vote.

The number of states taking aggressive positions to expand the number of out of state entities that must take some action with regard to the state’s sales or use taxes continue to expand.  Massachusetts has issued regulations with an effective date of September 22, 2017 that require internet vendors who have sales of more than $500,000 into Massachusetts and more than 100 transactions resulting in delivery into Massachusetts to collect and remit sales taxes. [Massachusetts Regulation 830 CMR 64H.1.7]

The regulation begins with the Department’s statements regarding why this rule does not run afoul of the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), especially the physical presence requirement in that ruling.  The Department states that virtually every internet seller makes use of some Massachusetts located property, stating:

Unlike the mail order vendor at issue in Quill, Internet vendors with a large volume of Massachusetts sales invariably have one or more of the following contacts with the state that function to facilitate or enhance such in-state sales and constitute the requisite in-state physical presence:

a. property interests in and/or the use of in-state software (e.g., “apps”) and ancillary data (e.g., “cookies”) which are distributed to or stored on the computers or other physical communications devices of a vendor’s in-state customers, and may enable the vendor’s use of such physical devices;

b. contracts and/or other relationships with content distribution networks resulting in the use of in-state servers and other computer hardware and/or the receipt of server or hardware-related in-state services; and/or

c. contracts and/or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services, including, but not limited to, payment processing and order fulfillment, order management, return processing or otherwise assisting with returns and exchanges, the preparation of sales reports or other analytics and consumer access to customer service. [Reg. 830 CMR 64H.1.7(1)(b)]

The regulation notes that this ruling applies only to internet vendors who otherwise would not be subject to any tax.  If an internet vendor is subject to collecting the tax due to other factors then these tests would not apply and collection would be required with the first dollar of sales.

Similarly, if the vendor does not have one of three contacts noted at Reg. 830 CMR 64H.1.7(1)(b) reproduced earlier.  The following two examples of vendors that would not be subject to collection of Massachusetts sales tax are found in the regulation (Reg. 830 CMR 64H.1.7(4)):

(a) 830 CMR 64H.1.7(3) does not apply if the vendor’s only contacts with Massachusetts are that in-state customers may access a site on the vendor’s out-of-state computer server. Further, the mere fact that in-state customers may access such site, without more, will not be considered a factor in determining a vendor’s tax collection obligation. See ITFA § 1105.

(b) A provider of Internet access service or online services (a “provider”) is not deemed to be the agent of a vendor for purposes of determining the application of 830 CMR 64H.1.7(3) to such vendor solely as a result of: 1. the display of such vendor’s information or content on the provider’s out-of-state computer server, or 2. the processing of orders through the provider’s out-of-state computer server. See id.

Since many businesses outsource hosting for websites, the business may have trouble determining whether any servers are located in Massachusetts that may house their data.  As a practical matter, it may be difficult to prove an entity isn’t subject to this rule if the entity does any sort of outsourcing, since the machines servicing some or all of the company’s website could be located anywhere.

An initial “interim period” test applies to determine if an organization must begin collection as of October 1, 2017.  As the regulation provides at Reg. 830 CMR 64H.1.7(3)(a) the following test will be applied to determine if collection is required through the end of 2017:

(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.

For periods after December 31, 2017 the testing period will be the preceding calendar year.

Vendors subject to this tax must file a report with Massachusetts by the 20th day of the each month to report sales for the prior month and pay over the tax. Failure to file the return or pay the tax will subject the taxpayer to penalties and interest. [Reg. 830 CMR 64H.1.7(7)]