Six online retailers recently sued the Massachusetts Department of Revenue over the pre-Wayfair enforcement of regulation 830 CMR 64H.1.7 (“Remote Sales Tax Regulation”). The complaint argues that, prior to the Supreme Court’s decision in South Dakota v. Wayfair, Inc., No. 17-494 (U.S. Jun. 21, 2018), the Remote Sales Tax Regulation violated the Due Process Clause of the U.S. Constitution and the Internet Tax Freedom Act. On Due Process, the six online retailers argue the Remote Sales Tax Regulation places an undue burden on, and discriminates against, interstate commerce. The online retailers also argue that the Remote Sales Tax Regulation violates the Internet Tax Freedom Act’s prohibition of discriminatory taxes on electronic commerce.
This is not the first time Massachusetts has been sued over its Remote Sales Tax Regulation, but it is the first time it is being sued at home. On October 25, 2017, Crutchfield Corp filed a complaint in a Virginia state court challenging the validity of the Massachusetts regulation. The Virginia lawsuit is currently pending. Additional details regarding the case along with a more detailed discussion of the Remote Sales Tax Regulation and potential constitutional challenges pre-Wayfair can be found here (“Massachusetts Promulgates Controversial Remote Vendor Nexus Regulation; Virginia E-Commerce Retailer Files Suit Protesting Constitutional Overreach” ). In sum, under the Remote Sales Tax Regulation, an out-of-state online retailer making sales into Massachusetts is deemed to have a Massachusetts sales tax collection obligation if it has certain minimum contacts (e.g., software downloaded by an in-state customer or “cookies” stored on in-state computers) and has more than $500,000 in Massachusetts sales from 100 or more transactions into the state. Central to the lawsuit is whether the minimum contacts defined under the Remote Sales Tax Regulation are sufficient to satisfy the physical presence standard that existed before Wayfair (see “U.S. Supreme Court Eliminates the Physical Presence Standard in Landmark South Dakota v. Wayfair, Inc., Ruling” ).
The Remote Sales Tax Regulation was effective October 1, 2017, eight months before the Supreme Court overturned its physical presence nexus standard originally outlined in Quill v. North Dakota, 504 U.S. 298 (1992). While Wayfair does not address whether certain forms of physical presence identified in 830 CMR 64H.1.7 are sufficient to create traditional sales tax nexus, the Court generally overturned the physical presence requirement in allowing South Dakota’s economic nexus provision to stand. Accordingly, the six online retailers are asserting that the Remote Sales Tax Regulation was unconstitutional before Wayfair and thus can only be enforced prospectively for periods post-Wayfair.
Massachusetts has been aggressive in enforcing its Remote Sales Tax Regulation for the pre-Wayfair period, sending letters to multiple out-of-state businesses assumed to have surpassed the sales thresholds but that have not filed sales tax returns in Massachusetts. The outcome of this lawsuit, as well as the corollary lawsuit filed in Virginia, will impact Massachusetts’ pursuit of these claims. Also, depending on how this suit is resolved, it may impact how other states enforce pre-Wayfair economic nexus provisions or attempt to apply post-Wayfair statutes retroactively. For example, Rhode Island is currently seeking to enforce its pre-Wayfair economic nexus provision. Taxpayers should watch how the Massachusetts and Virginia courts rule on these cases and consider how those rulings could impact the positions advanced by other states.