Massachusetts has a gained a new appetite for “cookies” and “apps" as a way to collect sales taxes from certain out-of-state vendors that make internet sales to residents within the Commonwealth. The Massachusetts Department of Revenue has issued regulations that expand the “physical presence” requirement to now include downloaded apps and internet cookies in connection with sales made to Massachusetts customers.

Vendors with a principal place of business located outside of Massachusetts are required to collect state sales tax when they are “engaged in business in the Commonwealth.” Under the U.S. Supreme Court decision in Quill v. North Dakota, out-of-state vendors must have a “physical presence” within the Commonwealth in order for Massachusetts to have authority to impose a sales tax on them when they sell tangible personal property or sell certain services to customers within the Commonwealth.

Will This Impact Your Business?

Under the new regulations, an out-of-state vendor that derives sales from transactions consummated over the Internet (“Internet vendors”) meeting the Threshold Sales requirement are considered “engaged in business in the Commonwealth” with the requisite physical presence if they have:

  1. property interests in and/or the use of in-state software (e.g., downloadable “apps”) and ancillary data (e.g., “cookies”) which are distributed to or stored on the computers or other physical communications devices of the vendor's in-state customers, enabling the vendor's use of such physical devices;
  2. 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
  3. 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.

In issuing these regulations, the Commonwealth is distinguishing Internet vendors from the mail-order retailers that were the subject of Quill, based on its assertion that Internet contacts with the state are different from using the mail and common carriers. In Quill, the U.S. Supreme Court held that a state could not impose sales tax obligations on a mail-order vendor merely because of the vendor’s use of the mail and common carriers. Instead, the vendor would need to have some sufficient physical presence in the state. To satisfy the physical presence test in Quill, the Massachusetts regulations view the use of cookies as creating sufficient physical presence within the Commonwealth.

“Cookies” contain data that is sent from a website and is stored on the user's computer or phone by the user's web browser while the user is browsing. Cookies provide certain identifying information and tracking habits about the user. According to the regulations, the term “cookies” means “[T]ext data files generally used by an Internet vendor to enhance its customer sales. Cookies are stored locally on computers and physical communications devices of the customers of an Internet vendor when such customers visit the vendor’s website for the first time and act to identify the customer on each subsequent visit.” Since these “cookie” files reside on computers that exist physically in Massachusetts the cookies are owned by the vendor (not the customers), and are used to help facilitate sales, according to Massachusetts, those cookies trigger “in-state business activity” for sales tax purposes.

The regulations, however, do contain two exclusions if Internet vendors are using out-of-state servers:

  1. 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, or
  2. the Internet vendor uses a provider of Internet access service or online services (a “provider”) if (a) the display of such vendor's information or content is only on the provider's out-of-state computer server, or (b) the vendors orders are processed through the provider's out-of-state computer server

Based on the new regulations, out-of-state Internet vendors whose only connection to the Commonwealth is through internet sales to Massachusetts customers, will need to be cognizant of how these new rules impact their sales tax obligations within Massachusetts.