Just days before Massachusetts was set to enforce a new revenue directive, the Commonwealth has changed course. Directive 17-1: Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax 17-1, which sought to impose the collection of sales tax on certain out-of-state businesses, has been revoked.
Directive 17-1 targeted out-of-state businesses who solicit customers in the state by redefining what it means to be “engaged in business in the commonwealth.” Specifically, the Commonwealth was relying on the presence of internet cookies. Internet cookies are data files which are stored on your computer by a web browser and contain information about you – often, your name and interests – that companies use to tailor your internet experience. The Department of Revenue in Massachusetts claims that like software, internet cookies are still “present in the state and serve to facilitate such vendor’s in-state sales.” That, they believe, constitutes enough of a presence to require the collection of sales tax.
(You can read more about the history of sales tax and presence here.)
It’s a novel approach and at the time, I noted that I couldn’t imagine how the matter wasn’t going to end up in court. Sure enough, it did. Just over two weeks ago, NetChoice, a trade association of Internet companies and organizations, and American Catalog Mailers Association (“ACMA”), a trade association representing the interests of companies, individuals, and organizations engaged in and supporting catalog marketing, filed suit to stop the new rule from taking effect. Among the arguments in the lawsuit were allegations that the Commonwealth had not followed proper procedures with respect to the directive.
“We welcome the move made by the Massachusetts Revenue Commissioner today,” said Steve DelBianco, executive director of NetChoice. He continued, “After hearing our arguments in court yesterday, the DoR realized they were in for a prolonged, and ultimately losing legal battle. Today’s actions will greatly benefit Massachusetts consumers as well as Bay State small businesses looking to sell across the country. We hope other states take note of today’s decision by Commissioner Heffernan, and re-think their own attempts to ignore Supreme Court precedent and federal law.”
The Commonwealth didn’t offer a mea culpa in response but did offer, as part of the information about the revocation of the directive that it “anticipates proposing regulations which, if adopted after public notice, comment, and hearing … would require large Internet vendors to collect Massachusetts sales and use tax on a prospective basis under standards similar to those described in Directive 17-1.”
The information about the revocation was otherwise quite brief. The Department of Revenue merely issued “Directive 17-2: Revocation of DD 17-1 In Anticipation of a Proposed Regulation” which states:
This Directive 17-2 revokes a Directive issued by the Department on April 3, 2017, DOR Directive 17-1: Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax. The revocation is effective immediately.
The old directive had been slated to take effect on July 1, 2017.