Massachusetts Supreme Court rejects retroactive Wayfair application

In brief

The Massachusetts Supreme Judicial Court has rejected the Department of Revenue’s attempt to apply its ‘cookie nexus’ regulation to pre-Wayfair periods and upheld the Appellate Tax Board’s (ATB) ruling that activities outlined in the regulation do not constitute physical presence under the Quill nexus rule.

[U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, Mass., SJC-13283, 12/22/22]

For consideration: The Court’s decision may benefit taxpayers that were assessed under the Department’s regulation for pre-Wayfair periods or that made tax payments under that regulation and the statute of limitations is still open. Some taxpayers settled their pre-Wayfair assessments with the Department. Unfortunately, those taxpayers may not have a right to amend their returns because a standard condition of the settlement agreement was that the covered periods are closed (except for a federal change or fraud).

Because of the Court’s limited discussion of the technical functioning of website ‘cookies’ and ‘apps,’ the decision may not be helpful in considering whether such a ‘virtual presence’ might constitute in-state business activity for income tax purposes under P.L. 86-272. 

Massachusetts’ ‘cookie nexus’ regulation

Under the Massachusetts Department of Revenue’s Vendors Making Internet Sales regulation (830 CMR 64H.1.7, effective September 22, 2017), nexus applied if an out-of-state seller had

• $500,000 in Massachusetts sales from transactions completed over the internet,
• 100 or more transactions resulting in delivery into the state, and
• Certain in-state contacts, including those discussed below.

The regulation stated that “Internet vendors with a large volume of Massachusetts sales invariably have [certain] contacts with the state that function to facilitate or enhance such in-state sales and constitute the requisite in-state physical presence[.]” This included having in-state “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[.]”

Observation: The Vendors Making Internet Sales regulation also listed in-state “contacts and/or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services” as creating physical presence. However, this activity was not considered by the ATB. Click here for more on the ATB’s decision.

Effective October 1, 2019, the Vendors Making Internet Sales regulation was replaced with a Remote Retailers and Marketplace Facilitators regulation (830 CMR 64H.1.9), which dropped the 100 or more transactions prong of the nexus threshold and lowered the sales threshold to $100,000 in Massachusetts sales.

ATB’s finding of no physical presence is reasonable

In determining whether the ATB’s conclusion that U.S. Auto Parts had no physical presence in the state was reasonable, the Court found both Quill and Wayfair instructive.

In Quill, the out-of-state seller had licensed its computer software program to in-state consumers. “The software, like the apps at issue here, enabled consumers to check the seller’s inventories and prices and to place orders with the seller….In addition, the seller retained title to ‘a few floppy diskettes’ that were present in the taxing State,” the Court observed. Such licensed software and diskettes were held in Quill not to constitute “substantial nexus” under the Commerce Clause.

In Wayfair, the US Supreme Court discussed remote sellers’ use of apps, cookies, and CDNs and stated: “A website may leave cookies saved to the customers' hard drives, or customers may download the company's app onto their phones….Between targeted advertising and instant access to most customers via any internet-enabled device, ‘a business may be present in a State in a meaningful way without’ that presence ‘being physical in the traditional sense of the term.’” (quoting Direct Mktg. Ass’n, 575 U.S. at 18.)

Based on the discussion in both cases, the Massachusetts Court deferred “to the board's reasonable conclusion that the use of apps, cookies, and CDNs does not constitute in-State physical presence as required by the regulation.”