This purpose of this Directive is to explain the application of the general sales and use tax jurisdictional standard set forth in chapters 64H and 64I of the General Laws to Internet vendors, taking into consideration the relevant provisions of the U.S. Constitution. As further explained below, for clarity and administrative simplicity, this Directive adopts an administrative bright line rule, rather than applying the state’s sales and use tax collection requirements on a case by case basis.
Under what circumstances is an Internet vendor with a principal place of business located outside the state required to register, collect and remit Massachusetts sales or use tax as set forth in General Laws chapters 64H and 64I?
An Internet vendor with a principal place of business located outside the state is required to register, collect and remit Massachusetts sales or use tax with respect to its Massachusetts sales as follows.
a. For the six-month period, July 1, 2017 to December 31, 2017, if during the preceding 12 months, July 1, 2016 to June 30, 2017, it had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions.
b. For each calendar year beginning with 2018 if during the preceding calendar year it had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions.
A vendor that is engaged in making taxable sales in the commonwealth or that sells taxable products for use in the commonwealth is subject to a sales or use tax collection duty when it is “engaged in business in the commonwealth” within the meaning of M.G.L. c. 64H, § 1 and it meets the constitutional requirements as discussed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The provisions of M.G.L. c. 64H, § 1 are to be “enforced to the extent allowed under [the] constitutional limits.” See TIR 96-8.
a. M.G.L. c. 64H, § 1; “engaged in business in the commonwealth”
General law chapter 64H, section 1 states a series of broad jurisdictional standards that, if met, cause a vendor to be “engaged in business in the commonwealth” for purposes of the state’s sales or use tax collection requirements. See generally M.G.L. c. 64H and 64I. For example, a vendor is “engaged in business in the commonwealth” when it has “a business location in the commonwealth.” M.G.L. c. 64H, § 1. Also, a vendor is “engaged in business in the commonwealth” when it “regularly or systematically solicit[s] orders for the sale of services to be performed within the commonwealth or for the sale of tangible personal property for delivery to destinations in the commonwealth” or “otherwise exploit[s] the retail sales market in the commonwealth through any means whatsoever, including, but not limited to, salesmen, solicitors or representatives in the commonwealth … [and] computer networks or … any other communications medium.” Id. Further, a vendor is “engaged in business in the commonwealth” when it is “regularly engaged in the delivery of property or the performance of services in the commonwealth.” Id. An Internet vendor with significant Massachusetts sales meets the section 1 requirement because, inter alia, it is exploiting the state’s retail sales market through “computer networks” and “other communications medium.”
b. Quill Corp. v. North Dakota; constitutional requirements
In the 1992 case, Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the United States Supreme Court evaluated the U.S. constitutional limits that apply to a state’s assertion of a sales or use tax collection duty with respect to a mail order vendor whose only contacts with the state are by mail or common carrier. Quill concluded that for the imposition of a sales or use tax collection duty to be valid as imposed upon a mail order vendor, the tax must meet the requirements of the Due Process Clause and the Commerce Clause of the U.S. Constitution.
i. Due process requirement
Quill considered the due process standard that applies when a state seeks to impose a sales or use tax collection duty on a mail order vendor. For due process purposes, the state sales or use tax jurisdictional standard is met when such a vendor “purposefully avails itself of the benefits of an economic market in the forum State.” 504 U.S. at 307. Therefore, a mail order vendor meets the due process requirement when it is “engaged in continuous and widespread solicitation of business within a State.” Id. at 307-308. An Internet vendor with significant Massachusetts sales meets this requirement because it has “purposefully availed itself of the benefits of the state’s economic market” by, inter alia, engaging in “continuous and widespread solicitation of business” in the state.
ii. Commerce Clause requirement
(A) In general
Quill also considered the jurisdictional standard that applies under the dormant Commerce Clause when a state seeks to impose a sales or use tax collection duty on a mail order vendor. A prior Supreme Court decision, National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), had determined that a mail order vendor could not be made subject to a state’s sales or use tax collection duty when it limited its in-state contacts to mail and common carrier. Subsequent legal and commercial developments had rendered the analysis in Bellas Hess questionable, but Quill re-affirmed the holding in that prior case.
The underlying logic in Quill was primarily that mail order vendors had reasonably relied upon the Court’s prior decision in Bellas Hess, and that the doctrine of stare decisis applies with greater force when a taxpayer has reasonably relied upon a prior Supreme Court precedent. See, e.g., Direct Marketing Assn. v. Brohl, 135 S.Ct. 1124, 1134 (2015) (Kennedy, J., concurring) (stating that 25 years after Bellas Hess, Quill “relied on stare decisis to reaffirm the physical presence requirement and to reject attempts to require a mail-order business to collect and pay use taxes”). In contrast, Internet vendors were not the subject of Quill and Internet commerce was an unknown phenomenon at the time of the case. See, e.g., Direct Marketing Assn., 135 S.Ct. at 1135 (Kennedy, J., concurring) (“[i]n 1992, the Internet was in its infancy”).
The specific standard that Quill articulated was that a vendor can be made subject to a state’s sales or use tax collection duty when it has an in-state “physical presence.” Because Quill specifically intended to reaffirm Bellas Hess in the context of a fact pattern pertaining to a mail order vendor, the case made clear that a vendor that limits its in-state contacts to those of mail or common carrier does not have an in-state physical presence. However, Quill did not otherwise define this term. Rather, Quill made clear that the determination of the existence of a vendor’s in-state physical presence is to be evaluated on a case by case basis. Also, Quill made clear that this determination is to be informed by the Supreme Court’s precedent, and that physical presence includes the situation where a vendor owns, leases or licenses in-state property, or relies upon one or more in-state representatives “to establish and maintain a market” in the state for its sales.
(B) As applied to Internet vendors
The business and activities of Internet vendors are factually distinguishable from the business and activities of mail order vendors. Internet vendors do not limit their contacts with the state to mail and common carrier. Further, modern-day Internet vendors with a large volume of in-state sales (“large Internet vendors”) invariably have one or more contacts with the state that will constitute an in-state physical presence, as discussed in greater detail below. See Direct Marketing Assn., 135 S.Ct. at 1135 (Kennedy, J., concurring) (“Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.”).
(1) In-state software and “cookies”
Large Internet vendors almost invariably own software that is downloaded and used by in-state customers on their computers and communications devices (“in-state software”) that functions to facilitate or enhance the vendor’s in-state sales. This software may be affirmatively downloaded, as in the case of “native” or “mobile” apps, or may be downloaded as the result of the user’s general exploration of the vendor’s website, as in the case of “browser” or “web” apps. Among other things, Internet vendors use “apps” to implement web-based shopping carts, to permit customers to compare products and evaluate product reviews, and to track their customers’ preferences and locations.
Software is generally considered to be tangible personal property. Specifically, software is generally considered to be tangible personal property under this term’s common law definition and under the sales tax law of most states, including Massachusetts. As noted by one state supreme court, “When stored on magnetic tape, disc, or computer chip, this software, or set of instructions, is physically manifested in machine readable form by arranging electrons, by use of an electric current, to create either a magnetized or unmagnetized space.” South Cent. Bell Tel. Co. v. Barthelemy, 643 So. 1240, 1246 (La. 1994). Software “is not merely knowledge, but rather is knowledge recorded on physical form which has physical existence, takes up space on the tape, disc, or hard drive, makes physical things happen and can be perceived by the senses.” Id.
Further, the ownership of in-state software by large Internet vendors would apparently constitute an in-state physical presence within the meaning of Quill. Quill recognized that “title to a few floppy diskettes present in a State might constitute some minimal nexus” but concluded that “the existence in [a state] of a few floppy diskettes to which [the vendor] holds title” does not result in nexus because it would represent a mere de minimis or “slightest presence.” See 504 U.S. at 315 n.8. In contrast, large Internet vendors own software that exists on the computers or other devices of all or substantially all of their in-state customers – software that is instrumental in the creation of the vendor’s in-state sales. A vendor’s in-state software is often the means itself of significant in-state business activity on the part of the vendor, which is also a stark difference from the facts of Quill.
As in the case of software, large Internet vendors also enhance their customer sales through the complementary use of text data files, or “cookies.” Cookies are not software but as in the case of software are present in the state and serve to facilitate such vendor’s in-state sales. Large Internet vendors store cookies on their customers’ computers and communication devices when the customers visit the vendor’s website. These files are stored locally on the customer’s computer or device the first time he or she visits the site and identify the customer on each subsequent visit. These files include “session cookies,” which are erased when a browser is closed, and “persistent cookies,” which are preserved across multiple browser sessions. Cookies facilitate sales by customizing the shopping experience and allowing each customer to readily log into his or her account, store items in a shopping cart, etc. Cookies also enable a vendor to track their customers’ behavior over time and to deliver ads that are specific to each customer. Vendors own the proprietary cookies that they place on their customers’ computers and devices. As in the case of in-state vendor software, the ownership and use of these in-state cookies results in in-state business activity by such vendor that distinguishes such vendors from the mail order vendors that were evaluated by Quill.
(2) Content distribution networks
Large Internet vendors routinely contract with providers of content distribution networks (“CDNs”) to use local servers to accelerate the delivery of their web pages to their customers. CDN servers are computer hardware that is housed in geographically distributed data centers. A CDN is an organized network of such servers that are generally placed in close proximity to Internet users. CDNs operate to hasten the delivery of Internet vendors’ web pages to nearby customers. By allowing Internet vendors to deliver web page content to their local customers more quickly and efficiently, CDNs ensure that the vendors’ customers are less likely to exit the vendors’ web pages without making a purchase and increase the likelihood that the customers will return for future business. Consequently, the CDNs perform local activities “on behalf of the [vendor that] are significantly associated with the [vendor’s] ability to establish and maintain a market” for its sales. See Tyler Pipe, 483 US at 251. When that activity takes place in Massachusetts it establishes an in-state physical presence on behalf of such vendor. See id.
(3) Other representative contacts
Large Internet vendors may also utilize other persons as in-state representatives that result in the creation of an in-state physical presence. For example, large Internet vendors commonly sell goods through third-party agreements with companies that are often referred to as “online marketplaces.” These online marketplaces, which offer a range of potential services through employees or other contract personnel, benefit the client-vendor by, among other things, enhancing its name recognition and creating consumer confidence with respect to its products. These arrangements may vary in form. Many of these agreements allow the Internet vendor to post goods for sale on a website operated by the online marketplace, with orders and payment then processed through that website (with subsequent order fulfillment completed by the individual Internet vendor). Other agreements may provide for increased services by the employees or other personnel of the online marketplace, which may include order fulfillment, return processing, access to the online marketplace’s customer service team, and the preparation of sales reports or other analytics. In either instance, although the website maintained by the online marketplace on which the vendor’s products are sold is “virtual,” some of the various services provided by the online marketplace in connection with the sale of the vendor’s products will be physical in nature. Because these latter, physical services operate to establish and maintain the Internet vendor’s market, these services, when performed in the state, will result in an in-state physical presence on the part of such vendor. See Tyler Pipe, 483 US at 251.
Also, large Internet vendors may utilize delivery services that exceed the type of delivery services that were evaluated by Quill. Quill held that a state could not impose a sales or use tax collection duty on vendors that limit their contacts with the state to the contacts of mail and common carrier. In contrast, large Internet vendors may utilize delivery services that provide not merely product delivery, but additional services that may include logistics, order fulfillment, storage, return processing and order management. In general, these additional services operate to enhance the vendor’s sales. Therefore, these services, when performed in the state, will result in an in-state physical presence on the part of such vendor. See Tyler Pipe, 483 US at 251.
This Directive explains the application of the general sales and use tax jurisdictional standard set forth in chapters 64H and 64I of the General Laws to Internet vendors, taking into consideration the relevant provisions of the U.S. Constitution. The application of the Commerce Clause of the U.S. Constitution prevents the state from applying the provisions of section 1 to a mail order vendor under certain circumstances as explained by the U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). However, the business and activities of Internet vendors are factually and legally distinguishable from those of mail order vendors. As explained above, an Internet vendor with significant Massachusetts sales meets the statutory and constitutional standards that apply for purposes of the imposition of the commonwealth’s sales or use tax collection duty. For clarity and administrative simplicity, this Directive adopts an administrative bright line rule, rather than applying the sales and use tax collection requirements on a case by case basis. Specifically, as noted, the Massachusetts sales and use collection requirements will generally apply to an Internet vendor that in the prior taxable year had greater than $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions.
/s/Michael J. Heffernan
Michael J. Heffernan
Commissioner of Revenue
April 3, 2017