830 CMR 64H.1.7 (the Regulation) explains how the general sales and use tax jurisdictional standard set forth in G.L. c. 64H and 64I applies to vendors making Internet sales, taking into consideration the relevant provisions of the U.S. Constitution and federal law.  The Regulation includes an explanation of the circumstances under which certain Internet vendors with a principal place of business located outside the state (Internet vendors) are required to register, collect and remit Massachusetts sales or use tax as set forth under the broad statutory standard of G.L. c. 64H and 64I.  The rationale for the requirements explained in the Regulation was previously stated in Directive 17-1 (DD 17-1), as later referenced in Directive 17-2, and was substantially restated in the Notice of Public Hearing for the proposed Regulation that was published in the Massachusetts Register.

One primary focus of the Regulation is an explanation of the application to Internet vendors of the dormant Commerce Clause “physical presence” sales and use tax jurisdictional standard.  See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  The Department of Revenue (Department) has previously stated that it construes sales and use tax jurisdiction under the state’s tax statutes to the fullest extent permitted under the U.S. Constitution.  See TIR 96-8.  Recent cases in other states have indicated that, in part because of advances in commercial practices, the physical presence standard will be met by a vendor making Internet sales into a state in some cases in which the vendor would not otherwise have physical presence.  See, e.g., Overstock.com, Inc. v. New York Department of Taxation and Finance, 987 N.E.2d 621 (N.Y. 2013), Travelscape v. South Carolina Dep’t of Revenue, 391 S.C. 89 (S.C. 2011).  Such changing commercial practices make it appropriate for the Department to issue up-to-date guidance, particularly given the importance of the jurisdictional issue.  See D & H Distributing Company vs. Commissioner of Revenue, 477 Mass. 538, 540 n.1 (2017) (referring to the Quill physical presence standard as "inflicting extreme harm and unfairness on the States" in light of "the dramatic technological and social changes that [have] taken place in our increasingly interconnected economy") (quoting Direct Mktg. Ass'n v. Brohl, 135 S. Ct. 1124, 1134-1135 (2015) (Kennedy, J., concurring).  See also Direct Marketing Ass'n v. Brohl, 814 F. 3d 1129, 1151 (10th Cir. 2016) (Gorsuch, J., concurring) (suggesting that states like Massachusetts should consider limiting, as appropriate, the “precedential island” of Quill).

The Regulation provides, inter alia, that the Quill physical presence standard will be met by an Internet vendor otherwise lacking a Massachusetts physical presence based on certain contacts with the state, including 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.  The Internet vendors meeting these standards are required to collect sales and use tax beginning October 1, 2017, if they also meet certain specific safe-harbor-type thresholds as to in-state sales and deliveries (the Bright Line Rule).  See 830 CMR 64H.1.7(3).

In its notice of public hearing filed in connection with the Regulation the Department requested public comment on all aspects of the Regulation, and in particular with respect to the Bright Line Rule.  See Mass. Register, Issue 1344, at 36-40 (July 28, 2017).  The Department subsequently received comments from seven persons/organizations:  Professor John Swain (Swain), the Center of Budget & Policy Priorities, (CBPP); Professor Woody Hartzog (Hartzog); the Retailers Association of Massachusetts (RAM); the Retail Industry Leaders Association (RILA); the International Council of Shopping Centers (ICSC); TechNet (TechNet); and Hugh Goodwin (Goodwin).  Other persons attended the August 24th public hearing but did not offer comments, including representatives from Sullivan & Worcester; Rath, Young & Pignatelli; Serlin Haley; Grant Thornton; and NetChoice.

The commentators’ backgrounds are as follows.  Swain is a professor of law at the University of Arizona College of Law, and is the co-author of the leading treatise on state taxation (with Walter Hellerstein).  Hartzog is a professor of law and computer science at the Northeastern University School of Law and College of Computer and Information Services; he has spent the last ten years studying the law and policy issues relating to the Internet and electronic data.  The CPBB is a non-partisan, non-profit research and policy institute that pursues federal and state policies designed both to reduce poverty and inequality and to restore fiscal responsibility in equitable and effective ways.  RILA is a trade association of the world’s largest retail companies, an organization representing more than 200 retailers, product manufacturers and service suppliers, which together account for more than $1.5 trillion in annual sales and more than 100,000 stores manufacturing facilities and distribution centers domestically and abroad.  RAM is a statewide trade association of approximately 4000 member companies, with members that range from independent “mom and pop” owned stores to larger, national chains operating in the general retail, restaurant and service sectors of the retail industry.  ICSC is a global trade association for the retail real estate industry with over 70,000 members in over 100 countries that focuses on the interests of shopping centers. TechNet is a national, bipartisan network of over 70 technology companies that promote the growth of the innovation economy by advocating a targeted policy agenda at the federal and 50-state level, with membership including dynamic startups to many iconic companies, which represent in total more than 2 million employees.  Goodwin is a partner in a California office of the law firm, DLA Piper.

In general, the Regulation comments probed three distinct issues with respect to the Bright Line Rule: (1) public policy; (2) the technical and legal soundness of the Department’s underlying analysis, as first stated in Directive 17-1 and restated in the Notice of Public Hearing for the proposed Regulation that was published in the Massachusetts Register; and (3) the burdens that would be imposed upon the affected taxpayers.  Goodwin suggested some clarifying edits to the regulation.

  1. Public policy

Several of the commentators commented on the public policy issues implicated by the Bright Line Rule.  Swain noted that the rule “is consistent with good tax policy because it helps ensure that sales or use tax is collected on internet transactions; thus, internet sellers and brick and mortar sellers compete on a level economic playing field with respect to sales and use taxes.”  RAM, RILA and ICSC each stated that the rule would close an unjustifiable legal “loophole” that has operated inequitably to benefit large Internet vendors at the expense of Massachusetts retailers, large and small.  RAM stated that “the issue of sales tax fairness and requiring sales tax collection from all remote sellers is the number one issue facing retailers today.”  CBPP similarly stated that the rule represented good policy because it would address an unfair competitive advantage that has been asserted by Internet vendors to the detriment of Massachusetts “Main Street businesses” and would address an unjustifiable, substantial loss of state sales/use tax revenue.  CBPP also noted that the Regulation represented good tax policy because it sets a “specific, measurable de minimis” threshold below which Internet vendors are not required to collect tax “consistent with previous judicial guidance,” and therefore protects “sellers with minimal sales in the state.”

No commentator argued that the Bright Line Rule’s policy objectives were questionable or outweighed by other policy considerations.  TechNet requested that the Department delay implementation of the Regulation “indefinitely or until at least 2019” (1) because of the compliance burdens that the rule would impose, (2) to forestall litigation against the Department that might oppose the rule, (3) to await court rulings in other states that could bring greater clarity to the general constitutional issues, or (4) so that the state could attempt to establish similar uniform rules with other states.  TechNet stated that the approach taken by the Bright Line Rule is unprecedented, but the Department notes, inter alia, that Rhode Island and Ohio have both passed statues asserting sales and use tax jurisdiction based on substantially similar facts, and numerous other states are currently asserting this jurisdiction based on similar bright line sales or delivery thresholds.

The Department generally agrees with the detailed, compelling policy considerations outlined in the comments of Swain, RILA, RAM, ICSC CBPP, and it is not persuaded by the TechNet comments that there is any reasonable basis for delay.  The burdens that would be imposed by the Bright Line Rule as referenced by TechNet are discussed in greater detail in Section 3 below.

  1. Technical and legal analysis

In its Notice of Public Hearing published in the Massachusetts Register, the Department specifically referenced and substantially restated its analysis as previously set forth in Directive 17-1 in support of the Bright Line Rule.  Several of the commentators stated their agreement with that analysis, and specifically represented that Internet vendors exploit the Massachusetts market through software and ancillary cookies that are distributed, downloaded or otherwise existent on their in-state customers’ computers or physical communications devices.  Also, no commentator claimed that this analysis was incorrect.  Goodwin requested that the Department further “explain” in the regulation how in-state software meets the requirement of Quill.  The Department concludes that such an explanation is not appropriate in the context of a regulation, and in any event was previously provided in Directive 17-1 and the Notice of Public Hearing that accompanied the proposed Regulation.

Swain noted that the Bright Line Rule “is consistent with existing constitutional constraints on state taxing powers because it requires that a taxpayer have a physical presence, such as an interest in in-state software that exceeds a de minimis amount, before a tax collection obligation can be imposed.”  Hartzog commented on the ubiquity of downloaded software “apps” on consumer mobile devices such as phones and tablets and noted that “some, if not most of the software that runs mobile applications generally reside on the [in-state] phone or tablet itself.”  Hartzog further noted that “while some apps draw heavily from remote software, such as cloud services like Dropbox, nearly all still require some local storage on [an in-state] mobile device that takes up space and can be perceived by the senses.”

RAM and ICSC provided firsthand knowledge of the means by which vendors utilize in-state software.  RAM stated that large out-of-state Internet vendors “conduct significant business with their customers here in the Commonwealth by embedding via downloaded software, applications or ‘apps,’ and ‘cookies’ on their customers’ electronic devices located in-state.” RAM further stated that:

We know this because it is also how our members that also sell online run their own online platforms here in the Commonwealth and elsewhere across the country.  Our member retailers and the out-of-state online sellers utilize “apps” and “cookies” to connect directly with their customers, to facilitate the online shopping experience, to track shopping preferences and interests, and to store items in an online shopping cart.

ICSC noted that its members use similar Internet technology, and stated its conclusion that Internet vendors use in-state cookies and downloaded apps to target their Massachusetts consumers.

CBPP stated that, consistent with the relevant Supreme Court “physical presence” precedent, “[t]he continuous presence in Massachusetts of remote sellers’ proprietary software and software-readable data documenting the identity and browsing/purchasing activities of consumers clearly is critical to their ability to establish and maintain a market for Massachusetts sales.”  CBPP also stated that the Bright Line Rule’s statement that jurisdiction can be established by in-state “marketplace providers” is appropriate.  CBPP further made reference to an expert report attached to its comments that was written by industry expert, Ashkan Soltan, in connection with the case, Crutchfield v. Testa, 2016-Ohio-7760 (Oh. 2016).  CBPP noted that this report further supports the Bright Line Rule.

  1. Compliance burden

TechNet stated that the Regulation’s timetable for implementation of the Bright Line Rule would be burdensome.  TechNet stated that it would be unrealistic for vendors to comply with the October 1st effective date because companies would need time to “purchase, install and product-map sales tax collection software and then integrate it with existing customer order and fulfillment systems.”  TechNet did not state that this compliance by means of purchasing currently existing tax-collection software would be expensive; TechNet instead stated that this compliance would require additional time. TechNet requested that the Department “postpone the promulgation of the regulation, either indefinitely or until at least 2019.”

Both RAM and RILA commented, based in part upon specific knowledge of their members in complying with state sales and use tax laws, that compliance with the Regulation would not be difficult or costly.  Both RAM and RILA noted the existence of simple, inexpensive compliance software, and observed that most large-sized Internet vendors already use such software to facilitate compliance in one or more states.  RILA noted that compliance therefore “will not be difficult” and “is likely to depend on the trivial costs associated with toggling an option in a software system that already exists.” RAM similarly observed that “[t]he minimal cost [required] to incur sales tax would be incurred in mere software changes, adding the MA zip codes to existing sales tax or point of sale software.”

The Department finds the detailed comments of RAM and RILA, which were based primarily on their membership’s first-hand experience, more persuasive than those of TechNet.  Therefore, the Department concludes, particularly given the policy considerations as referenced above, that no significant compliance burden exists, and that no postponement of the regulation is appropriate.


/s/Christopher C. Harding
Christopher C. Harding
Commissioner of Revenue


September 8, 2017