Technical Information Release TIR 18-8: Tax Jurisdiction Over Internet Vendors Prior to and Subsequent to Wayfair, Inc. v. South Dakota
Table of Contents
On September 22nd, 2017, the Department of Revenue (“DOR”) promulgated 830 CMR 64H.1.7, Vendors Making Internet Sales (the “Regulation”), which stated that certain Internet vendors with a principal place of business located outside the state and not otherwise subject to tax are required to register, collect and remit Massachusetts sales or use tax. The Regulation was promulgated after a public hearing held on August 24th, 2017 and after consideration of comments submitted in connection with that hearing. The Regulation took effect for tax periods beginning on October 1, 2017. On June 21st, 2018, the U.S. Supreme Court rendered its decision in Wayfair, Inc. v. South Dakota, 138 S. Ct. 2080 (2018), which struck down the physical presence nexus rule applicable to the imposition of a sales or use tax collection duty as referenced in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). This Technical Information Release (“TIR”) explains DOR’s administrative position with respect to the Regulation in light of Wayfair.
The general rule in the Regulation is that an Internet vendor with a principal place of business located outside the state and not otherwise subject to tax is required to register, collect and remit Massachusetts sales or use tax when, during the prior 12 month period, it had in excess of $500,000 in Massachusetts sales from transactions completed over the Internet and made sales resulting in a delivery into the state in 100 or more transactions. 830 CMR 64H.1.7(3). Massachusetts law with respect to sales and use tax jurisdiction extends to the fullest extent permitted by the U.S. Constitution. 830 CMR 64H.1.7(1)(b)1. Construing the constitutional law pre-Wayfair, the Regulation noted that vendors with a large volume of Massachusetts Internet sales would typically have certain physical contacts with the state related to their Internet transactions that would create physical presence under Quill, including, but not limited to, a property interest in or the use of software located in the state. 830 CMR 64H.1.7(1)(b)2.
The Regulation noted that in some cases an Internet vendor with a principal location outside the state may have been otherwise subject to tax for prior periods, i.e., apart from the contacts referenced in the Regulation. 830 CMR 64H.1.7(2), (6)(b). For example, such vendors may have previously owned inventory in the state or contracted with an in-state representative, including a related person, that created sales or use tax jurisdiction. Id. In these cases, the dollar and transactional standards set forth in 830 CMR 64H.1.7(3) did not apply.
Wayfair eliminated as “unsound and incorrect” the physical presence jurisdictional requirement established by Quill in favor of a rule that “nexus is established when the taxpayer or collector avails itself of the substantial privilege of carrying on business in that jurisdiction." 138 S.Ct. at 2099. That standard in turn can be met by the “economic and virtual contacts [the taxpayer or collector] have with the State.” Id. In Wayfair, “the nexus [was] clearly sufficient” where the relevant South Dakota law “applie[d] only to sellers that deliver more than $100,000 of goods or services into [the state] or engage[d] in 200 or more separate transactions for the delivery of goods and services into the State on an annual basis.” Id. In contrast to the South Dakota law, the Regulation applies only when a vendor with a principal place of business located outside the state not otherwise subject to tax exceeds $500,000 in Massachusetts sales from transactions completed over the Internet and makes sales resulting in a delivery in the state in 100 or more transactions. 830 CMR 64H.1.7(3).1
III. DOR’s Administrative Position
DOR is enforcing the Regulation for all tax periods after the Regulation’s effective date (October 1, 2017) both prior to and subsequent to Wayfair. A significant number of vendors complied with the Regulation as of the October 1, 2017 effective date, or shortly thereafter, and continue to collect and remit sales or use tax. A vendor that is subject to tax under the Regulation that has not registered to collect sales and use tax should do so at this weblink. A vendor with a principal place of business located outside the state and not otherwise subject to tax is not liable for Massachusetts tax if it has not previously met and does not currently meet the dollar and delivery thresholds stated in the Regulation.2
In some cases, for prior tax periods, an Internet vendor with a principal location outside the state was subject to state tax other than by reason of the Regulation. For example, some such Internet vendors may have owned inventory in the state sufficient to confer tax jurisdiction, in some cases where that inventory was stored in a warehouse owned by a company operating an online marketplace. In these cases, under current law, the vendor is liable for tax for the periods during which it was subject to tax (e.g., by reason of owning in-state inventory), irrespective of whether the vendor met the dollar and delivery thresholds stated in the Regulation.
/s/Christopher C. Harding
Christopher C. Harding
Commissioner of Revenue
September 17, 2018