The directive will require out-of-state retailers with more than $500,000 in sales into Massachusetts and at least 100 transactional sales delivered into the state within the previous 12 months to collect and remit the state’s 6.25% sales and use tax on all sales made into Massachusetts.

NetChoice, a national trade association representing online retailers, and the American Catalog Mailers Association, have filed a suit to block a new Massachusetts Department of Revenue directive that will require out-of-state retailers to collect sales tax in the commonwealth.

Department of Revenue Directive 17-1, which is set to take effect July 1, considers any downloaded apps or cookies that an e-commerce site stores on consumers’ devices to represent a physical presence in Massachusetts, which could force the merchant to collect sales tax. For example, if a Massachusetts consumer browses on the website of an online-only retailer based in Florida that places cookies on the shopper’s browser to track activity, that Florida retailer would now be considered to have a presence in Massachusetts and thus be subject to state sales tax collection rules under prevailing federal law.

Those merchants with an in-state presence that have more than $500,000 in sales into Massachusetts and at least 100 transactions in the state within the previous 12 months are required to collect and remit the state’s 6.25% sales and use tax on all sales made into Massachusetts.

NetChoice and the ACMA argue that the directive violates the federal Internet Tax Freedom Act, the commerce clause, and Massachusetts’ own procedure for implementing regulations.

“This is the first time we’ve seen a state have such blatant disregard for Supreme Court precedent and the Internet Tax Freedom Act, which Congress enacted specifically to stop states from imposing sales that discriminate against the internet,” says Steve DelBianco, executive director of NetChoice. Massachusetts claims that an out-of-state business is setting up shop in the computers and smartphones of residents who enter the website address of that business, he says. “One wonders why the state didn’t say the same thing about businesses with telephone numbers that were dialed by Massachusetts consumers over the last 75 years.”


The groups’ argument draws heavily on the landmark U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota that prohibits states from requiring merchants to collect taxes unless they have a physical presence in the state, or “nexus” in legal terms.

The groups are backed by former U.S. Rep. Chris Cox (R-California), a principal author of the lnternet Tax Freedom Act, a bill that barred certain e-commerce taxes.

“The principal purpose of the ITFA was to prevent commerce over the Internet—uniquely interstate because of its decentralized, packet-switched architecture—from being subjected to multiple and discriminatory taxation across a confusing patchwork of over 10,000 state and local taxing jurisdictions. The explicit text of the ITFA outlaws Directive I7- I ‘s reliance on the presence of a server for nexus. As the author and principal sponsor of the ITFA, I can say without qualification that Directive 17-1 is precisely what the law was written to prevent.”


The Massachusetts Department of Revenue counters that the directive is on sound legal footing. “While we cannot comment in any detail on pending litigation, the Department of Revenue believes that the directive has a firm legal and regulatory basis, and is important in providing a level playing field for Massachusetts retailers,” says Nicole St. Peter Mac Dermott, the department’s director of communications and constituent services. “Challenges are not unexpected, and the Department will work with the Attorney General’s Office to defend the directive.”

The Retailers Association of Massachusetts agrees, while also noting that the directive reflects the changing retail landscape. “In the 21st century a tax nexus isn’t necessarily what it would have been a few decades ago,” says Jon Hurst, the group’s president. “The concept of tax nexus used to mean a brick and mortar store or even a distribution center. But a lot of sellers don’t use either of those but do use the latest technology. Our tax policies need to adapt to these new realities.”

The Massachusetts directive is the latest attempt by a state to challenge that decision. States’ inability to collect sales tax from retailers without a presence in their states costs them, which the National Conference of State Legislatures, caused states to lose $29.6 billion in uncollected sales and use taxes from web and catalog purchases in 2015, according to an estimate by the National Conference of State Legislatures and the International Council of Shopping Centers, the most recent figures available.

As states such as Massachusetts and South Dakota appear to be inviting a Supreme Court challenge, NetChoice’s DelBianco says he is eager to have the court weigh in.


“We’re not against any and all online sales tax,” he says, noting that his organization supported the Online Sales Simplification Act of 2016 that U.S. Rep. Bob Goodlatte (R-Virginia) proposed last year. He expects new online sales tax legislation to be introduced this week.