The Massachusetts Department of Revenue (DOR) recently issued guidance under which it will require the collection of Massachusetts sales and use taxes by remote sellers that meet certain sales thresholds in Massachusetts. Beginning July 1, 2017, Directive 17-1 requires any "Internet vendor" that has made more than $500,000 of annual sales to Massachusetts customers in 100 or more transactions to register with DOR and to collect and remit sales and use taxes, even if such vendor does not have a physical presence in Massachusetts under traditional principles. For the period July 1, 2017 to December 31, 2017, the annual sales and transaction thresholds will be applied to a vendor's sales activity during the preceding 12 months, July 1, 2016 to June 30, 2017. For subsequent periods, the thresholds will be applied to a vendor's sales activity during the preceding calendar year.
Massachusetts follows other states, such as Alabama, South Dakota, Tennessee, and Vermont, that have enacted legislation that imposes sales tax collection responsibility upon out-of-state Internet vendors based upon the volume and/or value of sales made into the state. Massachusetts' approach differs, however, in that (i) Massachusetts did not enact new legislation, but is asserting such authority under its current statute and regulations and (ii) the Massachusetts DOR takes the position that this new rule satisfies the Constitutional requirements set forth in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
Quill - Physical Presence Test
A state's jurisdiction to impose a sales and use tax collection responsibility on out-of-state businesses is constrained by the U.S. Constitution. In Quill, the Supreme Court reaffirmed that both the Due Process Clause and the Commerce Clause limit the imposition of such responsibilities to situations where the vendor has a sufficient nexus, or connection, with the taxing state. Moreover, although the Court held in Quill that the Due Process Clause nexus requirement could be satisfied when a vendor targets a state's economic market through activities that are entirely outside the state, it held that the Commerce Clause requires an out-of-state vendor to have a physical presence in the state in order to be subject to a sales and use tax collection obligation. A physical presence is traditionally thought to require maintaining an in-state place of business, owning tangible property within the state, or having employees or representatives in the...