Businesses that do $500,000+ annually from more than 100 transactions are now accountable to collect sales tax from their customers due to Vendors Making Internal Sales regulation, a policy revision proposed earlier this year. Massachusetts argues the regulation closes an “unjustifiable legal ‘loophole’ that has operated inequitably to benefit large internet vendors at the expense of Massachusetts retailers, large and small.”

Why is this big news now? Because It will directly impact Boston/Massachusetts based startups – and local entrepreneurs need to keep this top of mind.

The Cookie Effect

The regulation, stipulates that placing cookies on Massachusetts residents’ devices while they visit a vendor’s website constitutes presence in the state – or, those cookies represent a presence comparable to a physical store. The regulation explains cookies “facilitate sales” and allow “a vendor to track behavior…and to deliver ads that are specific to each customer. 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.”

Impacted Businesses Speaking Up

Since the regulation went into effect October 1, it has, naturally, been met with resistance. One notable instance is Crutchfield, a Virginia-based online electronics retailer. Crutchfield filed a complaint arguing the regulation violates the U.S. Constitution commerce clause and the Internet Tax Freedom Act. Despite Massachusetts’ claim that cookies represent a physical presence, the Crutchfield complaints disagree, arguing that the regulation does run counter to the finding of Quill vs. North Dakota. In addition, the grievance states the Massachusetts Department of Revenue, “lacks the authority to enforce the regulation because it imposes an undue burden on interstate commerce under the Commerce Clause.”

Crutchfield also contends the Internet Tax Freedom Act “prohibits a state from imposing a discriminatory tax on electronic commerce,” and “any tax on electronic commerce that imposes an obligation to collect or pay that tax on a different person or entity than in the case of transactions involving similar property, goods or services” is discriminatory.

Brick and mortar retailers disagree. They argue that the regulations level the competitive playing field as the conversation heats up with similar policies freshly minted in Ohio and Rhode Island.

However, it’s not black and white. It’s not clear that cookies alone are sufficient to constitute a presence within the Nexus standards addressed by the U.S. Supreme Court. These state that an ecommerce retailer needs to be physically present in Massachusetts – or in any other state.

Empowering a Community – Next Steps and Massachusetts’s Response

With other states examining the Massachusetts regulation and awaiting a final determination as to its validity, the effect on companies doing business in Massachusetts could be significant. As mentioned above, new laws in Ohio and Rhode Island have similar tax obligations and regulations for internet sellers that use software — including apps– to make sales or employ a system of network servers in the state.

To be clear, the case of the Massachusetts regulation and the statutes in Ohio and Rhode Island, nexus is not created solely by the presence of cookies on in-state customers’ computers. Nexus is created only when the Internet software cookies are combined with annual sales revenue or total number of transactions reaching certain monetary thresholds which, it seems, the Massachusetts regulation addresses.

Despite this, if the Massachusetts regulation and the laws in Ohio and Rhode Island withstand the court challenges, other states are likely to follow with their own “cookie rule” which would then allow the use of cookies to be a determining factor when it comes to physical presence.

Across the nation we are seeing communities coming to together in response to this cause. While the federal government has failed in its previous attempts to pass comprehensive legislation addressing the nexus issue, dozens of states have passed their own versions of nexus laws, seeking to collect sales tax from out-of-state retailers resulting in various court challenges and inconsistent outcomes.

With the growing number of regulations that are changing quickly, it’s in the best interest of businesses to educate themselves on interstate commerce and the impact on marketing across state lines. As the laws evolve, remaining compliant is a moving target, possibly resulting in a very large – and unexpected– tax bill.

About the Author

Greg_ShepardGreg Shepard, CTO and CSO of Pepperjam, is a serial entrepreneur focused around building sustainable growth businesses. With over 20 years of experience Greg is a true visionary in the space – he has built several successful ecommerce companies in the online retail, publishing, and SAAS performance marketing categories. His work centers around a passion for influencer marketing and solving attribution hurdles that major advertisers, brands and platforms face. A telling example is how he build Pepperjam from the ground up, born as Affiliate Traction in 1999 and later acquired by eBay Enterprise Marketing Solutions in early 2016 – which was then rebranded to Pepperjam. At Pepperjam he is in charge of mapping the company’s trajectory for future product and service offerings. Greg also founded the brand compliance agency AdAssured and is in the process of writing an executive strategy-based book targeted for C-suite marketers.