Leave cookies? Pay sales tax, says Massachusetts

Massachusetts just devised a fairly brilliant scheme for collecting sales tax from out-of-state sellers.picseli-6730

The Department of Revenue (DOR) recently published Directive 17-1: Requirement that Out of State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax. This guidance from the DOR lays out the conditions under which “internet vendors” that ship into Massachusetts must register to collect and remit sales tax. Since almost all websites use “cookies”, the directive could have a significant impact.

What is a cookie?

Cookies are small files that are left on computers by websites either temporarily (“session” cookies) or for longer periods of time (“persistent” cookies) that help eCommerce vendors track, among other things, progress in the shopping cart checkout process. Since these files reside on computers that exist physically in Massachusetts, are owned by the vendor (not the customer), and help facilitate sales, according to Massachusetts that triggers “in-state business activity” and therefore triggers a requirement to register to collect and remit sales taxes.

Does it apply to wineries?

Massachusetts is one of the very few states that wineries can ship to that does not require sales tax registration as a condition of receiving a direct shipping permit. To determine whether this new directive would even apply to wineries, we have to answer a few questions:

  1. Do wineries leave cookies?
    According to Andrew Kamphuis, former Founder and CEO of Vin65, “It’s next to impossible to have a shopping cart without having cookies. Almost all wineries have an eCommerce site, and I’m not aware of any wine industry eCommerce companies that do not leave cookies.”
  2. Are wineries “large Internet vendors”?
    The directive only applies to internet vendors that do more than $500,000 in sales in Massachusetts AND more than 100 transactions per year. It would not be uncommon for a winery to do 100 transaction in Massachusetts per year. But, $500,000 in sales per year is a significant amount. Let’s say you sell your wines for $50 per bottle, and make 2 different 3-bottle club shipments per year to 100 different Massachusetts customers. That’s only $30,000 in sales per year, so well below the $500,000 threshold.
  3. Will this directive take effect?
    The directive is designed to take effect on July 1st. However, it seems likely that at least one group will challenge the law’s constitutionality in courts. According to NPR, NetChoice is already pursuing an injunction to block enforcement before it takes effect.
  4. Does the directive apply to out-of-state wine shipments?
    Even if this directive is found to be constitutional, it’s unlikely that wine shipments would be subject to sales tax even for those over $500,000 in sales. Because the ABCC Advisory on wine shipping makes no mention of sales tax but explicitly requires registration with DOR for excise taxes, it seems clear that sales tax are not required. Further, a 2010 ballot initiative repealed the application of sales tax to sales of alcohol that are subject to excise taxes.

Why does this matter?

As we’ve discussed in the past, sales tax reform is coming. States are looking for any way they can to work around the Quill Supreme Court decision, and they’re getting closer and closer to cracking that code. This new attempt by Massachusetts is just another example of a creative solution to compel out of state sellers to pay sales taxes, joining Colorado’s “tattletale” reporting rules (which were upheld as constitutional and are now being copied by multiple states), “economic nexus” rules in multiple states that are working through the courts, and “click-through nexus” in multiple states. Massachusetts accelerates the march to reform and in very short order, the issue of sales tax on eCommerce orders will be settled either by Congress or the Supreme Court.

Until then, fast changes and a lot of uncertainty will exist at the state level. This directive in Massachusetts will be challenged, and we’ll wait to see if an injunction is granted. If it survives the courts, other states will copy it. Massachusetts chose a very high threshold of $500,000, but other states that follow would likely have a much lower annual revenue threshold ($100,00 as the standard in Colorado, for example) or separate transaction threshold. Even though this directive will likely not apply to any wineries, it’s worth staying on top of the ever-changing sales tax landscape.

9 thoughts on “Leave cookies? Pay sales tax, says Massachusetts”

  1. How about a flat rate sales tax for online sales to all states with uniform reporting and payment? Gee, that would make life too easy and cost effective for small merchants would it not?

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    1. The states would actually make more money as I know many wineries that don’t report their sales because it’s too complected and costs to much. Trying to get all the states to agree would be like herding cats. They are their own worst enemies and they create a system that causes costs to be higher for them and excludes small businesses that can’t afford the reporting. Stuped!

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    2. Something needs to change, and I think all options should be on the table. The current sales tax landscape is broken for so many reasons. Keeping track of local jurisdictions, taxability and exemptions, and staying on top of all the forms is so difficult for small businesses. Yet states are broke so they’re looking for ways to collect on taxes that are required by their current laws. Unfortunately, Congress just doesn’t get anything done anymore, so we’ll likely end up in the Supreme Court. Hopefully the end result is a system that is significantly simplified and much fairer to all.

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  2. I’d like to understand the legal basis for claiming the website owns a file that
    the user consented to downloading ( browser set to allow cookies),
    was customized for that user alone, resides on the user’s computer in the user’s directory,
    and can be edited or deleted by the user at will.

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    1. It does seem like a bit of a stretch and will certainly be challenged in the courts. The bigger picture here is that the Quill decision just doesn’t make sense anymore and the Supreme Court has signaled that it could revisit that decision. These crazy work arounds wouldn’t be necessary if that decision changed or if we had a federal law that made it easier for states to get tax revenue.

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