Massachusetts rejects retroactive application of cookie nexus


On Dec. 22, 2022, the Massachusetts Supreme Judicial Court affirmed the Massachusetts Appellate Tax Board’s (Board) decision rejecting the retroactive application of Wayfair’s economic nexus standard to an out-of-state internet retailer.1 The Board previously held that an out-of-state internet retailer did not have physical presence with the state when its contacts were limited to cookies and apps placed on the devices of Massachusetts customers and the use of third-party content delivery networks prior to the U.S. Supreme Court’s Wayfair decision.2 The court reaffirmed that the internet retailer was not required to remit use tax under the Massachusetts Department of Revenue’s (Department) “cookie nexus” regulation promulgated prior to Wayfair as doing so would “upset settled expectations” of applying Wayfair economic nexus and physical presence standards on a prospective basis.




Cookie nexus



Imposition of pre-Wayfair nexus standards


In an attempt to impose additional use tax collection obligations on remote sellers, the Department issued a bright-line rule3 in which an internet vendor with a principal place of business located outside Massachusetts that is not otherwise subject to tax is required to register, collect, and remit Massachusetts sales or use tax for its sales to Massachusetts customers if the following two conditions are satisfied for the prior calendar year:

  • The vendor made more than $500,000 in sales to Massachusetts customers over the internet
  • The vendor completed 100 or more transactions that were delivered into Massachusetts4

The Department adopted the regulation several months prior to the release of the Wayfair decision. With the exception of a prorated application for the 2017 calendar year, beginning in 2018 and thereafter, the bright-line tests for internet retailers are applied by looking at prior calendar year data.5


The regulation provides that out-of-state vendors are considered to maintain physical presence (i.e., sufficient minimum contacts) when their contacts with the state include cookies and apps placed on the devices of Massachusetts customers and the use of third-party content delivery networks.6 This type of nexus was subsequently dubbed “cookie nexus” and was unique to vendors with these types of remote contacts in Massachusetts.



Constitutional standards and the Internet Tax Freedom Act


The regulation includes a “background” section in which the Department asserts that its expansive nexus provisions comply with the dormant Commerce Clause, the Due Process Clause, and the Internet Tax Freedom Act (ITFA).7 The Department explains that its regulation is bound by the “physical presence” standard under the dormant Commerce Clause specified in Quill.8 However, the Department distinguishes Quill, stating that unlike the mail order vendors at issue in Quill, internet vendors with a large number of internet sales invariably have sufficient presence in the state to constitute a physical presence. The Department includes the use of in-state software and the accumulation of ancillary data (such as “apps” or “cookies”)9 stored on the in-state customers’ computers (or similar devices).10


In Quill, the U.S. Supreme Court held that due process requires that an out-of-state vendor purposefully avail itself of the state’s economic market before the state can collect sales or use tax. In its regulation, the Department argues that a bright-line standard acts as a barometer for purposeful availment of the market and satisfies due process requirements.11


Lastly, the regulation addresses the Department’s compliance with ITFA.12 ITFA prohibits discriminatory taxation of e-commerce transactions and prohibits a state from asserting jurisdiction over an internet vendor based on certain factors. The Department contends the regulation is nondiscriminatory because it asserts jurisdiction over both internet and non-internet vendors evenhandedly. The regulation allows the Department to have the same jurisdictional bright-line standard for all vendors, similar contacts with the state which would constitute physical presence, without implicating prohibited factors in the ITFA.




Retailer challenge to Department’s assessment and Board’s rejection of cookie nexus


Once the regulation became effective, U.S. Auto Parts Network, a California retailer that sold auto parts online, was notified by the Department that it had met the nexus criteria under the state’s cookie nexus regulation and was therefore required to collect and remit sales and use tax for October 2017 and thereafter. Following the retailer’s failure to comply with the regulation, the Department issued a notice of assessment.13 In response, the retailer filed an abatement application which was denied. Both parties then filed motions for summary judgment. The Massachusetts Appellate Tax Board’s rejected the application of cookie nexus (and implied expansion of the parameters of physical presence) upon transactions which took place prior to Wayfair, stating that retroactive application of Wayfair would allow the Commissioner “to tax a vendor that acted consistently with then-current Commerce Clause jurisprudence” and would be unfair and inconsistent with Wayfair’s essential tenets.14




Massachusetts Supreme Judicial Court affirms Board’s decision


Agreeing with the Board’s determinations, the Massachusetts Supreme Judicial Court affirmed the Board’s decision in rejecting the Department’s retroactive application of cookie nexus post-Wayfair and expounded further upon the underlying principles of Quill and Wayfair. The court stated that it would not “upset settled expectations” by imposing a use tax collection obligation for periods before Wayfair on vendors lacking an in-state physical presence. Additionally, the court ruled that using virtual connections such as cookies do not constitute physical presence and that the regulation itself erroneously “cabined its enforcement to the parameters of Quill.”


The court concluded that apps, cookies, and content delivery networks do not establish a physical presence to satisfy the Quill standard. The court found that substantial nexus was not triggered despite customers using the vendor’s software and that the “‘physical aspects’ of technologies” as discussed in Wayfair would not apply to cookies, apps, or content delivery networks.


Additionally, the court emphasized the fact that in Wayfair, the U.S. Supreme Court commented favorably upon the prospective application of South Dakota’s substantial economic nexus statute. The Supreme Court did not want to burden taxpayers with retroactive application of the state statute in question. Rather, the Supreme Court intended to provide leeway for taxpayers to comply with the recent sales and use tax collection and remittance obligations.


As explained by the court, the Department’s desire to retroactively apply cookie nexus to obtain additional funds directly conflicts with the Supreme Court’s intent of providing remote/online vendor taxpayers with a period of respite to comply with the newly formed obligations. The court reemphasized the need for reform from Quill’s limited enforcement of substantial nexus by mere physical presence in the current age of the online retailer era and welcomed the concept of economic nexus being a fair measurement of nexus. Nevertheless, the court stated that advance notice and prospective application are imperative for the implementation of economic nexus standards to not violate constitutional standards such as due process.






While it might be easier to reflect on this decision in hindsight, it was unsurprising that the Massachusetts Supreme Judicial Court determined this case in a manner consistent with the U.S. Supreme Court’s prospective application in Wayfair.


In Wayfair, the U.S. Supreme Court ensured that any application of its precedents would not be applied retroactively for the exact reason that the retailer’s use tax assessment was initially abated by the Board: to avoid unfair taxation and related penalties. Unfair taxation is deeply rooted in constitutional notions of due process. Although the court did not opine on whether the Department’s application of cookie nexus retroactively violated due process, the opinion suggests that the court very likely may have reached that conclusion if the Board’s decision was not already affirmed on other grounds. It is likely doubtful that the Department will appeal this decision given the court’s severe pushback against retroactive application and the success of an economic nexus standard enacted in 2019.15


Despite out-of-state online retailers claiming a victory on legal grounds from the court’s reaffirmation of the Board’s decision, it is unlikely that many will be able to successfully petition the state for refunds to remedy the sales tax already collected under the cookie nexus regulation. Sales tax refunds are constrained to a three-year statute of limitations lookback period. This means that any taxpayer submitting a petition for abatement and refund would have collected and paid tax stemming from cookie nexus since 2020. This would have happened while this case was still under heavy scrutiny in 2018 and essentially obsolete with the enactment of a statutory economic nexus standard in 2019. The Department’s current position is that out-of-state businesses cannot push beyond the three-year statute of limitations and that the tax when collected and paid by these online retailers was rightfully due and paid under the regulatory standards at the time. Taxpayers who never paid or paid the tax under protest may be able to claim a waiver of their tax liabilities. A waiver of tax liability is likely a more advantageous avenue to proceed with, rather than a refund, as such claims for waiver of liability are more quickly settled than those requesting tax refunds. Taxpayers currently under audit during periods where “cookie nexus” was implemented may now be able to favorably resolve any liabilities asserted related to “cookie nexus.”


It is anticipated that the court’s decision will put the proverbial “nail in the coffin” on cookie nexus implementation. Nevertheless, from a practical standpoint, the Department is likely shielded from facing any material monetary repercussions from out-of-state retailer refund claims given that it litigated its claims beyond the statute of limitations.




1 U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, Massachusetts Supreme Judicial Court, No. SJC-13283, Dec. 22, 2022.
2 South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
3 Mass. Regs. Code tit. 830, § 64H.1.7, effective Sept. 22, 2017. The regulation is designed to interpret when a vendor is engaged in business in Massachusetts for the purpose of being subject to a sales or use tax collection duty. Mass. Gen. Laws ch. 64H, § 1.
4 Mass. Regs. Code tit. 830, § 64H.1.7(3). Note that Massachusetts subsequently enacted an economic nexus threshold of $100,000 in sales with no transaction threshold effective Oct. 1, 2019. Ch. 41 (H.B. 4000), Laws 2019, enacting Mass. Gen. Laws ch. 64H, § 34(a).
5 Mass. Regs. Code tit. 830, § 64H.1.7(3).
6 Mass. Regs. Code tit. 830, § 64H.1.7(1), (2).
7 Mass. Regs. Code tit. 830, § 64H.1.7(1)(b).
8 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
9 Cookies are text files generally used by an internet vendor to enhance its customer sales. Cookies are stored locally on computers and physical communications devices (such as smartphones) of the internet vendor’s customer when the customer visits the vendor’s web site for the first time. On subsequent web site visits, the cookies identify the customer. Mass. Regs. Code tit. 830, § 64H.1.7(2).
10 Mass. Regs. Code tit. 830, § 64H.1.7(1)(b)2.
11 Mass. Regs. Code tit. 830, § 64H.1.7(1)(b)3.
12 MASS. REGS. CODE tit. 830, § 64H.1.7(1)(b)4.
13 The assessment totaled $60,139.81, which included a double assessment of the tax and penalties.
14 Massachusetts Appellate Tax Board, No. C339523, Dec. 7, 2021. For a discussion of this opinion, see GT SALT Alert: “Massachusetts rejects applying Wayfair retroactively.”
15 Ch. 41 (H.B. 4000), Laws 2019, enacting Mass. Gen. Laws ch. 64H, § 34(a).




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