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Massachusetts updates bright-line nexus standard

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On Dec. 13, 2019, the Massachusetts Department of Revenue adopted a new regulation which explains the recently enacted Massachusetts statutory sales and use tax collection obligations applicable to out-of-state remote sellers and marketplace facilitators. Generally, as of Oct. 1, 2019, remote retailers with no physical presence are required to collect sales or use tax as vendors when they exceed an annual Massachusetts sales threshold of $100,000. The previous regulation including a threshold of $500,000 in sales and at least 100 transactions with Massachusetts customers is accordingly revoked.

Bright-line nexus standard On July 31, 2019, Massachusetts enacted budget legislation that included a new statute which imposes a sales and use tax registration, collection and remittance requirement on remote retailers and remote marketplace facilitators that have annual sales in Massachusetts that exceed $100,000.1 This statute, which was effective Oct. 1, 2019, supersedes a regulation that imposed different collection thresholds.2 Under the terms of the previous regulation, which became effective in September 2017, Internet vendors with a principal place of business outside Massachusetts and at least $500,000 in annual sales via the Internet and 100 or more transactions that were delivered into Massachusetts were required to collect and remit sales or use tax.3

The new regulation clarifies the new statutory sales and use tax collection requirements. Specifically, the regulation4 explains that vendors making taxable sales in Massachusetts or selling taxable tangible personal property or services for use in the state must collect sales or use tax when they are “engaged in business in the commonwealth” under Massachusetts law and meet the requirements of the U.S. Constitution. The sales tax collection requirements generally are enforced to the extent allowed under the constitutional limits.

Beginning Oct. 1, 2019, remote retailers with no traditional in-state contacts (i.e., physical stores, employees, inventory, representatives, etc.) are generally required to collect sales or use tax as vendors when they exceed $100,000 in Massachusetts sales in a calendar year. The term “remote retailer” is defined as a retailer, including a marketplace seller or marketplace facilitator, engaged in business in the commonwealth only through remote vendor contacts.5 Such retailers may sometimes sell their products and services through intermediaries, known as marketplace facilitators.6 A marketplace facilitator may also be a marketplace seller and is always considered a retailer. Total Massachusetts sales for a marketplace facilitator include both its own Massachusetts sales and the Massachusetts sales that it facilitates on behalf of marketplace sellers.7

If during the preceding 12 months (i.e., Oct. 1, 2018, to Sept. 30, 2018) a remote retailer or remote marketplace facilitator had more than $100,000 in Massachusetts sales, then registration and collection is required effective Oct. 1, 2019.8 For the 2020 calendar year and thereafter, if on Jan. 1, a remote retailer or remote marketplace facilitator had over $100,000 of sales into Massachusetts during the preceding calendar year, registration and collection is required.9 However, if the remote retailer did not pass the $100,000 threshold until after Nov. 1 of the prior year, the registration and collection deadline changes to allow the remote retailer a limited amount of additional time to comply. In that case, the remote retailer must register and start to collect tax at the beginning of the third month after passing the threshold.10

In-state marketplace facilitators must register, collect and remit sales or use tax on all Massachusetts sales made on their own behalf regardless of any threshold. However, they are only required to register, collect and remit tax with respect to Massachusetts sales facilitated on behalf of marketplace sellers if they meet the annual $100,000 sales threshold.11

The regulations provide exceptions from treatment as a “marketplace facilitator” for taxpayers solely engaged in purchasing products for resale12 and for those solely providing payment processing services, advertising services, or facilitating motor vehicle rentals or sales of meals.13 Further, they include relevant examples applying the rules to taxpayer situations,14 administrative guidance15 and instructions for registration, returns and payment.16 Notably, the Commissioner may, at his discretion, issue a waiver from the responsibility to collect and remit tax to certain marketplace facilitators and to marketplace sellers of taxable telecommunication services.17 Marketplace facilitators may be relieved from liability for incorrect collection or remittance on transactions they facilitate in cases where an invalid exemption certificate is accepted in good faith or for certain errors.18

Commentary  Massachusetts’ previous regulations asserting bright-line nexus on Internet vendors with $500,000 in annual sales and at least 100 transactions were considered by many in the state and local tax community to be especially aggressive in that they adopted the thresholds without relying upon any supporting statutory guidance. In fact, a Virginia Circuit Court judge recently dismissed a case brought by a Virginia taxpayer challenging the applicability of those standards for sales and use tax purposes. Although the judge found a lack of jurisdiction based on the absence of sufficient contact in that instance, the taxpayer had asserted that the rule violated both the federal Commerce Clause and the Internet Tax Freedom Act.19

In 2019, Massachusetts superseded the previous regulation by enacting a statute and promulgating a corresponding new regulation to implement the Wayfair20 standards for remote retailers and marketplace facilitators. Massachusetts has enacted statutory thresholds which are relatively similar to those adopted by several other states and consistent with the South Dakota threshold upheld in Wayfair. Notable changes from its previous version include the substantial reduction of the gross sales threshold from $500,000 to $100,000 in a calendar year, the elimination of the required number of transactions as a threshold for taxation, and clarification that the sales threshold is applicable to marketplace facilitators. The previous regulation focused on the requirements applicable to “Internet vendors.” In light of these significant regulatory changes, remote retailers should re-examine their contacts with Massachusetts to determine their appropriate collection and remittance responsibilities.


 
1 MASS. GEN. LAWS ch. 64H, § 34, as enacted by Ch. 41 (H.B. 4000), Laws 2019.
2 MASS. REGS. CODE tit. 830, § 64H.1.7.
3 Id.
4 MASS. REGS. CODE tit. 830, § 64H.1.9(3).
5 MASS. REGS. CODE tit. 830, § 64H.1.9(2)(b). Other relevant terms are also defined, including in-state marketplace facilitator, marketplace, marketplace facilitator, marketplace seller, remote marketplace facilitator, remote marketplace seller, retailer and vendor.
6 MASS. REGS. CODE tit. 830, § 64H.1.9(1)(b). For the period from Oct. 1, 2019, through Dec. 31, 2019, the 12-month period from Oct. 1, 2018 through Sept. 30, 2019, is used in lieu of the prior calendar year.
7 MASS. REGS. CODE tit. 830, § 64H.1.9(3)(c).
8 MASS. REGS. CODE tit. 830, § 64H.1.9(3)(a)(1).
9 MASS. REGS. CODE tit. 830, § 64H.1.9(3)(a)(1).
10 MASS. REGS. CODE tit. 830, § 64H.1.9(3)(a)(2)b.
11 MASS. REGS. CODE tit. 830, § 64H.1.9(3)(b). The same effective dates apply.
12 MASS. REGS. CODE tit. 830, § 64H.1.9(3)(d).
13 MASS. REGS. CODE tit. 830, § 64H.1.9(4).
14 MASS. REGS. CODE tit. 830, § 64H.1.9(3)(e).
15 MASS. REGS. CODE tit. 830, § 64H.1.9(5).
16 MASS. REGS. CODE tit. 830, § 64H.1.9(7).
17 MASS. REGS. CODE tit. 830, § 64H.1.9(6).
18 MASS. REGS. CODE tit. 830, § 64H.1.9(8)(a).
19 Crutchfield vs. Commonwealth of Mass., Case No. CL17001145-00, Commonwealth of Virginia 16th Judicial Court, Oct. 9, 2019. See GT SALT Alert: Virginia Circuit Court Finds Lack of Jurisdiction in Massachusetts Remote Seller Nexus Case.
20 South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

 


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