A Massachusetts tax auditor once said to me with pride, “They don’t call us ‘Taxachusetts’ for nothing!” when I explained that the Department’s position was unsupported. Recently, Massachusetts was reminded that its Taxachusetts moniker may be well deserved when the Supreme Judicial Court of Massachusetts (the State’s high court) held that “cookies” and other electrons did not constitute taxable nexus for periods prior to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, 138 S. Ct. 2080 (2018). U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, 199 N.E.3d 840, SJC-13283 (Mass. Dec. 22, 2022).
In Wayfair, the U.S. Supreme Court reversed the physical presence requirement that had existed for more than 50 years, leaving us with nexus standards the parameters of which will be debated for years to come. However, for periods prior to Wayfair, the purported taxpayer must have a “substantial nexus” that is more than the “slightest presence” and electrons nexus (whether by applications, cookies, or CDNs) doesn’t fly. Not at all a “shocking” result!
The Facts: U.S. Auto Parts Network, Inc. (the “Company”) was organized under the laws of a state other than Massachusetts; was headquartered outside Massachusetts; had no offices (leased or owned), inventory, facilities, or equipment in Massachusetts; had no employees or representatives in Massachusetts; and delivered its goods to Massachusetts customers by common carrier from locations outside Massachusetts. The Company sold automobile parts via the Internet through websites and mobile applications (an “online” retailer) to customers located in Massachusetts. The sales and use tax period at issue was October 1, 2017, to October 31, 2017, for which the Company did not register for or collect and remit sales or use tax.
The Company’s business included three activities. A customer could download mobile applications onto portable devices located in Massachusetts. When customers accessed the Company’s website the Company delivered small data and text files to customers’ computers (the files, referred to as “cookies,” record and maintain data about the customer’s online activities) to the Internet browser of the customer’s device. The Company also used content delivery networks (each a “CDN”) operated by third parties that enabled website users to access the third-party servers rather than a website host’s servers to speed communications by shortening the transmission distance for certain information.
A Massachusetts DOR (“MADOR”) regulation stated that commencing October 1, 2017, a non-domiciliary vendor that otherwise met sales thresholds and employed applications, cookies, or CDNs in connection with sales in Massachusetts had to register and collect/remit Massachusetts sales or use tax. MADOR explained the purported incursions to its jurisdiction via the applications, cookies, and CDNs “as ‘electrons’ existing in the Commonwealth” that created nexus by application of its regulation and retroactive application of the Wayfair decision.
The Decision: The Supreme Judicial Court of Massachusetts held that Wayfair could not be applied retroactively in conjunction with the pre-Wayfair regulation. It further held that under the U.S. Supreme Court’s earlier case law (holding that a sales or use tax collection obligation could not be imposed by a state on a non-domiciliary vendor that did not have a physical presence in that taxing state and delivered goods to customers in the state via common carrier or U.S. Mail reasoning so based on the dormant Commerce Clause of the U.S. Constitution), the purported “electrons” existing in the Commonwealth did not constitute a substantial nexus.
