By way of Directive 17-2, the Massachusetts Department of Revenue has revoked Directive 17-1. The latter was to have taken effect for the six month period starting on July 1, 2017. Directive 17-1 provided that an internet retailer with a principal place of business located outside the state must collect Massachusetts’ 6.25 percent sales and use tax if it had in excess of $500,000 in Massachusetts sales and 100 or more transactions of sales for delivery into Massachusetts.
Directive 17-1, which was issued on April 3, 2017, is no longer in effect however. Instead, as per Directive 17-2, the Department of Revenue anticipates proposing regulations that will be subject to public notice, a comment period, and a hearing. If, after that, the regulations are adopted, the department will then require large internet vendors to collect sales and use tax on a prospective basis, under standards similar to those described in Directive 17-1.
We addressed Directive 17-1 in a mid-April blog, noting that it was likely to be challenged, speculating that it may run afoul of the 1998 Internet Tax Freedom Act (ITFA) prohibiting discrimination against electronic commerce, and the taxation of internet access fees.
Indeed, soon after Directive 17-1 came out, Netchoice and the American Catalog Mailers Association (ACMA) sued the Department seeking, among other things, declaratory relief. These two plaintiffs are becoming well known in their advocacy; they are behind similar lawsuits challenging the imposition of internet sales taxes in other states, such as Tennessee and South Dakota, which we described in our above-linked blog.
In a report describing a hearing in the case on June 27, 2017, Bloomberg quoted the judge’s description of Directive 17-1 as a “’sea change’ in the state’s policy regarding tax collection requirements for out-of-state sellers… ‘It’s a brand-new policy. Retailers have never had to do this before.’” As can be inferred from the revocation, one main problem was the fact that the Department of Revenue had not sought public input. The court opined that the department should have used a regulation, not a directive, suggesting that the “move to compel e-retailers to collect the state’s sales tax should have been discussed in public.”
On June 28, 2017, the court granted the plaintiffs’ requested relief, and dismissed the other counts, on the grounds that Directive 17-1 “is a regulation promulgated without compliance.”
On its website, the ACMA celebrated the court’s decision, and the fact that the department and the state’s Attorney General had “pulled their new regulation…which was a clear expansion of physical presence well beyond anything contemplated previously…. Apparently, realizing they faced an adverse ruling… [the Department] and its counsel concluded it would be better to pull the regulation ...”The ACMA also cheered comparable court-ordered injunctions in their cases in Tennessee and South Dakota, declaring that “no one other than the U.S. Congress and the Supreme Court itself has the privilege of re-writing precedent...” The group professed that its work to clarify national legislation is critical to “stopping the insanity…when states attempt to unilaterally contravene established Supreme Court precedent,” and vowed to continue with it.