MA asserts nexus over internet vendors

Fascinating. MA has decided to declare that an out-of-state internet vendor (as opposed to non-internet mail order vendor) who makes too many sales in MA has taxable nexus.
They even assert that the code of a webapp being downloaded to a computer in MA means the vendor has a physical presence in MA.
http://www.mass.gov/dor/businesses/help-and-resources/legal-library/directives/directives-by-years/2017-directives/dd-17-1.html
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On Monday, April 3, 2017 at 5:13:44 PM UTC-4, Rich Carreiro wrote:

I'm not a lawyer, but I think their position is defensible. I'm actually surprised that MA did this first and not NY or CA.
Ira Smilovitz, EA
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The Supreme Court has used what it calls the "purposefully availed" test - when a vendor knowingly targets purchasers is a particular state, that state can claim jurisdiction over the vendor for sales done in that state. In other words a state has jurisdiction when someone "purposefully avails itself of the privilege of conducting activities" in the state.
For example in McGee v. International Life Ins.Co. (1957) 355 U.S. 220, a life insurance company was allowed to be sued in a state where it had sent one letter to solicit business from the plaintiff's decedent.
The theory appears to be that if a vendor does more than 100 transactions in a year in Massachusetts, amounting to more than $500,000, it can be presumed that it is targeting or intentionally soliciting business from that state. It's hard to say how the courts would treat this - it could be that most cases the law would be approved. But there could well be individual situations where the courts would say the law goes too far.
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That numerical argument seems like a non-starter. Quill sold $1M/yr to 3000 customers in North Dakota, the court found against the state anyway, and that was 1992 dollars, worth about $1.7M today. The targeting arguments also seem weak, since Quill certainly knew it was sending catalogs and orders to addresses in N.D. and it didn't matter.
As far as I can make out the Mass. argument, they're saying this is different from Quill because Quill's only contacts were through common carriers, presumably the post office and maybe UPS or Fedex. These sales are over the Internet, which is not a common carrier. I don't know whether that's meaningful or just pixie dust.
In Quill the court also seemed to say that dealing with all the state tax rules would be burdensome, but with 25 years of advances in computers and networking, that's less clear, particularly for a state like Mass. that charges the same tax rate statewide.
R's, John
PS: I have occasionally made taxable sales within New York, where the rate varies by county and city, and have wasted time squinting at Google maps to guess which town and so which county an address was really in.
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"Stuart O. Bronstein" wrote in message wrote:

The Supreme Court has used what it calls the "purposefully availed" test - when a vendor knowingly targets purchasers is a particular state, that state can claim jurisdiction over the vendor for sales done in that state. In other words a state has jurisdiction when someone "purposefully avails itself of the privilege of conducting activities" in the state.
For example in McGee v. International Life Ins.Co. (1957) 355 U.S. 220, a life insurance company was allowed to be sued in a state where it had sent one letter to solicit business from the plaintiff's decedent.
The theory appears to be that if a vendor does more than 100 transactions in a year in Massachusetts, amounting to more than $500,000, it can be presumed that it is targeting or intentionally soliciting business from that state. It's hard to say how the courts would treat this - it could be that most cases the law would be approved. But there could well be individual situations where the courts would say the law goes too far. ----
I don't see how this is valid. Without a presence in the state, I don't see how a state can reach OUTSIDE ITS BORDERS to impose its law on an "alien" (with respect to the state) entity.
It's not the vendor reaching into the state, but the residents of the state reaching outside the state to the vendor. Big difference.
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If someone in one state sends a bomb or poison into another state, and someone is injured, the state where the damage took place surely has jurisdiction over the person who perpetrated it, even if he never stepped foot in that state. It's the same theory.

When that's the case, you're right. But when a vendor actively and knowingly solicits business in a state, it can be subject to the laws of that state if it causes damage or injury there.
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Except that Quill v. N.D. says for sales tax purposes, if they reach via the post office or common carrier, it doesn't count, except maybe it might.
The decision isn't particularly long, but I find it hard to parse out the nuance. It's clear that the court expected the Congress to sort this out legislatively, but after 25 years I'm not holding my breath.
https://www.law.cornell.edu/supct/html/91-0194.ZO.html
R's, John
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You're right. They say that, for sales tax purposes, only communicating by mail and delivering goods by common carrier is not a sufficient contact with the state to impose sales tax, because it is a burden on interstate commerce. For criminal and other kind of cases, the interstate commerce issue does not exist, so jurisdiction may be proper in those cases.
It's a close question whether it's fair because in-state companies do have to collect the tax, or its unfair because a company doing interstate business has to keep track of and interact with so many tax systems. But the Court made that decision.
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Remitting sales tax can be very painful. I used to sell books mail order, within NY state every county any many cities set their own tax rates, and I'm supposed to report everything by tax jurisdiction so they can allocate the $12 I sent them. I gather that 50 state sales tax software costs on the order of $100K/yr.
Another response to Quill would have been for states to simplify collection, e.g., a single rate per state for out of state sales, and a central clearinghouse so you can send in one form and one check rather than 45. There's been some motion toward that but the big states like NY and CA (both of which have a zillion different rates) haven't signed on.
R's, John
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wrote:

Someone mentioned earlier that the criteria is 100+ transactions and $500K per year. This presumably minimizes the burden on small proprietors like you were. On the other hand, a nationwide retailer like Amazon should be able to afford to track this.
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Most of the largest mail order retailers pay sales tax now. Amazon stopped dodging sales tax years ago and now has warehouses all over the place, so they have physical nexus in most states. Staples and Walmart and LL Bean have physical stores. The target of this tax is the next tier down.
In case it's unclear, I think the mail order sales tax exemption is a crock, something that happened accidentally and is now considered to be a law of nature, much like the mortgage tax exemption. Having been the mayor of my village, which depends on state sales tax for a large chunk of its budget, I would really prefer that our local stores that hire local staff and pay local property taxes compete on the same terms as anonymous giants with warehouses in Pennsylvania.
R's, John
PS: I'm scratching my head about how MA plans to enforce this. The post office isn't going to give them delivery records, and it's going to be a challenge if they try to send subpoenas demanding records from random out of state businesses.
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John Levine wrote:

Are you sure about this assumption? I'm not.

States are, somehow, getting this data for cigarette tax.
/BAH
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On Thursday, May 25, 2017 at 9:35:13 PM UTC-7, John Levine wrote:

CA doesn't have "a zillion" different rates. I don't recall the exact number, but it's less than 30.
-- Arthur Rubin, Brea, CA (Tax preparation services are not subject to sales tax in California, or I would probably know the exact number of tax ratea)
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Seems like a zillion compared to Massachusetts and Ohio each which has (1) one.
California may only have 30 rates, but the BOE's rate spreadsheet has almost 1800 entries to tell you what rate applies in what city. It's even worse than that because post office names and five digit zip codes don't match city or county boundaries. My rural post office covers parts of three counties so when I'm ordering stuff online, web sites sometimes pop up a window asking which county I'm in.
I think that if you standardize the address and get its nine digit zip code, that's fine enough grain to tell what the rate is, but now you need an address standardization application with access to the USPS address database, and a tax to zip+9 database.
Without a simplified system with one averaged rate per state, you'd have to be pretty big to afford the overhead of all-state tax collection.
R's, John
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"Stuart O. Bronstein" wrote in message wrote:

If someone in one state sends a bomb or poison into another state, and someone is injured, the state where the damage took place surely has jurisdiction over the person who perpetrated it, even if he never stepped foot in that state. It's the same theory. ====I would disagree: Your example would be a federal matter - interstate commerce clause of the U.S. Constitution. However, let's go a step further. Let's say that instead of a bomb, someone shot another person using a firearm across an international border. Where did the crime occur? In the country the shooter was in, not the victim. Now, the country of the victim would have recourse against the shooter's country - prosecute the shooter or it's war.
What it comes down to is jurisdiction. I do not see how a state or country can assert jurisdiction outside of its borders (excluding air/water/space-craft carrying its flag). The authority to tax generally stops where a state's jurisdiction stops. The alien company is outside it's jurisdiction and therefore the authority to tax is lacking. "Alien" can be defined as something outside of the state's jurisdiction, and in this case, that's what it means.

When that's the case, you're right. But when a vendor actively and knowingly solicits business in a state, it can be subject to the laws of that state if it causes damage or injury there. ===By using a web site, I agree that the vendor is soliciting business, but that does not equate to targeting a specific area - i.e. "in state" as opposed to the entire country (or world). There is no overt act by the vendor to solicit solely in the target state. Jurisdiction and authority to tax doesn't exist where the intrusion is merely incidental.
In this situation, the state is free to impose a use tax upon the buyer inside its jurisdiction. However, there simply is no authority to impose sales tax to be collected at a source outside its borders, and furthermore as this is a U.S. state, the U.S. Constitution preempts any such attempt as a violation of the [federal] power to regulate interstate commerce.
I don't really care what Massachusetts THINKS it can do. This action is unconstitutional under the federal scheme, and the Tenth Amendment seals its fate. "[T]he relevant provisions of the U.S. Constitution" forbid states to do what MA is trying - to regulate interstate commerce. MA's analysis is faulty at IV(b)(ii)(B). It tries to argue that Internet communication for a mail order house is somehow fundamentally different (for tax nexus purposes) than a telephone-based order, but it is NOT. To assert jurisdiction, the web site need be hosted in state - just like if a telephone call center of the vendor were in state, to create a tax-assertable physical presence. The entire section of argument footnoted to source 16 is legally wrong in its conclusion, and therefore everything that follows is nonsense.
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There's at least two centuries of case law exploring the exceptions to that principle. You might want to review it. There are also lots of interstate agreements on various topics which suggests that things are not as cut and dried as you imagine.

Reread the Quill decision, which had a much more nuanced analysis.

Well, that's one position. We'll surely see how it plays out in court.
R's, John
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On Tuesday, May 30, 2017 at 10:39:23 AM UTC-7, John Levine wrote:

Laws can change, but, at the moment, Internet sales are _more_ protected from state regulations than telephone sales.
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ira smilovitz wrote:

That's why I call it "Taxachusetts", and the many lousy automobile drivers here I call "Massholes".
Jeff
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Jeff Wisnia wrote:

ives/directives-by-years/2017-directives/dd-17-1.html

surprised that MA did this first and not NY or CA.

Massachusetts seemed to be the "first field test site" for US tax law changes.
/BAH
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I read it. As they're basing it on Quill v North Dakota which is now 25 years old, they're not breaking new ground. I've always been surprised that lots of other states didn't amend their sales tax laws to take advantage of the favorable ruling. My state lost Bellas Hess 50 years ago and sales tax laws are still the same today. Well, we have a retailers occupation tax as the sales tax was unconstitutional under the 1870 constitution, not an issue under the 1970 constitution.

Hah! It's because the vendor asserts ownership of the ordering application. Let's see if a vendor using an open source ordering application can successfully assert that there's no nexus. Software copyright and patenting has long been abused and they can't have it both ways.

Technical question about sales versus use taxes: If the state asserts nexus, is the duty imposed upon the retailer to remit taxes always going to be a sales tax and not a use tax, or are there exceptional circumstances in which the vendor is remitting a use tax? I always think of a use tax as being levied on the purchaser and not the retailer.
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