Massachusetts Tax Agency Proposes Online Sales Tax Mandate

Published August 3, 2017

The Massachusetts Department of Revenue has issued a proposed regulation to require online businesses located outside the state to collect and pay sales taxes to the state. The department withdrew a similar policy statement in June.

The policy statement, Directive 17-1, was scheduled to take effect on July 1, but NetChoice, a trade association representing owners of online businesses, filed a lawsuit in the state’s Superior Court requesting Judge Mitchell Kaplan block enactment of the directive.

On June 28, the state’s tax department withdrew Directive 17-1.

The Department of Revenue followed up on July 28, proposing a formal regulation requiring online businesses located in other states and doing $500,000 or more in sales and 100 or more transactions to Massachusetts residents, to collect and pay the state’s sales tax.

If adopted, the regulation would take effect on October 1.

In Quill v. North Dakota, a 1992 Supreme Court case that created a “nexus” standard for business taxation, the court decided businesses cannot be required to collect and pay sales taxes to jurisdictions in which they are not physically located.

Tilted Playing Field

David Tuerck, executive director of the Beacon Hill Institute, says online businesses have a tax advantage over brick-and-mortar ones.

“The existence of a tax on retail sales and the nonexistence of a tax on internet sales discriminates against retail sales,” Tuerck said. “It creates an economic inefficiency and directs consumers towards buying on the internet instead of in stores.”

Requiring online businesses to remit sales taxes to taxing jurisdictions based on where their customers live gives large online businesses an advantage over smaller e-businesses because there are so many different taxing jurisdictions, Tuerck says.

“The entities that are harmed would be small entities that sell online and would have to deal with complication,” Tuerck said. “It’s a problem for a small online seller to have to collect taxes from every jurisdiction.”

A Simple Solution

Collecting taxes based on where businesses are located, instead of where customers live, is an obvious solution, says Andrew Moylan, executive vice-president of the National Taxpayers Union.

“I think that the answer is staring us in the face,” Moylan said. “It’s to require tax collection for each sale that’s made over the internet, but to require tax collection in the exact same way that you require tax collection in a store: based not on where the consumer lives, but on where the business itself is located,” Moylan said.

Taxing online and brick-and-mortar businesses in the same way makes sense, Moylan says.

“I live in Virginia, but I work in DC,” Moylan said. “If I go to make a purchase in DC, they don’t ask what district I live in, in Virginia. They just have the simple standard of applying DC rates.

“That’s what internet retailers should do,” Moylan said. “That’s a simple standard, the exact same standard that every brick-and-mortar sale uses today.”