DOR SCRAPS ONLINE TAX PLANS
Lawsuit shifts state to a regulatory strategy
The state Department of Revenue has quashed an order that would have required certain online retailers to start collecting state sales taxes from Bay State customers beginning tomorrow.
The about-face on Wednesday came amid a Suffolk Superior Court lawsuit against DOR commissioner Michael Heffernan by two trade groups representing online businesses and catalog marketers that sought to block the directive.
DOR instead will seek approval of the proposal through the regulatory process, with the goal of starting tax collections this fall. It made the decision after consulting with Attorney General Maura Healey’s office, because the judge was focusing on the way taxpayers were informed of the impending collections.
In January, the Baker administration proposed collecting the 6.25 percent sales tax from online retailers that had more than $500,000 in sales and 100 transactions in Massachusetts annually — even if they didn’t have a physical location here.
A 1992 Supreme Court ruling held that online sellers without a physical presence in a state can’t be forced to collect state sales taxes on purchases made by a state’s residents. Online retail giant Amazon.com in 2012 signed an agreement with the DOR to start collecting Massachusetts sales taxes beginning Nov. 1, 2013, after it opened a Cambridge software office and bought a North Reading robotics company. The Baker administration’s argument is that retailers could be considered to have a state presence if Massachusetts consumers have downloaded their smartphone and computer applications, the retailers maintain cookies on consumers’ devices, or if retailers had vendor and delivery networks that service Massachusetts.
Gov. Charlie Baker and legislators had hoped to generate $30 million from the online sales tax for the fiscal 2018 budget. The lawsuit was filed by the American Catalog Mailers Association and NetChoice, which represents online retailers and had called the directive an “unconstitutional tax grab.” NetChoice executive director Steve DelBianco said the groups wouldn’t hesitate to refile their suit if the state continues to pursue the tax collections.
“I don’t see how any court will agree that electrons flowing into a computer or smartphone comes anywhere near a physical presence,” DelBianco said.
Tax attorney Richard Jones said turning the plan into a regulation could give it more legal weight because, by law, regulations must go through a lengthy process.
“Regulations are typically given more deference by courts and hold greater authority than directives,” Jones said. Still, whether internet cookies can be considered tangible property still will be an open question, according to Jones.
“This will be challenged again, without doubt,” he said. “It’s rather farfetched.”