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Daily Tax Report: State

Virginia Court Dismisses Massachusetts Online Sales Tax Case

Oct. 9, 2019, 6:29 PM

A Virginia judge refused to weigh in on the legality of taxing out-of-state vendors based on their use of in-state software, saying the issue should be decided in Massachusetts.

But it may soon be a moot point because that so-called “cookie nexus” rule is being phased out in Massachusetts and a handful of other states. In its place are much broader Wayfair-inspired rules to collect taxes from remote vendors based on volume of sales in a state.

Crutchfield Corp. LLC of Charlottesville, Va., an online auto parts retailer, sued the Massachusetts Department of Revenue in October 2017 over the department’s regulation that requires online vendors to collect state sales tax if they use in-state apps and computer “cookies.”

The retailer also argued Massachusetts shouldn’t be allowed to impose such a tax that started before the South Dakota v. Wayfair decision, the seminal June 2018 ruling that threw out a standard that businesses had to have a physical presence in a state to be taxed there. That ruling indicated states could not retroactively tax companies based on a non-physical connection, like an economic connection, to that state.

Massachusetts, however, has argued that Wayfair doesn’t apply to its cookie nexus regulation anyway, maintaining that cookies are a form of physical presence in the state

No Jurisdiction

Judge Cheryl V. Higgins of the Virginia Circuit Court for Albemarle County decided in an Oct. 9 ruling that Virginia doesn’t have jurisdiction over the Crutchfield case. Crutchfield attorney Matthew Schaefer, of Brann & Isaacson of Portland, Maine, declined to say whether his clients would file an appeal in Virginia or file a new suit in Massachusetts.

Schaefer hinted, however, that his clients aren’t ready to drop the case.

So far, Massachusetts “has managed to avoid court review of the important questions” about the online tax and retroactivity, Schaefer said. “Those issues remain open for another day,” he said.

Cookie ‘Crumbling?’

Cookie nexus may soon be a museum piece anyway, thanks to the Wayfair ruling and its endorsement of states’ approach to compelling remote vendors to collect and remit taxes based on volume of sales. States are moving away from cookie nexus as a way to get remote vendors to pay up, said Richard Cram, director of the national nexus program at the Multistate Tax Commission.

“My guess is it will gradually fade away,” Cram told Bloomberg Tax Oct. 9. “I wouldn’t expect anyone else to propose it.”

In addition to Massachusetts, three other states had cookie nexus requirements, he said: Ohio, Iowa, and Rhode Island. They passed such requirements when states were prohibited from compelling remote vendors to collect and remit taxes because of the physical presence standard affirmed in the Supreme Court’s 1992 Quill ruling. A state with a cookie nexus requirement argued that a remote vendors’ placing cookies on the computer of a buyer in the state meant that vendor had physical presence.

Since the Wayfair ruling, all four states have repealed or announced they will repeal their cookie nexus requirements to be replaced by the economic sales volume approach favored by the Supreme Court in Wayfair, Cram said. Massachusetts recently scheduled a hearing for Nov. 7 to repeal its cookie nexus requirement.

However, the state appears to be “not giving up on enforcement of cases prior to the reg being repealed,” Cram said. “They’re not wiping out cookie nexus for the time prior to their economic nexus” law.

Massachusetts’ cookie nexus regulation took effect Oct. 1, 2017, while the sales tax law based on the level of a remote vendor’s economic activity took effect two years later, on Oct. 1, 2019.

Massachusetts still has “some assessments outstanding back to 2017, and so they may still be pursuing those,” Cram said.

Oral Arguments

In oral arguments Aug. 30, Schaefer told Judge Higgins that Virginia has jurisdiction over the case, and that it should continue. Brann & Isaacson is the same firm that represented Wayfair in 2018.

The Massachusetts DOR argued to Higgins that the suit should be dismissed and that Massachusetts should handle it anyway. The department didn’t immediately reply Oct. 9 to a request for comment about the Virginia court’s decision.

On May 13, a Massachusetts Superior Court judge dismissed a separate challenge to the state’s cookie nexus rules, filed by Blue Nile LLC and five other online retailers. Brann & Isaacson represented the retailers in that case, as well.

The case is: Crutchfield v. Harding, No. CL17001145-00, 10/8/19

To contact the reporters on this story: Adrianne Appel in Boston at aappel@bloomberglaw.com; Tripp Baltz in Denver at abaltz@bloomberglaw.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com