Massachusetts Develops a Novel Approach to Nexus – What It Means To Ecommerce Sellers

Charles Maniace
May 31, 2017

Massachusetts is attempting to avoid a head-on challenge to Quill, opting instead for rules that stretch — but attempt not to break — the physical presence standard.

Internet vendors should take serious note of Massachusetts’ new approach to defining what constitutes physical nexus. If you partake in one of these three types of common activities, you will likely soon have a sales tax collection obligation in Massachusetts:

  1. Licensing software to Massachusetts residents or companies.
  2. Depositing small data files (i.e. cookies) on the computer or mobile device of a Massachusetts residents or company.
  3. Utilizing third-party Content Distribution Networks, Online Marketplaces, or enhanced delivery providers.

The Facts

As reported in an earlier blog, the Mass. DOR issued Directive 17-1 on April 3, 2017. The Directive, which is clearly aimed at online sellers, specifies a requirement to collect and remit sales tax exists when sellers have more than $500,000 in Massachusetts sales or engage in 100 or more transactions with Massachusetts customers.

If the story ended there, we could fairly place the new rule into the same category as those enacted in Alabama, South Dakota, Tennessee, Vermont and Wyoming that seek to completely replace the physical presence requirement with a purely economic standard. The Massachusetts approach, however, is quite different.

Rather than wage an outright challenge to the Quill physical presence doctrine, Massachusetts has devised a new and novel expansion of the Quill standard. Online sellers should take note of this critical distinction. While state challenges to Quill face a long and uncertain legal battle, state courts have been historically receptive to interpreting Quill in a way that acknowledges the digital economy.

A New Approach

Without question, there is an “economic” component to the Massachusetts rule and it seems clear that regulators intend to exclude small, out-of-state, internet sellers. However, “small” means very small, in this case: If you have 100+ transactions in Massachusetts, you are not considered small and these rules will apply to you.

What makes the Massachusetts Directive different from the approach taken in other states is the acknowledgement that Quill remains the law of the land. However, the state also explained that the internet was in its infancy when Quill was decided and its drafters could have not have contemplated what may or may not constitute  physical presence in today’s digital world.

To that end, the DOR specifies that virtually all modern-day internet vendors with a “large” volume of in-state sales are physically present in Massachusetts in a way that functions to facilitate or enhance their make a market in Massachusetts.

This form of physical presence, while different from the mail-order business at issue in the Quill case, is nonetheless “physical” according to the Commonwealth. Without saying it out loud, Massachusetts has created a nexus presumption for internet vendors.

Nexus in the Digital Age

The DOR details three activities that demonstrate internet vendors have physical presence. While each borrows from existing sales tax principles, they squarely represent a new frontier in nexus analysis.

Licensed Software

Every state holds that owning property creates nexus, including leased or rented property. Massachusetts has taken this idea to the next level. Like many other states, the Commonwealth holds that software — in any form — is tangible property for sales tax purposes. Further, when software is transmitted, it’s generally licensed as opposed to being sold.

Connecting the dots, software providers — including app providers — hold title to property in Massachusetts when they provide software to Massachusetts residents. When that software helps them make a market for their products in Massachusetts, it creates nexus.


When a consumer visits a website, the vendor will very frequently deposit a small data file on the customer’s computer or device. The file, or “cookie,” may last forever or may only exist for a single browsing session. In either case, cookies facilitate sales by simplifying login, customizing the shopping experience, maintaining a “shopping cart” and tracking customer behavior for advertising purposes. Since cookies are property owned by the internet vendor in Massachusetts and help the vendor make a market, Massachusetts contends that nexus exists.

Content Distribution Networks, Online Marketplaces, and Delivery Providers

According to Massachusetts, Internet vendors routinely:

  1. Contract with technology providers (content distribution networks) to ensure customers can connect to their websites as quickly as possible.
  2. Engage with “online marketplaces” that facilitate order processing, payment, fulfillment and customer service.
  3. Employ delivery providers that also offer logistics, order fulfillment, storage, return processing and order management.

In each situation, when third-party providers offer their services in Massachusetts, the DOR contends that since they help the vendor establish and maintain a market, they are likewise creating nexus.

This argument closely resembles the “click-through” nexus principal enacted by New York in 2008 which presumes that in-state affiliates act as agents in making a market for sellers if they direct traffic to their websites and are paid a commission if a purchase is made.  

Internet Vendors Need to Take Notice

Massachusetts is attempting to avoid a head-on challenge to Quill, opting instead for rules that stretch — but attempt not to break — the physical presence standard. Each activity Massachusetts describes as nexus-creating is subject to debate. For example, while cookies are downloaded onto computers and devices for shopping convenience, the amount of “property” in any given cookie is extremely small – some might even categorize it as de minimus.

Similarly, can it really be said that an arm’s-length contract between an internet vendor and a distribution network, marketplace, or delivery provider is similar to the “agency” relationship that exists when an affiliate provides web traffic in exchange for a piece of the pie for any purchases.

However, back in 2008 many commentators would not have predicted that “click-through” nexus would withstand legal scrutiny and become the law of the land in 19+ states.

Internet vendors should take serious note. Yet another approach has been devised to level the tax compliance playing field between in-state and out-of-state sellers. Whether the Massachusetts approach is successful remains to be seen. But one thing is certain: If Directive 17-1 withstands early legal challenges, other states will be quick to follow.

In this rapidly changing regulatory environment, only organizations that take a strategic approach to compliance and deploy nimble technology solutions will be positioned to succeed.

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Charles Maniace

Chuck is Vice President –Regulatory Analysis & Design at Sovos, a global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, he leads a team of attorneys and tax professionals that provide the tax and regulatory content that keeps Sovos customers continually compliant. Over his 20-year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC, Bloomberg and more. Chuck has also been named to the Accounting Today list of Top 100 Most Influential People four times.
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