The attempt by Massachusetts to collect millions in new sales taxes from out-of-state online retailers is an aggressive reinterpretation of existing law that will probably be challenged in court, tax experts said.
“This is really a rather extreme, unprecedented approach,” said George S. Isaacson, a lawyer who has challenged similar rules in other states. “This is really a radical change in Massachusetts.”
State officials, who unveiled the proposal Monday, refused to answer questions Wednesday about the Revenue Department’s new policy, which directs online retailers located outside of Massachusetts to collect and remit sales taxes once they reach $500,000 in annual sales and more than 100 transactions here.
Under existing federal law, companies typically can’t be forced to collect sales taxes unless they have some physical operations in a state. But the new Massachusetts policy would interpret the use of software applications or invisible advertising-tracking code in Web browsers as a physical presence, triggering those tax collections.
Governor Charlie Baker’s administration said it expects to raise $30 million in the fiscal year that begins July 1 under the new legal interpretation.
Experts in state tax policy said the Baker administration’s strategy would invite immediate lawsuits from online retailers.
“This is really pushing the envelope to the extreme,” said Richard Pomp, a law professor at the University of Connecticut. “It’s creative. It’s aggressive. But ultimately you would not think itwould be acceptable to a court.”
Online retailers, and mail-order sellers before them, have been able to avoid collecting sales taxes for purchases made across the country because of a 1992 US Supreme Court ruling known as Quill v. North Dakota.
That decision held that a state couldn’t deputize a retailer to collect sales taxes from its residents unless the company had a physical presence in the state. That typically has been interpreted to mean shipping warehouses, administrative offices, or some other actual business location.
That exemption, however, became controversial as e-commerce companies including Amazon.com Inc. and eBay Inc. grew into household names. State governments have become more aggressive about seeking sales tax collections from online sellers in recent years, while also hoping for changes at the federal level.
Amazon, which previously resisted many attempts to collect sales tax in additional states, now collects and remits those charges in all 46 states with a sales tax. But some other online sellers, particularly smaller companies, don’t remit sales taxes nationwide, in part because of the cost and complexity of complying with some 10,000 different taxing jurisdictions, said Isaacson, the attorney who also teaches at Bowdoin College.
Tax experts said states have gotten more aggressive in their attempts to challenge the Quill ruling, particularly after recent failures to pass a new national online sales-tax policy. Most prominent among them are Tennessee, South Dakota, and Alabama, which have enacted laws or regulations requiring online sales-tax collections once a seller reaches a minimum threshold of sales in the state.
Those cases are assumed to be vehicles for a new US Supreme Court ruling on the law, said Scott Peterson, vice president of US tax policy at Avalara Inc., a Seattle company that sells sales-tax software.
“Frankly, the states have kind of given up on Congress,” Peterson said. “They would like to get back to the Supreme Court, because they think they’ve got an argument.”
Massachusetts’ policy could be one example of that legal strategy, but its attempt to define the use of software or Internet networking services as a physical presence could roil the debate, said Cara Griffith, editor in chief of Tax Notes, a tax-policy publication.
“There are some states out there that are trying to legitimately challenge Quill and redefine what physical presence means,” she said. “Certainly, that is a debate that the time has come for. But when they go as far as Massachusetts did, it sort of negates and takes away from what the debate is.”