When the US Supreme Court ruled in June that states could tax online sellers that do not have brick-and-mortar stores within their borders, that seemed like it could clear the way for Massachusetts to collect millions from Internet retailers around the country.
If only it were that simple.
An electronics retailer is moving ahead with a separate legal challenge to a year-old Department of Revenue policy. Under it, many Internet sellers whose only connections to Massachusetts consumers are through online transactions have to collect sales taxes and remit them to the state.
A lawyer for Crutchfield Corp. argues that the Supreme Court decision doesn’t protect Massachusetts when it imposes unreasonable conditions on out-of-state sellers. The case is being waged in a state court in Virginia, where Crutchfield is based.
Resolving another case, one between three retailers led by Boston-based Wayfair and the State of South Dakota, the Supreme Court in June upended the traditional legal understanding that a retailer without a physical presence in a state can’t be required to collect and remit sales taxes. Essentially, the court said the rise of e-commerce had rendered the physical-presence test outdated.
But the Supreme Court didn’t rule that all states can immediately start collecting sales taxes through online sellers. Instead, states first must prove that they are not imposing an undue burden on interstate commerce by doing so. South Dakota passed this test. Whether Massachusetts can remains to be seen.
“It’s not the case that every out-of-state vendor is now required to collect sales tax, even if they make only one small sale to Massachusetts customers,” said Richard Jones, a tax lawyer with Sullivan & Worcester in Boston. “But really the lines should be drawn, and what those lines are is still unclear.”
George Isaacson, an attorney for Crutchfield, said Massachusetts has not adopted an important measure that would show its taxation system is fair to out-of-state sellers. The Supreme Court, in the Wayfair case, pointed to South Dakota’s participation in a coalition of 24 states that have coordinated and streamlined their sales tax rules, to minimize confusion among retailers, as a reason for allowing online collections.
But Massachusetts, Isaacson pointed out, has not joined that coalition.
The basis of the Baker administration’s logic for collecting taxes from out-of-state sellers was that cookies, a kind of tracking code that retailers place on customers’ phones and computers — as well as the use of apps — count as a kind of as physical presence.
The theory: If enough Massachusetts consumers install apps from, say, Newegg or Overstock on their phones, those retailers then have a physical presence in the state. The administration exempted many smaller vendors. (Amazon, the biggest online retailer, has been already collecting sales taxes here for nearly five years.)
Crutchfield had initially argued in its lawsuit, among other things, that cookies do not constitute a physical presence. But that position could have been rendered moot by the Supreme Court ruling, said tax lawyer Ken Silverberg of Nixon Peabody.
However, Isaacson said Crutchfield is also challenging the Department of Revenue’s efforts to collect online sales taxes dating back to Oct. 1, 2017, when the Baker administration first adopted a so-called “cookie tax.”
“At a high level, the real issue here is an unreasonable position being taken by Massachusetts, especially when compared to other states,” Isaacson said.
The Department of Revenue declined to comment, citing the pending litigation.
About 300 companies have registered to collect under the Baker administration’s cookie-tax rules, and the Revenue Depatment had collected about $14 million through June 30 as a result. But that amount was far short of the $169 million to $279 million the Government Accountability Office last year estimated that Massachusetts could collect annually if the Supreme Court ruled as it did in the Wayfair case.
And legal experts say a number of major retailers may be holding out on registering with Massachusetts, as they wait for a ruling in the Crutchfield case.
While other states moved quickly after the Wayfair decision to announce they would set up their own systems for online sales, Massachusetts did not. Instead, the Baker administration chose to duke it out in court over its cookie tax.
Isaacson said Massachusetts is arguing the Virginia court lacks jurisdiction over the Massachusetts Department of Revenue.
Jon Hurst, president of the Retailers Association of Massachusetts, has long argued for online sales tax collections, saying they would level the playing field for brick-and-mortar merchants. The Legislature, he said, could create a taxation plan that adheres to the Wayfair decision, so that the state’s new online sales tax collections aren’t held up by the Crutchfield lawsuit.
“I didn’t expect things to happen overnight,” Hurst said. “[But] it would be better to get this done sooner rather than later.”