ACMA and NetChoice Prevail In Challenge To Massachusetts Tax Rule For Internet Sellers

On June 28, 2017, in response to a lawsuit filed by Brann & Isaacson on behalf of the American Catalog Mailers Association and NetChoice, the Massachusetts Superior Court entered an immediate judgment halting implementation of Massachusetts Department of Revenue Directive 17–1, “Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax.” Directive 17–1 had purported to require affected Internet vendors to collect and remit Massachusetts sales tax effective July 1, 2017, based on a newly announced theory of state tax nexus for online sellers. The ACMA and NetChoice promptly challenged the Directive in court, arguing that it violated the state’s Administrative Procedures Act, the federal Internet Tax Freedom Act, and the U.S. Constitution.

In a ten-page Memorandum of Decision and Order, Justice Kaplan noted that “[c]onsistent with the Quill physical presence test and the limitations imposed by Congress under the ITFA, until the Directive issued on April 3, 2017, the Massachusetts DOR had not required an Internet retailer to collect and remit sales or use tax on goods sold for delivery in Massachusetts, if it did not have a physical presence.” In striking down Directive 17-1, the court ruled that the Commissioner of Revenue had used the Directive to announce “an abrupt change in the policy concerning an out-of-state merchant’s new obligation to register with the DOR and collect and remit sales/use tax from Massachusetts customers.” In doing so, the court concluded, the Commissioner had denied affected persons “the opportunity for notice, input, and perhaps debate…provided them by the [Administrative Procedures Act].”

The same day, the Department of Revenue announced its intent to revoke the Directive , effective immediately. In light of the court judgment and announced revocation by the Department of Revenue, Internet vendors who otherwise may have been affected by Directive 17-1 are now not required to register to collect and remit Massachusetts sales tax as of July 1.

The ACMA and NetChoice are represented in the litigation by George S. Isaacson, Matthew P. Schaefer, and Jamie Szal. The case is American Catalog Mailers Association and NetChoice v. Heffernan, Mass. Superior Court, Civil Action No. 1784CV01772.