As online sales continue to grow - estimates are 15 percent a year - many states worry that millions of dollars in sales tax are being lost. Massachusetts is one of them.
In April, Massachusetts Department of Revenue (DOR) Directive 17-1 issued a rule to collect online sales taxes that was set to go into effect on July 1, 2017. In the last days of June, however, the agency decided to revoke the Directive 17-1 and go back to the drawing board.
An unprecedented approach
When you shop online, you are technically supposed to back-pay sales taxes with your annual tax return. In practice, few people do this and there hasn’t been a focus on enforcement.
NPR explained how the proposed Massachusetts tax would work in its All Tech Considered. As one of the latest states to try collecting the 6.25 percent state sales tax from out-of-state retailers, the approach involves “cookies.”
These bits of data that websites store on our computers and phones are used to track visits and searches. They explain why a facebook ad might come up for something you searched recently on Amazon. Massachusetts had argued that these Internet cookies constituted a physical presence in the state.
Arguably, it is “an Internet answer to an Internet problem.” But it does stretch the definition of property. NetChoice, a trade association of e-commerce sites, was not convinced and sued to block the measure. They argued that an Internet cookie was not the same thing as a strip mall store front. Another argument was related to ownership of this data: who owns the advertising software tracking code?
Eventual online sales tax
While the DOR will not implement the Directive, it is not giving up on the idea. In a notice the Commonwealth stated that it “anticipated proposing regulations which, if adopted after public notice, comment, and hearing … would require large Internet vendors to collect Massachusetts sales and use tax.”
Businesses with physical locations, restaurants and pizza parlors, in the state also need to pay close attention to sales tax collection and payment. For those who do business in Massachusetts, but do not have a store front or sales executives in the state it will be important to follow the issue.