Imagine having a tax be unconstitutional all your life until a Supreme Court decision finally makes the tax lawful, and then your state tries to impose the tax retroactively during the years it was unconstitutional.
It’s a reality for online retailers selling into Massachusetts, which is requiring sales tax remittance for the 2017 business year even though the Supreme Court did not rule online sales taxes constitutional until 2018 in South Dakota v. Wayfair. Massachusetts’ retroactive tax creates grave constitutional concerns. NTUF has filed a brief with Massachusetts highest court to stop the tax assessment in U.S. Auto Parts Network v. Commissioner.
For over 50 years, it was unconstitutional for a state to force a retailer to collect sales tax unless the company had a physical presence in the state. Physical presence was well understood in the case law to only apply when a company had an employee or real estate in the jurisdiction (like a warehouse or a store). This was the doctrine that the Supreme Court created in 1967 in National Bellas Hess after Illinois tried to tax purchases from a mail order seller that had no physical presence in the state. The Supreme Court reaffirmed this decision in 1992 in Quill v. North Dakota.
Prior to Wayfair, Massachusetts Department of Revenue invented a novel “cookie nexus” regulation in 2017. The regulation subjected any online business with over 100 transactions and $500,000 in sales in Massachusetts to sales tax if they placed a “cookie” (a web-browsing block of data) on a customer’s computer. The regulation states that this intangible presence through cookies was actually a physical presence that would comply with the Supreme Court’s physical presence rule.
NTUF’s Taxpayer Defense Center’s amicus curiae brief argues the regulation was unconstitutional at the time it was passed and any business who complied with the regulation would have been subject to lawsuits from their customers for tax overcollection. The regulation assured that a business to end up in a courtroom, either in a lawsuit for over collecting taxes or for not collecting what Massachusetts unconstitutionally demanded.
Furthermore, the Supreme Court’s 2018 decision in Wayfair did not change the unconstitutionality of the Massachusetts law. The Court specifically upheld South Dakota’s online sales tax law precisely because it prohibited retroactive enforcement of the sales tax.
Retroactive taxes are dangerous as they violate the due process rights of citizens. Retroactive online sales taxes are especially discriminatory as they force out-of-state businesses to pay out of their own pocket a tax that normally their customers pay, creating concerns about hampering interstate commerce. Such retroactive taxes aimed at online retailers also implicates the Permanent Internet Tax Freedom Act.
NTUF will be monitoring the outcome in this case and remains actively on the lookout for any state that tries to impose a retroactive tax.