March 12, 2018

To expand sales tax revenues, some states are now searching for and using the presence of Internet cookies dropped across state lines to add to their coffers.

These cookies are the colloquial expression for small snippets of software code stored on remote computers, phones, and other internet-connected devices. Cookies are extremely common. They’re what allows a website previously visited to “recognize” the computer’s user when the site is revisited. Cookies are everywhere. States aren’t looking to tax the transmission or storage of cookies, but instead want to base a claim of sales tax nexus on the transmission and storage of a cookie once transmitted to an in-state device.

Nexus and Who Collects

In the United States, sellers who sell to customers in other states are not obligated to collect sales taxes on those sales unless they have a “physical presence” in the state where the customer resides. This physical presence can take many forms, including employees, inventory, or even referral advertising arrangements. Once established, the seller has triggered sales tax nexus and the state can compel that seller to collect and remit sales taxes on sales to in-state customers.

Back to the cookies: a few states recently determined the transmission and storage of cookies satisfies the physical presence necessary to trigger sales tax nexus. In late 2017, Massachusetts published regulations on the topic.  Now, sellers who distribute or store apps or cookies on computers or other devices of Massachusetts customers have established a “physical presence” in the state.  The “physical presence” of the apps or cookies triggers sales tax nexus for the sellers who distributed or stored them on the devices of Massachusetts customers.[1]

Once sales tax nexus is triggered, a seller must register and report all taxable and exempt retail and wholesale sales into the state. Massachusetts provides thresholds to prevent small sellers from having to collect, for example, sellers who sell less than $500,000 annually into Massachusetts are excluded from the rules.

How Does the Cookies Rule Affect Sellers?

The approach taken by Massachusetts is novel, daring, and already being challenged.[2]  The results of those legal challenges notwithstanding, Ohio[3] and Rhode Island[4] passed similar legislation in 2017. The arguments for and against the physical attributes of cookies are interesting and can approach the molecular level, but for retailers, the new rules signal the ingenious and aggressive ways that states are looking to tax sales. History shows its likely other states will adopt similar rules in the near future.

Companies that sell into Massachusetts, Ohio, or Rhode Island have a new wrinkle to address in determining their likelihood of establishing nexus there and likely will face the same issue in other states as well. For companies that make retail sales anywhere across the United States, the issue of nexus and the obligation to comply with sales tax rules of other states is front and center.

Awareness is a key first step. Additionally, any company selling products or services across state lines should develop a sales tax plan with an initial goal of addressing the issue of nexus in a consistent manner. The result should be a rational, repeatable process to help make future decisions about where collection is required.

We can help your company identify areas where risk exists in your sales tax compliance efforts and provide proven ideas on how to improve workflows and decrease that risk. For more information on this topic, please contact our SALT team.

[1] See Mass. Regs. Code 830 CMR §64H.1.7(1)(b)(2)(a).
[2] Crutchfield v. Mass. Dept. of Revenue ( Circuit Court of Abermarle County (Virginia).
[3] Ohio FY17-18 Capital Budget. See House Bill 49.
[4] Rhode Island FYE 06/30/18 Budget. See House Bill 5175.

© Clark Nuber PS, 2018. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.