Since June 2018, there has been a surge of legislation and corresponding litigation around the implementation of new sales tax laws. While many states are implementing new laws that go into effect this year, others have had economic nexus laws in place since well before the Wayfair ruling. Massachusetts is one of those states, having passed a law in October 2017 that required out-of-state online retailers to collect sales tax.
This alone isn’t out of the ordinary. More than a dozen states had similar laws on the books before Wayfair, and many online retailers opted not to comply, citing previous Supreme Court decisions like Quill that stated physical nexus was required. But Massachusetts has taken the additional step of telling retailers that sales tax should have been collected and must be remitted retroactively for the months between October 2017 and June 2018.
Retailers Fight Massachusetts on Retroactive Collection
Because of the state’s decision, six retailers have filed a lawsuit claiming they shouldn’t have to pay the sales tax they would have collected in those eight months, because it was still unconstitutional to require them to do so before the Supreme Court’s ruling. Specifically, they cite language in the Wayfair ruling that appears to argue against retroactive collection of sales taxes.
These six companies alone would owe the state nearly $3 million in back sales taxes in that eight-month period, so are concerned that they, along with many other retailers who did not join the suit, would be required to pay taxes they may not have collected.
The Goal of the Lawsuit
The primary goal of the lawsuit by Newegg, Blue Nile, Silver Star Brands, Sweetwater Sound, US Auto Parts Network, and Balsam Brands is to eliminate whatever sales tax obligation the State claims they hold going back to October 2017.
Filed in December, the lawsuit seeks to show that Massachusetts is saddling retailers with an undue burden that they could not have prepared for when they thought the law was illegal. This is not the first time that Massachusetts has faced legal action over this law. Crutchfield – an audio system retailer out of Virginia, similarly argued that the law was too much of a burden.
The argument in the current suit is that the action puts out of state companies at a disadvantage because they did not collect taxes during that eight-month period, in effect discriminating against interstate sellers, which would violate the Commerce Clause. They also argue that Massachusetts is violating the Internet Tax Freedom Act – a law passed in 1998 that says online businesses cannot be taxed differently from offline businesses. The DOR regulations passed by Massachusetts do not apply to print catalogs or other out of state sellers who don’t operate online.
Because of these issues, the plaintiffs are asking for the entire regulation to be blocked.
The Continued Impact of Wayfair Fallout
While only one state of many with similar laws, these situations have ripple effects for companies throughout the United States, due to the very nature of interstate commerce. As new economic nexus laws are implemented and states work to determine how to enforce existing regulations, these issues will continue to develop. For retailers, it represents a time of uncertainty and upheaval, meaning it’s more important than ever to be organized, prepared, and well versed in the laws both nationally and in each state in which they operate.