If you are selling goods or products online and some of your customers are located in Massachusetts, you need to be aware of the state’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, physical presence means having:
As you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
Example 1: You are an online retailer located in Portland, Oregon and make a sale through your website to a customer in New Bedford, Massachusetts—a state where your business has no physical presence: You are not required to collect sales tax from the New Bedford customer.
Example 2: You are an online retailer located in Worcester, Massachusetts and make a sale through your website to a customer in Cambridge, Massachusetts: You are required to collect sales tax from the Cambridge customer.
Example 3: After several years of operating solely out of a warehouse in Portland, Oregon, you open a one-room satellite office just outside of Boston, Massachusetts—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Springfield, Massachusetts: You are required to collect sales tax from the Springfield customer.
For guidance on how physical presence is determined under Massachusetts law, consult Chapter 64H, Section 1 of the Massachusetts General Laws (MGL), which defines the phrase “having a business location in the commonwealth.” The definition explains that “A person shall be considered to have a business location in the commonwealth” only in certain circumstances, which largely follow the bulleted items listed above. For additional information, check the section entitled “Who is a sales/use tax vendor?” in the online Guide to the state’s sales and use tax published by the Massachusetts Department of Revenue (DOR).
Some items sold via the Internet to Massachusetts customers may be exempt from sales tax under Massachusetts law. For example, MGL 64H(6)(k) states that many articles of clothing costing $175 or less are exempt from sales tax. For further information on exemptions, check the various sections of MGL 64H(6)—and also the DOR’s online Guide to the sales and use tax, which contains sections covering many of the most important tax-exempt items.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. The section of the DOR’s online Guide to the sales and use tax entitled “What is the use tax?” mentions, among other possibilities, items purchased over the Internet, and gives, as an illustrative example of where use tax is due, the case of a consumer buying goods from an out-of-state firm and paying no sales tax.
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
In Massachusetts, the physical presence rule applies for Internet retailers that sell to Massachusetts customers. Unlike a number of other states that have passed so-called Amazon laws requiring larger Internet retailers with no physical presence in the state to collect and pay sales tax, Massachusetts has not enacted any such law. However, because the issue is a subject of hot debate, you should check in periodically with the Massachusetts Department of Revenue to see if the rules have changed.
Updated: April 14, 2016