Hey, there! Log in / Register

Online retailer doesn't have a 'physical' presence in Massachusetts just because some of its cookies and apps are stored in a data center here, court rules

The Supreme Judicial Court concluded today that "electrons" stored at a Cambridge data center and used to assemble Web pages and feed apps for a California auto-parts retailer do not mean the retailer has a "physical presence" in Massachusetts.

Going forward, the ruling is sort of moot, because it applies to a taxation policy that the US Supreme Court invalidated in 2018 - in a case involving Back Bay-based Wayfair - that states could only tax sales by companies with a "physical presence" in the state.

But the Massachusetts Department of Revenue concluded the ruling let it pursue taxes retroactively under the old rule and that US Auto Parts Network, which has no stores or salespeople here, owed it roughly $60,000 in back taxes on purchases made before the ruling by Massachusetts residents, because its Web pages, cookies and apps were stored and assembled online via a data center in Cambridge owned by Akamai Technologies and that those "bits - electrons stored in charge traps on a silicon substrate" constituted a physical presence in Massachusetts.

In its ruling today, the state's highest court essentially said: Nope. And also, nope.

It cited the struggle the Supreme Court went through in trying to resolve "physical presence" in the Internet age before that court concluded the answer was to simply toss the entire idea - in a case in which South Dakota sought to tax purchases made by its residents at Wayfair's online store:

[I]t is not clear why a single employee or a single warehouse should create a substantial nexus while 'physical' aspects of pervasive modern technology should not. For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers' computers. A website may leave cookies saved to the customers' hard drives, or customers may download the company's app onto their phones. . . . Between targeted advertising and instant access to most customers via any internet-enabled device, 'a business may be present in a State in a meaningful way without' that presence 'being physical in the traditional sense of the term.'"

The Massachusetts court continued:

The Court's analysis, leading it to abrogate the physical presence rule, suggests its view that any "physical aspects" of technologies such as the use of apps, cookies, and CDNs would not satisfy the Quill standard [an earlier case that established the "physical presence" standard].

And whenever there is ambiguity in a Massachusetts tax case, established principle is that the ruling has to go to the taxpayer, the court said.

The court's ruling technically upholds a similar determination by the state Appellate Tax Board. After it got dunned by DoR, US Auto Parts appealed to the board, which ruled in its favor. DoR then appealed to the SJC.

Free tagging: 
PDF icon Complete ruling167.34 KB


Like the job UHub is doing? Consider a contribution. Thanks!


Will get interesting with all the permanent remote work/virtual companies. Now, where’s my $3500 62f refund?

Voting closed 8

Particle accelerator experiments prove the existence and measure the mass of subatomic particles, which arguably supports the physical presence test. A better analogy might be Trust Situs, where a trust may have funds on deposit in State A, but have its Situs in State B where the Trustee does business, or even State C where the beneficiary lives. It all depends upon the language of the document, the governing law, and the facts.

Voting closed 5

If a paper catalog from a company is not considered a physical business presence in a state then neither should a webpage. Even if the catalogs (pages) undergo final assembly, warehousing, and delivery by a contracted third party in that state -- which is directly analogous to what it sounds like Akamai did here. In my mind the two are entirely analogous, so I'm surprised the court had to go to such lengths.

Voting closed 8