New England Remote Retailers May Be Subject to Use Tax Collection Due to Economic Nexus

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Insights  <  New England Remote Retailers May Be Subject to Use Tax Collection Due to Economic Nexus

U.S. Supreme Court (“Court”) Justice Anthony Kennedy’s comments in his concurring opinion in Direct Marketing Association v. Brohl, (2015; Colorado) (“DMA”), have invited states to challenge the physical presence nexus standard enunciated by the Court in Quill Corp. v. North Dakota (1992). This standard requires that a retailer must have a physical presence in a state in order for a state to require a vendor to charge, collect, and remit sales and use taxes on its taxable sales. Without the requisite physical presence, a state cannot compel a vendor to collect its sales and use taxes from its customers. Justice Kennedy, along with other members of the Court, agreed that this was the proper nexus standard at the time. Now, however, Justice Kennedy’s comments in DMA suggest that if Quill were decided in today’s technologically advanced world, a different decision may be reached by the Court.

As a result of Justice Kennedy’s comments in DMA and Congress’ inaction to pass federal legislation, states have begun to pursue legislation on their own that require remote vendors to register for use tax collection due not only to their physical presence but also due to their economic presence within the state (i.e., simply having sales derived from customers within the state). According to the states, too many sales and use tax dollars are not being remitted to silently wait for the Court or Congress to act. States believe that in today’s e-commerce world, it is no longer an undue burden to require remote retailers to comply with their sales and use tax laws and collect the tax; the Commerce Clause of the Constitution is no longer a hindrance.

States that enacted legislation in response to Justice Kennedy’s seemingly favorable view of the economic nexus standard know very well that such legislation is currently against U.S. Constitutional restraints, as determined by the U.S. Supreme Court in Quill, and that such legislation would be challenged. However, in light of Justice Kennedy’s comments in DMA that an economic nexus standard may be more appropriate in today’s world, states are welcoming a challenge to allow the Court to take a fresh look at the constitutional nexus requirement it mandated 25 years ago. Furthermore, by states passing such legislation, states are banding together and speaking with one voice in hope of getting the attention of Congress to act, without the Court’s intervention, by enacting federal legislation that would require remote vendors to collect use tax.

Alabama was the first state to adopt a regulation that now requires remote sellers with “substantial economic presence” in Alabama to register for a license and to collect and remit Alabama use tax on their sales into the state, regardless of whether the remote seller has a physical presence in Alabama. Under Alabama’s regulation, a remote seller has a “substantial economic nexus presence” in Alabama if it has $250,000 or more in retail sales into Alabama.

Other states such as South Dakota and Tennessee quickly followed Alabama’s lead and have enacted similar rules. Retailers are quickly challenging these laws and regulations as being unconstitutional (e.g., Newegg, Inc. v. Alabama; South Dakota v. Wayfair, Inc.; Am. Catalog Mailers Association v. Tennessee). This, however, has not been a deterrent to a number of other states that are considering enacting similar requirements. States know that these three states are anxious to bring their cases to the U.S. Supreme Court, with the expectation that certiorari will be granted and that the physical presence nexus standard will be replaced by the Court with an economic nexus standard. When that happens, states want to ensure that they have the law in place in their statutes and regulations so that they can immediately enforce it, without question. During the 2017 legislation session, for example, over fifteen states have introduced bills to enact sales and use tax economic nexus standards in spite of Quill.

In the Northeast, Connecticut, Massachusetts, and Vermont have joined the queue of the economic nexus standard movement and have enacted economic nexus standards that are representative of how other states are approaching it. This year, New York State and Rhode Island have introduced economic nexus legislation, neither of which has passed to date. Maine has held steady with its physical presence nexus standard and New Hampshire continues to not impose a sales or use tax.


The first hint that Connecticut was moving in the direction of an economic nexus standard for requiring remote vendors to charge, collect, and remit use taxes to the state was the revocation of Special Notice 92(19), Effect of Quill Corp. v. North Dakota on the Collection of Use Tax by Retailers Who Engage in Business in Connecticut. As of the date of the issuance of Announcement 2013(9) on December 19, 2013, out-of-state retailers (whether an Internet vendor or a brick-and-mortar vendor) could no longer rely on Special Notice 92(19), which was issued shortly after the Quill decision and recognized that Connecticut could not enforce an economic nexus standard.

A little more than three years later, on March 28, 2017 the Connecticut Commissioner of Revenue Services announced that the state will be “stepping up its effort to collect sales taxes not paid by on-line and other out-of-state retailers with a significant volume of sales into Connecticut.” The Commissioner said that, due to Congressional inaction, “it’s up to the states to assure the promise of the federal Commerce Clause that neither in-state nor out-of-state retailers will have an unfair advantage in the marketplace and in taxes paid to help maintain that marketplace.” According to the Commissioner, current Connecticut tax law “requires out-of-state sellers of goods that have a substantial economic presence in the state to collect and remit sales tax.” Generally, that law states that remote sellers who make 100 or more retail sales to destinations within Connecticut during a 12-month period are required to collect use taxes on their taxable sales.

The Commissioner estimates that at least $70 million of use tax is not being remitted annually to the state either because remote vendors are not charging the tax or consumers are not self-remitting the tax, as a use tax.


On April 3, 2017 the Massachusetts Department of Revenue released Directive 17-1, Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Taxes, which requires Internet vendors with significant Massachusetts sales to collect sales and use tax. The Directive announces that an Internet vendor not previously required to collect Massachusetts sales and use tax must register with the Department and must collect and remit Massachusetts sales or use tax as of July 1, 2017, and thereafter, if it has more than $500,000 in Massachusetts sales in 100 or more transactions.

The Directive doesn’t take an economic nexus approach as the other states have, although that would seemingly be the only route to go with respect to Internet vendors. Rather, the Massachusetts Department of Revenue believes that “large Internet vendors invariably have one or more contacts in Massachusetts that constitute an in-state physical presence” and, thus, under Quill, Massachusetts can constitutionally require Internet vendors to collect the tax. Specifically, the Directive explains that Internet vendors have the requisite physical presence nexus in Massachusetts through various means such as the ownership of and use of in-state software and cookies; the utilization of content distribution networks; and the utilization of in-state representatives such as online marketplaces. Due to these physical connections to Massachusetts, large remote Internet vendors are required to charge, collect, and remit sales tax on their Massachusetts destination taxable sales. Perhaps other states will pick up on Massachusetts’ approach to “taxing” Internet vendors, by utilizing a similar physical presence position coupled with their own economic nexus legislation.


Last year, Vermont enacted legislation instituting a sales and use tax economic nexus standard, requiring the collection and remittance for any person with sales of tangible personal property exceeding an annual sales threshold of $100,000 or 200 individual sales transactions in Vermont. However, under Vermont’s law, the economic nexus standard would not be effective until the later of July 1, 2017 or beginning in the first quarter after the U.S. Supreme Court’s decision or federal legislation repeals the physical presence standard and replaces it with an economic nexus standard. With no cases in Court at this time, and without federal legislation likely to be enacted, if at all, before July 1, 2017, it looks like the July 1, 2017 effective date is now meaningless.

As is illustrated by these three states, states are taking different tactics to the nexus standard that requires remote vendors to collect their tax. Remote retailers with significant sales (e.g., over $100,000) or frequent and recurring transactions (e.g., 100 sales transactions or more) into states that have enacted economic nexus legislation, regulations, or administrative releases need to be aware of the states’ movement and not be caught off guard. Remote retailers (such as Internet vendors, marketplace vendors, and brick-and-mortar businesses such as retailers, distributors, and manufacturers) will need to decide whether to comply with a state’s position or potentially face a tax assessment from the state’s tax authority. As of now, the enforcement of the economic nexus standard as applied to sales and use tax collection is unconstitutional under the Quill decision. Nevertheless, state tax department authorities (e.g., audit and appellate divisions) will continue to enforce their laws and regulations and any tax assessment will likely have to be appealed through their court system.

If you would like to discuss how the economic nexus standards may apply to your business, please contact Tony Switajewski, State and Local Tax Partner, at (860) 561-6810 or

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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