What to Know About Sales Tax and Cookies
Despite the taxes some states levy on sales of prepared food items -- including cookies -- when it comes to the cookies you don’t eat, a handful of states determined these can have huge implications for your client’s sales tax obligations.
The other type of cookies are the colloquial expression for small snippets of software code stored on remote computers, phones and other internet connected devices. The code snippets are written and transmitted to users’ hard drives by publishers to make the publisher’s software products, services and apps work better on remote devices.
A good example of a cookie in action occurs when a website previously visited “recognizes” a user when the site is visited again, or an app is opened up. These bits of code can perform myriad functions, from logging internet activity to important authentication functions.
These days, it seems almost everyone owns a device with internet access, and chances are these devices have a cookie, several cookies or hundreds of them installed. However, rest assured the states aren’t looking to tax the transmission or storage of these cookies. Instead, some states are looking to base a claim of nexus on the transmission and storage of a cookie.
Nexus and Who Collects
These states aren’t taxing the transmission or storage of a cookie, but they are finding sales tax nexus is triggered once a cookie is transmitted to an in-state device. Allow a quick digression to level set: in the United States, sellers making retail sales to customers 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, but once established, the seller has triggered sales tax nexus. The state can compel that seller to collect and remit sales taxes on sales it makes to in-state customers.
Regarding the cookies: a few states recently determined the transmission and storage of cookies satisfies the physical presence necessary to trigger sales tax nexus. One of them recently published regulations on the subject.
In late 2017, Massachusetts published regulations establishing, “the use of in-state software (e.g., ‘apps’) and ancillary data (e.g., ‘cookies’), which are distributed to, or stored on, the computers or other physical communications devices of a vendor's in-state customers, and may enable the vendor's use of such physical devices, constitutes a “physical presence” and the publisher of the cookies is obligated to collect sales taxes or otherwise comply with sales tax rules in Massachusetts [See Mass. Regs. Code 830 CMR §64H.1.7(1)(b)(2)(a)].”
Under the rules, a seller whose website or app leaves a cookie on a buyer’s device must register and report all taxable and exempt retail and wholesale sales into the state. Massachusetts provides thresholds designed to prevent small sellers from the obligation to collect, and sellers who sell less than $500,000 annually into Massachusetts are excluded from the rules.
How Does the Cookie Rule Affect Sellers?
The approach taken by Massachusetts is novel, daring and already being challenged [Crutchfield v. Mass. Dept. of Revenue (et.al.) Circuit Court of Albemarle County (Virginia)]. The results of those legal challenges notwithstanding, Ohio and Rhode Island passed legislation in 2017, including similar language.
The American Catalog Mailers Association challenged Ohio’s cookie nexus rules at the end of 2017 (American Catalog Mailers Association v. Joseph W Testa, Commissioner of the Ohio Department of Taxation. Court of Common Pleas, Franklin County, Ohio). The arguments for and against the “physical” attributes of cookies are interesting and occasionally devolve into the physicality of molecules and electrons.
Physics 101 aside, retailers living in the world of things we can see and touch, including the threat of sales tax audits, rightly see the new rules as signaling the ingenious and aggressive ways the states are looking at growing the number of sales tax collecting sellers. Based on proven history, it is likely other states will adopt similar rules soon. In fact, Connecticut warned in late 2017 that a publication addressing cookie nexus would be forthcoming in 2018.
Companies who sell into Massachusetts, Ohio, Rhode Island and perhaps Connecticut have a new wrinkle to address when determining their likelihood of establishing nexus. For companies that make retail sales anywhere across the nation, the issue of nexus and the obligation to comply with sales tax rules of other states is front and center.
From a practical point of view, awareness is always a key first step, but the development of a high functioning sales tax administration process is a wise exercise for any company making sales of products or services across state lines. One of the first stages in any sized company’s sales tax process maturity arc is to establish clear guidelines for identifying and monitoring sales tax collection obligations, aka nexus.
If “cookie nexus” rules stick and become widely adopted, a company’s cookie strategy will need to be addressed in that process. Start the nexus conversation with your staff and the clients it may impact before sales tax obligations eat you up.
Shane is a Senior Manager in the State and Local Tax Department at Clark Nuber, P.S. in Bellevue Washington. Shane focuses on state and local indirect tax obligations for companies of all sizes operating across the United States and...