The Massachusetts Department of Revenue (DoR) issued regulatory directive 17-1 in April 2017, which was intended to take effect on July 1, 2017. The directive extended the Department's interpretation of the physical presence prerequisite for the obligation to collect and remit sales tax to include the software that online retailers have on customers' computers. As a result of this change in interpretation, the Department declared that online retailers were obligated to collect and remit sales tax from sales to Massachusetts residents if the retailers' total sales into the state exceeded $500,000 in the previous calendar year and if the retailer had made 100 or more transactions for delivery into the state.
The directive was challenged in June 2017 by the American Catalog Mailers Association (ACMA) and NetChoice, which respectively represent catalog and large online-only retailers. These organizations alleged that the DoR had not followed the proper administrative procedure in enacting such a significant policy change, along with other charges, including that the directive discriminated against online retailers.
The Superior Court of Massachusetts heard oral arguments on the associations' motion for a preliminary injunction at the end of June, during which the court expressed some skepticism about the discrimination claims and also about the Department's claim that the State could make a change in policy of this magnitude through a directive rather than notice and comment rulemaking. (The Retail Litigation Center filed an amicus brief in the case.) Following the hearing, the Department withdrew the directive but issued a public statement that it would propose a new rule with substantially the same content as the directive in the near term. A public hearing was held on this proposed regulation on August 24th. The DoR published its response to the public comments on September 8, 2017.
On September 22, 2017, the DoR promulgated its final regulation requiring online retailers, beginning October 1, 2017, to register, collect, and remit sales and use tax. The regulation applies to internet vendors whose total sales into the state exceeded $500,000 in the previous calendar year and if the retailer had made 100 or more transactions for delivery into the state.
The Massachusettes Department of Revenue sent notices to retailers who did not comply with its new regulation, one of which was Crutchfield Corporation, an electronics retailer based in Virginia. As a result, on October 25, Crutchfield filed suit in Virginia state court to challenged Massachusetts' law. Crutchfield relied on Quill to argue that Massachusetts doesn't have the authority to require an out-of-state retailer to register, collect or remit sales tax. The suit asked the court to enjoin the Department of Revenue from enforcing its rule against the company.