By Martin I. Eisenstein and Nathaniel A. BesseyBrann & Isaacson

There have been a number of developments in the last month or so in the large states that warrant a new column on this subject. The common theme is an effort by states and local jurisdictions to use the U.S. Supreme Court’s June 2018 decision in South Dakota v. Wayfair as a basis to export tax obligations to online retailers located outside of their state.

A company’s state tax obligations are in large part determined on the basis of the applicable nexus standard for the tax in question: essentially, is there a sufficient connection between the state and the business or activity being taxed to permit the state to impose its tax?

In our federal system, the principal governing standard setting the permissible boundaries of state taxation is derived from the Commerce Clause of the U.S. Constitution. In the case of state income tax, federal statutory law comes into play as well. You probably saw the ACMA press release November 16th, reporting an order out of the California Superior Court, permitting the ACMA to move forward with its challenge to the California Franchise Tax Board’s regulation that interpreted the federal statute, Public Law 86-272, as it applies to the California franchise (income) tax, so as to expand the reach of its income tax.

In the first of our two-part report on recent state tax developments, we discuss developments in the sales tax area, particularly in two states – Massachusetts and Colorado – where out-of-state companies are being subjected to significant compliance burdens by taxing authorities. In Part 2, we will discuss the states’ attempt to impose income tax obligations on companies located elsewhere, including efforts by California, which prompted the ACMA court challenge.

After the Supreme Court’s decision in Wayfair reversed the Commerce Clause physical presence test of Quill v. North Dakota (1992), the states rapidly adopted so called “economic nexus” laws, in which mere sales into the state over a small amount required the retailer to collect and remit the state’s sales tax. Every state that has a sales tax has now adopted an economic nexus law, with the law in Missouri, the last state to adopt economic nexus, set to take effect on January 1, 2023.

In the wake of the Wayfair decision, some states, such as Hawaii, Maine, and Vermont, demanded that retailers begin collecting the state’s sales tax within a matter of weeks. Others provided grace periods of a few months or more (e.g. Florida – 2 years) to permit retailers to commence sales tax collection. In every case but one, however, the states adopted economic nexus on a prospective basis, and did not seek tax collection for any periods prior to July 1, 2018. Massachusetts was the lone exception.

In September 2017, the Massachusetts Department of Revenue (DOR) issued the Internet Vendor Regulation, also affectionately known as the “cookie rule.” The regulation provided that, effective October 1, 2017, any internet vendor whose annual Internet sales to Massachusetts exceeded $500,000 was required to collect the sales tax, unless the retailer did not use cookies, apps or content delivery networks (“CDNs”), technologies that the DOR declared created a physical presence in Massachusetts.  Since every company that maintains a website uses cookies, Massachusetts assessed a sales tax going back to October 2017 on over 40 retailers based outside of Massachusetts.

Most of the retailers, including many ACMA members, protested the assessments on several grounds, including the fact that cookies, apps, and CDNs do not constitute a physical presence. One of the companies, US Auto Parts, represented by Brann & Isaacson, litigated the assessment before the Massachusetts Appellate Tax Board, while the protests by the other assessed companies were stayed because the decision in the US Auto Parts case will affect the outcome of these other cases.

In a unanimous decision of the three members of the Board, the Board agreed with our argument that these virtual contacts did not satisfy the physical presence requirement. The Board also rejected the Department of Revenue’s argument that Wayfair should be applied retroactively to justify the sales tax assessment based merely on these virtual contacts.

Although Massachusetts like other states has realized large sales tax revenues after July 2018 as a result of Wayfair, the DOR nevertheless appealed the Board’s decision, repeating its argument before the Board that Wayfair should be applied retroactively.  The Massachusetts Supreme Judicial Court heard oral arguments on November 4, 2022, at which the seven judges peppered the attorneys with questions. The Court will issue a written decision in the next several months. While it is dangerous to determine the result of a case from oral argument, we are optimistic based on the questions and comments of the Judges.

Colorado has a complex mosaic of sales tax jurisdictions, including over 200 state-administered county, special district and municipal taxing bodies, in addition to the State of Colorado. Despite the significant burdens of collecting and remitting the state-administered state and local taxes – a task that requires the monthly filing of a return that exceeds 150 pages – the burden of filing state-administered returns pales in comparison to the enormous burden of complying with the sales tax laws of 69 home-rule cities, such as Denver, Boulder, Golden, Colorado Springs, and Lakewood.

Each home rule city has the power to impose its own taxes that may not have the same tax base as the state and state-administered system. For example, the state law exempts shipping and handling charges based on certain conditions, while the home rule jurisdictions generally tax shipping and handling and the few exceptions for taxability are different than the state level exceptions. In addition, each jurisdiction has its own forms and tax returns.

Most troublesome is the fact that multiple cities may use the same zip code, so that tax decisions based on zip code can lead to substantial errors. The state has recently developed a sales and use tax system known as SUTS, which provides a no-cost lookup service to determine the correct local jurisdiction based on the address inputted, but this system does not eliminate the extraordinary burden of home-rule city tax compliance.

In addition to the fact that some home rule jurisdictions have yet to adopt the SUTS system, more significantly it can take several minutes to use the lookup feature and download the correct rate. Use of the “free” SUTS system can lead to large abandonment rates, given the fact that online customers demand responses in seconds or less rather than minutes. As a practical matter, therefore, most retailers use third party sales tax collection software, which may geocode the proper jurisdiction but at significantly greater expense than tax collection for other jurisdictions.

Despite the burdens of home-rule city tax collection, several home-rule jurisdictions have enacted economic nexus laws and begun to enforce them. The home-rule city economic nexus laws are largely based on the CML Model Ordinance on Economic Nexus issued by the Colorado Municipal League. The Model Ordinance provides an economic nexus standard for only those companies that do not have a physical presence in Colorado but whose annual sales to customers anywhere in the state of Colorado (not necessarily within the particular city imposing the tax) exceed $100,000.

For businesses that do have a physical presence in Colorado, the nexus standard for home-rule cities continues to be based on physical presence, meaning that the CML Model Ordinance on Economic Nexus applies different nexus standards to out-of-state business than to businesses with a physical presence in Colorado.

As we wrote in State Tax Notes last August, the laws may be vulnerable to challenge based on the Commerce Clause and Colorado law, including the fact that the law discriminates on its face against interstate commerce.

Our firm also recently engaged with several Colorado home-rule cities on behalf of out-of-state retailers who have been audited by one or more of the home rule jurisdictions, and have successfully persuaded some of these jurisdictions not to assess an out of state retailer for past taxes. We should note that one city — Lakewood — continues to insist on enforcing its law against Wayfair (See Wayfair v. City of Lakewood, Colorado District Court, City of Jefferson, Case No. 2022CV30710, filed August 5, 2022), although the circumstances described in that case may differ from the way other retailers do business. Stay tuned for developments in that case.

Nearly 4-1/2 years after the Supreme Court’s decision in Wayfair, ACMA members face challenges in the sales tax area.  How to address those challenges, as is the case for most legal issues, depends on the facts and circumstances of the individual retailer.  ACMA members should carefully consider these developments in light of the way they do business to determine the appropriate course of action.

We will give you a break to celebrate Thanksgiving before we report on the state income tax area. Speaking of Thanksgiving, we wish you a happy holiday for you and your families.




The author’s bios are linked above. For more information, contact Marty Eisenstein at


Legal Disclaimer:
This column is for educational purposes only, to provide information as of the date of the blog about various legal issues we believe may be of interest to members of the ACMA and other catalog marketers. Reading this column does not create an attorney-client relationship between you and any of the column’s authors or their law firm Brann & Isaacson.  Although the authors of this column are attorneys, the information provided here is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. This column is not intended to be legal advertising or to solicit any specific representation. The views expressed are those of the authors, and are not intended to reflect or express the views of the ACMA or any of its members.


ACMA Contacts:
Paul Miller, vice president & deputy director, 914-669-8391,

Hamilton Davison, president & executive director, 800-509-9514,
© 2022 ACMA, Inc. This report is for ACMA members only. Please do not circulate beyond your company. Any reproduction is prohibited.
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