U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, — N.E.3d —- (2022)



Ben Robbins, Senior Staff Attorney for the New England Legal Foundation, filed an amicus brief for NELF in the Massachusetts Supreme Judicial Court (SJC) in U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, responding to the Court’s request for amicus briefing on the constitutionality of the Commissioner’s 2017 regulation that required out-of-state online retailers with no traditional physical presence in Massachusetts, such as U.S. Auto Parts (an online retailer of after-market auto parts headquartered in California), to collect a sales or use tax from Massachusetts customers and remit the tax to the Commonwealth.[1]  At issue is whether the Commissioner of Revenue violated the “dormant” Commerce Clause[2] when he issued a regulation in 2017 that required out-of-state online retailers with no traditional physical presence in Massachusetts, such as U.S. Auto Parts Network, Inc. (an online retailer of after-market auto parts headquartered in California), to collect a sales or use tax from Massachusetts customers and remit the tax to the Commonwealth.[3]  In addition to U.S. Auto Parts, there are approximately 45 other online companies with identical claims against the Commissioner, in cases pending before the Department of Revenue and the Appellate Tax Board (ATB).  Therefore, the SJC’s decision in this case will have affect the rights of many out-of-state companies doing business in the Commonwealth.  The Court has scheduled oral argument for November 2.


In essence, the 2017 DOR regulation required any remote online company with a sufficient virtual and economic presence in the Commonwealth to collect and remit a sales or use tax from its Massachusetts customers.  For instance, the regulation imposed the tax collection duty on any business with a certain minimum annual number and dollar amount of Massachusetts sales, and with certain common in-state digital contacts, namely “cookies,” apps, and the use of third-party content distribution networks (cdn) to facilitate online sales, resulting in the occasional use of in-state cdn servers.


However, at the time of the regulation’s promulgation, the United States Supreme Court had long required that out-of-state sellers must have a physical, brick-and-mortar presence within the taxing state, such as with outlets, offices, or employees, to satisfy the Court’s “substantial nexus” requirement between the seller’s activity and the taxing state under the dormant Commerce Clause.  See Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (under Commerce Clause, out-of-state mail order house could not be required to collect and remit sales tax because it lacked physical presence in that state).[4]  Moreover, the ITFA prohibits a state from imposing “discriminatory taxes on electronic commerce,” and defines a “discriminatory tax,” in part, as “impos[ing] an obligation to collect or pay the tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means.”  In this connection, the 2017 DOR regulation applied only to online retailers.  It did not apply to mail order companies.  (Nor could it have, under clearly established Supreme Court precedent.  See Quill, above.)


In October, 2017, shortly after the regulation took effect, the Commissioner notified U.S. Auto parts that it must collect and remit a use tax to the Commonwealth for all online sales made to Massachusetts customers in the prior twelve months.   When U.S. Auto parts did not do so, the Commissioner assessed a tax of over $60,000 on the company, which represented double the estimated use tax for all relevant sales, in addition to penalties and interest.  Since the sales at issue transpired a long time ago, U.S. Auto Parts would have had to pay the entire tax assessment from its own resources.

Nine months after the DOR’s 2017 regulation took effect, the Supreme Court reversed itself in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), by expressly abandoning the physical presence requirement, and held that an economic and virtual presence were sufficient to establish the necessary substantial nexus between the out-of-state retailer and the taxing state.[5] In essence, the High Court aligned this substantial nexus test with the familiar “minimum contacts”/purposeful availment test required under the Due Process Clause to establish personal jurisdiction over an out-of-state party.  Nonetheless, the Commissioner argues that Wayfair should apply retroactively to its 2017 application of the regulation against U.S. Auto Parts.


The Appellate Tax Board (ATB) abated the Commissioner’s assessment of the use tax against U.S. Auto Parts.  The ATB held that the regulation was unconstitutional when it was promulgated and enforced against U.S. Auto Parts, and that the Wayfair decision did not apply retroactively.  (The ATB did not reach the ITFA issue.)


In his brief for NELF, Ben argued, in support of U.S. Auto Parts, and ostensibly all of the many other similarly situated remote online companies with the same claims against the Commissioner, that the SJC should affirm the ATB’s ruling.  First, the regulation violated the Supreme Court’s dormant Commerce Clause test in effect in 2017.  The Court itself made it crystal clear in Wayfair that the “physical presence” required by its earlier cases could not, by definition, capture the digital contacts made possible only by the emergence of the internet age, along with the resulting robust economic presence that e-commerce allows in the taxing state.  As the Court explained, “Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill [decided in 1992]. . . . [T]he continuous and pervasive virtual presence of retailers today is, under Quill, simply irrelevant. This Court should not maintain a rule that ignores these substantial virtual connections to the State.”  Wayfair, 138 S. Ct. at 2095 (emphasis added).


Ben also argued that Wayfair does not apply retroactively to validate the Commissioner’s 2017 regulation after the fact.  By the Court’s own clear language in the Wayfair opinion, this new “virtual and economic presence” test under the Commerce Clause is prospective only.  “[T]he physical presence rule no longer controls . . . .”  Wayfair, 138 S. Ct. at 2098 (emphasis added).  Moreover, the Court emphasized the fact that the South Dakota tax statute at issue, which embraced a virtual and economic standard comparable to the DOR regulation at issue here, was prospective only.  This feature, said the Court, among other features of the statute at issue, boded well on remand for a state court determination of the statute’s validity under the dormant Commerce Clause..  “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. . . . [T]he Act ensures that no obligation to remit the sales tax may be applied retroactively.”  Wayfair, 138 S. Ct. at 2099 (emphasis added).


Perhaps even more importantly, the exclusively prospective reach of Wayfair is consistent with the Supreme Court’s own “presumption against retroactivity” that the Court has long applied to the interpretation of federal statutes that burden private rights.  “Since the early days of this Court, we have declined to give retroactive effect to statutes burdening private rights unless Congress had made clear its intent.”  Landgraf v. USI Film Prod., 511 U.S. 244, 270 (1994) (emphasis added).[6]


This presumption against retroactivity is necessary to serve “‘the [foundational] principle that the legal effect of conduct should ordinarily be assessed under the law that existed when the conduct took place . . . .’”  Landgraf, 511 U.S. at 265 (quoting Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 855 (1990) (Scalia, J., concurring) (emphasis added)).  Indeed, the retroactive application of a change in the law that restricts private rights would raise serious due process concerns.  “The retrospective aspects of legislation, as well as the prospective aspects, must meet the test of due process, and the justifications for the latter may not suffice for the former.”  Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 17 (1976).

Applying this bedrock presumption against retroactivity, the Wayfair Court’s change in its Commerce Clause jurisprudence indeed “burdens private rights” because it exposes remote online retailers, such as U.S. Auto Parts, to a new tax liability that did not exist when their conduct took place, based solely on their virtual contacts in the taxing state.  In particular, the Commissioner promulgated his regulation in 2017, when the Quill physical presence rule was in place and determined the tax collection obligations of out-of-state retailers.  Moreover, the 2017 regulation targeted U.S. Auto Part’s Massachusetts sales that occurred in 2016.  See 830 C.M.R. § 64H.1.7(3)(a).


Therefore, the Wayfair Court’s decision is presumed to apply prospectively only, unless “[the Court] had made clear its intent” to apply the decision retroactively.  Landgraf, 511 U.S. at 270.  Nowhere does the Wayfair Court indicate any such retroactive intent.  To the contrary, the language of the opinion plainly points to its future application only, as amicus has discussed above.


On December 22, 2022, the SJC issued its decision in, in which the Court held, consistently with Ben Robbins’ amicus brief for NELF, that the 2017 regulation was unconstitutional because it violated the “physical presence” requirement that the United States Supreme Court then required under the “substantial nexus” prong of its dormant Commerce Clause doctrine.  As Ben had argued for NELF, the regulation’s use of electronic contacts–cookies, apps, and CDNs–did not satisfy the physical presence requirement then in effect.  Indeed, as Ben had argued, the Supreme Court in Wayfair had to disavow its old physical presence requirement precisely to capture those typical digital indicia of doing business in the taxing state, in the modern internet economy.  As Ben had also argued, the SJC held that Wayfair did not apply retroactively to sanitize the Commissioner’s rogue 2017 regulation.  The Court reasoned that the regulation expressly limited itself to the Supreme Court’s then-controlling precedent in Quill, which upheld the older physical presence requirement and would not have recognized the electronic contacts named by the regulation (cookies, apps and CDNs).

[1] The Court’s amicus announcement of May 16, 2022 states:


Whether the Commissioner of Revenue had the authority to require the taxpayer, an internet vendor with no traditional physical presence in Massachusetts, to collect sales [and use] taxes on internet sales to Massachusetts customers, based on the taxpayer’s internet contacts in Massachusetts such as a mobile application, “cookies,” and third-party content distribution networks; whether such requirement violates the Commerce Clause or the Internet Tax Freedom Act, 47 U.S.C. § 151 note.


[2] The Commerce Clause provides, in relevant part, that “The Congress shall have Power . . . To regulate Commerce  . . . among the several States . . .”  U.S. Const. art. I, § 8, cl. 3.  The United States Supreme Court has explained its longstanding dormant Commerce Clause doctrine as follows:


Although the Commerce Clause is written as an affirmative grant of authority to Congress, this Court has long held that in some instances it imposes limitations on the States absent congressional action. . . . First, state regulations may not discriminate against interstate commerce; and second, States may not impose undue burdens on interstate commerce.


South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2089, 2091 (2018) (emphasis added).



[3] U.S. Auto Parts delivered the products that it sold to its online customers in Massachusetts via common carrier from locations outside of Massachusetts.  It did not own or lease any offices, facilities, inventory, or equipment in Massachusetts, and it had no employees or representatives in Massachusetts.


[4] See also Nat’l Bellas Hess, Inc. v. Dep’t of Revenue of Illinois, 386 U.S. 753 (1967) (state could not impose use tax collection and remittance obligation on mail order house with no outlets, sales representatives, or other physical presence in Illinois).


[5] In 2019, the Commissioner repealed the 2017 regulation.

[6] As the Landgraf Court explained, this strong presumption against retroactivity is anchored in traditional notions of fairness and common sense:


[T]he presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic. Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted. . . . It is therefore not surprising that the antiretroactivity principle finds expression in several provisions of our Constitution.


Landgraf, 511 U.S. at 265 (cleaned up) (emphasis added).



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