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Taxpayers got a rare win at the end of last year when a Massachusetts court struck down a bizarre “cookie nexus” law that the state had enforced for years. Unfortunately, because of the “heads I win, tails you lose” way that tax disputes so often work out for the taxpayer, there’s not likely to be much in the way of refunds for businesses that were strong-armed into paying this unconstitutional tax.

For context, in 2018, the Supreme Court overturned the longstanding precedent that states could only require businesses with “physical presence” in that state to collect and remit sales taxes on that state’s behalf. Instead, they allowed states to enforce these obligations on the basis of “economic nexus,” or a significant enough economic presence in the state.

Long before this 2018 Supreme Court decision, states had tried to come up with workarounds to this “physical presence” restriction. Massachusetts’s effort was its “cookie nexus” law, which considered the digital “cookies,” tiny files that websites store on a user’s device to do things like save passwords or remember the contents of a user’s shopping cart from a previous session, to constitute physical presence.

This was, to put it mildly, a stretch. But with the outcome of the Wayfair decision, battles over the scope of “physical presence” appeared to be moot. After all, states had what they wanted — the power to compel out-of-state businesses to collect sales taxes on their behalf — and most states with workaround laws on the books simply transitioned to more constitutionally sound economic nexus laws. 

But not Massachusetts. Massachusetts continued to claim that its “cookie nexus” law was valid under the old “physical presence” standard, and enforced it as such. This meant that taxpayers were expected to abide by it not only going back to 2018, but even before. 

In December of last year, Massachusetts’s Supreme Judicial Court finally considered the merits of the state’s position. Unsurprisingly, it found them wanting, and struck it down. 

One would expect that this would mean that Massachusetts is on the hook for repaying all the taxpayers it swindled with this half-baked legal position. Unfortunately, it does not seem that that is the case.

There’s a couple of reasons for this. The first reason is that taxpayers are only eligible for refunds going back during the period covered by the three-year statute of limitations — in other words, essentially only businesses that registered during the last three years are eligible. Businesses that were pressured into complying before this time are out of luck.

The other reason is that many businesses in disputes with Massachusetts over its cookie nexus law entered into settlement agreements. Those settlements generally bar the taxpayer from seeking any post-settlement refunds, even in cases like this where the Department of Revenue’s position is found to have been legally unsound.

The result is that the only taxpayers likely to receive any refund are those who never buckled to the Department of Revenue’s pressure and either refused to pay any tax under the law or paid and then filed a refund claim soon after, before the statute of limitations expired. Under this status quo, businesses are expected to be constitutional law experts as well as soothsayers, recognizing that Massachusetts’s stance is legally unsound and knowing that it would eventually be struck down. Those who failed to demonstrate such fortune-telling abilities are left holding the bag. 

Unfortunately, tax officials are often indifferent to the unfair position that this puts businesses in, viewing and presenting to courts any challenge to the legality of a tax assessment as a direct threat to their government’s ability to operate. To receive relief, taxpayers usually have to pay first just to even get in the door to challenge an assessment, no matter how specious the legal argument being used to justify it is. 

This is just one example of the Catch-22 taxpayers are often left in. But it speaks to a larger standard that prioritizes tax revenue over taxpayers, rather than the other way around.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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