Massachusetts has ordered a tire chain to charge Bay State residents a 5 percent sales tax on their purchases in New Hampshire in an unprecedented move that could have huge implications for consumers and other merchants.

Town Fair Tire Centers, which is based in Connecticut but has six shops in New Hampshire and 25 in Massachusetts, is fighting back with a lawsuit now before the Massachusetts Supreme Judicial Court that accuses the state of violating the US commerce clause. If Massachusetts prevails in the case, which is likely to be heard next month, it could drive up costs for consumers and retailers such as Best Buy and Sears that sell expensive home appliances and other goods in New Hampshire, which doesn't have a state sales tax. It also could mean millions of dollars in new tax revenue for the Commonwealth as it faces a $1.1 billion budget deficit, according to tax analysts.

"This is a first-of-its-kind case," said Fred Nicely, general counsel of the Council on State Taxation, a nonprofit trade association of multistate corporations engaged in interstate and international business. "There's huge ramifications to the entire retail community."

To others, it's a case of "Taxachusetts" striking back at the "Live Free or Die" pride of New Hampshire. The Granite State has long lured Massachusetts residents over the border to enjoy tax-free shopping. New Hampshire Governor John Lynch has even gotten involved, kicking off a campaign one year to persuade Bay Staters to head north so they don't have to cram all of their shopping in when the Commonwealth decides to hold a three-day "sales tax holiday."

The idea that Massachusetts consumers can't enjoy a tax break isn't sitting well with the locals in this troubled economy. Just last week Governor Deval Patrick proposed taxing alcohol, candy, and soda, and raising taxes on hotels and meals.

"People are free to buy their tires wherever they want at the best price," said Erin Willet of Lunenburg, who routinely drives 20 miles to Nashua, N.H., to avoid tax on household items and big ticket purchases like appliances. "If Massachusetts doesn't like it, then they should have predictable tax-free holidays so that people can plan their shopping to take advantage of it."

The Town Fair Tire legal battle dates back to 2003, when the Massachusetts Department of Revenue audited the three New Hampshire stores Town Fair Tire operated at the time, after receiving evidence that Bay State residents were driving up to buy tires and having them installed at the chain's shops. The auditors identified 313 sales made to Massachusetts consumers, based on invoices that included Commonwealth addresses and in some cases telephone numbers. The state's tax authorities say the records demonstrate that Town Fair Tire knew the customer intended to use the goods in the Commonwealth, and therefore should have charged a 5 percent "use tax" - essentially a sales tax for items purchased for use or storage in the Bay State. Those taxes then would be given to Massachusetts. Following the audit, Massachusetts authorities assessed the company about $108,947 in tax, penalties, and interest related to the sales.