This post has been updated from its original content. To see the latest news regarding South Dakota, scroll down to the ‘Update’ section below.
As of May 1, if not blocked by the courts, the state of South Dakota will change their law regarding when a seller must register, calculate, collect, and remit sales taxes on transactions into the state. This new law removes the physical presence requirements and replaces it with an economic presence standard.
The take away here is that as of May 1, many sellers who previously were not required to collect and remit sales tax for their sales into South Dakota will be required to do so under state law.
Current law, as laid out by the US Supreme Court, does not allow for an economic presence standard. However, whether or not this law is constitutional is still to be decided.
In this post, we’ll break down the law and what the implications are for remote sellers. So what does this mean for sellers currently not collecting taxes on sales into South Dakota?
What is the law?
SB 106 requires remote sellers to collect sales tax from South Dakota consumers if during the previous calendar year or the current calendar year:
- The remote seller’s gross revenue of sale of tangible property, electronically transferred products, or services delivered into South Dakota exceeds $100,000;
- The remote seller has 200 or more separate transactions of tangible property, electronically transferred products, or services delivered into South Dakota.
Why did the state enact this law?
The State of South Dakota, like all states, is concerned about the loss of sales tax revenue from sales by remote sellers. The reality is, with the explosion of eCommerce businesses and the increasing number of sales by remote sellers, the state isn’t receiving the sales taxes on many of those sales. While the buyer is legally obligated to self-remit the tax on any purchase where the vendor didn’t collect, very few actually do.
The state is tired of waiting for federal legislation to address the issue and is presenting a direct challenge to the physical presence (property or employees within their borders) standard as laid out in the Quill vs. North Dakota U.S. Supreme Court case, decided in 1992.
The South Dakota legislature believes that given modern computing and software options, it’s neither unusually difficult nor burdensome for remote sellers to collect and remit sales taxes associated with sales into the state.
What does this actually mean for businesses?
If a remote seller meets either one of the requirements of SB 106 (listed above) and does not currently hold a South Dakota business tax license, the seller must register and begin collecting sales tax on their sales into the state.
But the law also provides an immediate and automatic suspension of enforcement if the law is challenged in the courts. Essentially, the state is expecting and, some may say, asking for a legal challenge.
What should you do if you currently don’t collect sales taxes in South Dakota?
You should determine if you meet either of the threshold requirements to register; $100,000 in sales, or more than 200 sales into the state; either last year or in this year. If your sales haven’t reached that level, then this new law doesn’t apply to you. However, you do need to keep monitoring your sales to ensure you don’t cross either threshold.
If you do meet one or both of the thresholds, you are required to register and begin collecting taxes on your sales into South Dakota as of May 1. However, you also have to decide how you are going to comply with this new law. We suggest you reach out to a SALT professional to determine what’s right for your business. But be aware, registering your business may make it vulnerable to sales tax audits.
The legislation recognizes the situation remote sellers are put in, as it requires tax collection that may be in contradiction of the Supreme Court Decision in Quill. It’s apparent that the state expects that this law will be challenged in the courts. Accordingly, the law provides that the obligations created by this law would be put on hold if there is a legal challenge.
For Taxify clients who want to comply with the new law, it is very easy to get started. Simply turn on collection in South Dakota for your organization in your Taxify account.
On April 29, two lawsuits were filed in the 6th circuit court of South Dakota, in reference to this law.
The first was filed by the American Catalog Mailers’ Association and Netchoice, against the Department of Revenue, seeking a declaratory judgement that the law is unconstitutional and unenforceable.
The second was filed by the state of South Dakota, naming four remote sellers as defendants; Wayfair, Inc., Systemax, Inc., Overstock.com Inc., and Newegg Inc. The state is also seeking declaratory judgement that the statute is valid and the state has the right and ability to require these sellers register and collect South Dakota sales tax.
With litigation now pending, the application and enforcement of this statute is now on hold until the courts hear the case and decide on the merits.
You can be assured that whichever side doesn’t prevail at the circuit court level will appeal to the South Dakota Supreme Court. From there it could, and most likely would, then be appealed up to the U.S. Supreme Court. The U.S. Supreme Court doesn’t have to hear a case, but based on the history and comments by Justice Kennedy in a case out of Colorado regarding the CO reporting law; it seems highly probable the US Supreme Court would take the case.
In typical situations it often takes many years for a court case to make it up to the US Supreme court; but in this case, it could actually make it in less than a year. This is exactly what South Dakota and many other states would like to have happen.
Who will prevail?
That question can only be answered by the courts, and there are proponents on both sides of the issue who believe they have the stronger case and will prevail. We will closely monitor the litigation and provide updates as the cases progress.
What should I do now?
For the moment, remote sellers are not required to register, collect, or remit sales tax on their South Dakota sales. Remote vendors should assess their situation and verify they do not have a physical presence in South Dakota, and any other state where they are not currently collecting tax. If you truly do not have a presence in South Dakota, then you can continue to operate as you are currently; however, you should continue to monitor the situation as this could change depending on the results of the litigation.
We will continue to closely monitor the implementation of this new law, and any legal challenges. To stay updated, be sure to subscribe to our newsletter.
Check out our vlog featuring for more information on the South Dakota legislation:
Featuring: Matt Walsh, VP of Our Tax Compliance Research Department