Recently, South Dakota’s governor signed Senate Bill 106 into law. This is a sales tax related law and, in most cases, it would only affect retailers and online sellers who either live in South Dakota or who have sales tax nexus in the state. But this South Dakota sales tax law is a little different.
When the law goes into effect on May 1, 2016 it will require many out-of-state sellers to collect sales tax from South Dakota buyers, even if they don’t have a physical presence in South Dakota. The new law says that out-of-state sellers should collect sales tax in the state they reach this threshold:
- The seller grossed more than $100,000 in sales of tangible personal property, any product delivered electronically or services in South Dakota in the previous calendar year or current calendar year OR
- The seller sold tangible personal property, any product delivered electronically or services in South Dakota in 200 or more separate transactions
To reiterate, any seller – no matter if they have a physical presence, employee, or other common nexus causing factors in South Dakota – will be on the hook to collect and remit sales tax from South Dakota buyers if they sell over $100,000 in the state or make 200 or more separate sales in South Dakota.
Wait, is that legal?
Short answer: No.
The Quill v. North Dakota case back in 1992 set the precedent that states could only require sellers with sales tax nexus to charge sales tax in that state. But, of course, eCommerce has boomed since way back in 1992. Now, with online sales growing exponentially every year, many transactions that take place across state borders aren’t taxed. And states – many of whom get a majority of their income from sales tax – are complaining that transactions aren’t being taxed and that they are losing out on state revenue.
Of course, if a consumer buys an item consumption within the state (“consumption” in this case just means you buy a pair of jeans to wear or some laundry detergent to use to wash those jeans, etc.) and they don’t pay sales tax on that item, they are supposed to pay “use tax” on that item to the state. Consumer use tax, though, is incredibly hard to enforce. (When’s the last time you counted up how much sales tax you should have paid on your online purchases? Probably never.) It’s much easier to find ways to require out-of-state merchants to collect sales tax than it is to persuade in-state buyers to pay use tax. And, out-of-state merchants can’t vote out the legislators who make these laws.
A case about Colorado use tax went all the way to the Supreme Court last year. While the Supreme Court decided not to hear the case, Justice Anthony Kennedy did announce that he welcomes a challenge to the Quill V. North Dakota case.
Meanwhile, nearby in our legislative branch, members of congress have been debating some form of internet sales tax for the past several years, though no bills have as yet meandered their way into law. (Note: At TaxJar we’ve come out strongly against the current “internet sales tax” bills as written because they are way too burdensome on online sellers.)
What does it all mean? Basically, the precedent set by Quill that states can only require sellers with some sort of physical presence in the state is under siege.
The new South Dakota law was designed to be challenged in the courts. South Dakota is making a big bet that, if a legal challenge proceeds all the way to the Supreme Court that it will overturn the precedent set by Quill. (The law even mentions Kenndy’s remark.) If that’s the case, then other states would be able to pass similar laws (and many have or are trying to) and also require out-of-state sellers to collect and remit sales tax.
That’s a basic summary of what’s going with South Dakota’s new law. If you have questions or something to say, start the conversation in the comments!