Sales Tax 101 SD States

Update on South Dakota’s Attempt to Redefine Sales Tax Nexus

by Jennifer Dunn

South Dakota unconstitutional sales tax law

The last time we wrote about South Dakota’s provocative 2016 sales tax law, they had just passed it and were on their way to suing major retailers like New Egg who they felt violated their law. You can read all about that in “The New South Dakota Sales Tax Law, Explained.”

But to quickly recap, in March of 2016, South Dakota passed a law stating that online sellers who gross more than $100,000 in sales to customers in South Dakota or who make sales in over 200 separate transactions to South Dakota customers have sales tax nexus in the state and are required to collect sales tax from South Dakota buyers.

But that’s highly illegal and violates the precedent set by Quill v. North Dakota, right? The one that says merchants have to have some kind of presence in a state to be required to collect sales tax, right? Exactly.

South Dakota’s law was designed to be unconstitutional. It was practically daring someone to challenge it in court. Taking a cue from Justice Anthony Kennedy in another Supreme Court case, South Dakota is betting on the fact that if a sales tax nexus case can get to the Supreme Court then Quill will be overturned. They think this because in 1992, when the Quill case was decided, the word eCommerce wasn’t even in the dictionary yet. The world has changed, South Dakota opines, so the laws of the land should change with it.

What’s going on with South Dakota’s law now?

South Dakota was back in the news last week because they were hoping for a big loss in state court. Why a loss? Because if they can lose in South Dakota state court they can then appeal the case to the big chamber – the United States Supreme Court.

On the state’s timeline, if they could quickly lose in South Dakota, they would be able to bring their case to the Supreme Court by June 2018. If they get their way, Quill will be overturned over the summer when the justices hand down their decisions, and South Dakota will be free to require all online sellers to collect South Dakota sales tax from buyers in the state.

There’s no word yet when a decision will come down from the South Dakota state court to set all these events in motion.

What happens if Quill is overturned?

If Quill is overturned, the concept of nexus as we know it will no longer exist. States like South Dakota, that have already passed laws that are currently unconstitutional due to Quill, would then be able to enforce them. Online sellers with no presence in the state – no location, employee, warehouse ,etc. – and who meet the law’s criteria, would be required to collect sales tax from South Dakota buyers. Other states would probably jump at passing similar laws. (Some already have.)

Other online sales tax initiatives might be affected. Right now, four separate laws are floating around Congress designed to apply some kind of federal framework over state sales tax. To varying degrees, these laws are endorsed by states because they would allow states to collect more money in sales tax. If Quill is overturned, perhaps states would back off these new laws (all but one of which of which would be costly and complicated to implement).

This could be good for online sellers – because some of these laws, like the Marketplace Fairness Act and the Remote Transaction Parity Act would require online sellers to collect more sales tax in more states.

Or it could be bad for online sellers – because some of these laws, like the Online Sales Tax Simplification Act (the bill I think would do the most good for online sellers AND states) and the No Taxation Without Representation Act – could simplify the complicated patchwork of sales tax that online sellers currently deal with.

Right now, the sales tax landscape is like a much tamer version of Game of Thrones. There are many players in the space – state laws, federal laws and court cases – and it’s unclear how a move by one will affect all the others. However, I’ll keep covering these issues as they progress, so subscribe to this blog by clicking the green “Subscribe” button below to follow along with me.

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