UPDATES: South Dakota Looks to Reshape the Sales Tax Nexus

Erik Wallin
May 4, 2016

UPDATE – April 29, 2016

As predicted, legal challenges to the South Dakota Economic Sales Tax Nexus standard were swift to arise. On Thursday, April 28, 2016, South Dakota filed a suit against several prominent internet retailers in the South Dakota Sixth Circuit Court. (State of South Dakota et al. v. Wayward Inc. et al). In their filing, South Dakota requested a declaratory judgment seeking to enforce the requirements imposed by SB 106.

As part of the declaratory judgment request South Dakota is fully acknowledging that a declaration in favor of the state will require abrogation of the US Supreme Court’s decision in Quill v. North Dakota, 504 U.S. 298 (1992), and ultimately the state is seeking to have the case heard by the US Supreme Court. In its complaint, South Dakota detailed the state identified 206 sellers which lacked physical presence in South Dakota but nonetheless met the economic nexus requirements specified in SB 106, and as such should charge tax under the new law. South Dakota further explained that notices were sent to each of these sellers specifying that they were required to collect sales tax under the new law and instructed them to register with the state by April 25. The named defendants were part of this group and are alleged to have not registered with the state by the required deadline.

Likewise, on April 29, a Complaint for Declaratory Judgment was filed in South Dakota’s Sixth Circuit Court by two trade associations representing e-commerce and catalog sellers against the Secretary of the South Dakota Department of Revenue. (American Catalog Mailers Association and NetChoice v. Gerlach.) The action, to no one’s surprise, challenges the basic constitutionality of the new South Dakota law under the Quill doctrine.

Quite simply, the plaintiffs contend that “Because SB 106 violates the Quill physical presence requirement, usurps the role of Congress in regulating interstate commerce, and unlawfully expands the State’s taxing authority over companies, individuals, and organizations located throughout the United States and potentially the world, based solely on their having customers in South Dakota, the law is plainly unconstitutional.” The Complaint asks the Court to declare SB 106 unconstitutional and unenforceable on its face, enter judgment for the plaintiffs accordingly, award the plaintiffs costs and attorney fees, and grant such further relief as the Court finds just and proper.

We are watching both legal actions closely and will provide updates as the situation develops. For a full summary of the original issue triggered by the passage of SB 106, please read the original blog and watch our video below, about how South Dakota is trying to establish a new sales nexus and challenge Quill, presented by Matt Walsh, VP of Tax, Compliance/Research.

 


The State of South Dakota seems to be tired of waiting for Marketplace Fairness. Citing Justice Anthony Kennedy’s concurrence in Direct Marketing Association v. Brohol, South Dakota seems poised to challenge the Quill doctrine, which prevents states from enforcing sales or use tax collection obligations on remote sellers that lack physical presence (property or employees within their borders). A new sales tax nexus for everyone may be on the horizon.

The South Dakota legislature believes that given modern computing and software options, it is neither unusually difficult nor burdensome for remote sellers to collect and remit sales taxes associated with sales into the state. The state’s main concerns is that the inability to collect tax from remote sellers seriously erodes the sales tax base of South Dakota and causes harms seen in the loss of funding for state and local services.

In order to mount a challenge of Quill, on March 22, 2016, Governor Dennis Daugaard signed SB 106 into law. This new legislation, which will go into effect May 1, 2016, will impose sales tax collection obligations on remote (out-of-state) sellers who do not have a physical presence in South Dakota.

The New Nexus Standard

SB 106 requires remote sellers to collect the sales tax from South Dakota consumers if during the previous calendar year or the current calendar year:

  1. The remote seller’s gross revenue of sale of tangible property, electronically transferred products, or services delivered into South Dakota exceeds $100,000
  2. The remote seller has 200 or more separate transactions tangible property, electronically transferred products, or services delivered into South Dakota.

If a remote seller meets one or both of requirements of SB 106 and does not currently hold a South Dakota business tax license, the seller must complete an application.

What Does This New Nexus Standard Mean for Retailers?

It is apparent throughout the legislatures findings within SB 106 that this bill contemplates that there will be legal challenges based on the decision in Quill Corp. v. North Dakota. This legislation also recognizes the situation remote sellers are being put in by requiring tax collection that may be in contradiction of the Supreme Court Decision in Quill.

Accordingly, the legislation provides that the obligations created by this law would be appropriately stayed by the courts until the constitutionality has been clearly established by a binding judgment. A binding judgment could include a decision from the Supreme Court of the United States abrogating its decision in Quill or a final judgment applicable to a particular taxpayer.

South Dakota SB 106 will likely be challenged as soon as the State makes it first tax assessment in accordance with the law. Such a challenge would cause a stay of enforcement during what could be a very interesting and lengthy court battle that could decide the future of Quill and the concept of nexus as we know it. We here at Sovos Compliance will be keeping our eyes on how this proceeds and keep you posted as updates occur.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Erik Wallin

Erik Wallin is a Senior Tax Counsel on the Tax Research Team at Sovos Compliance. Erik has been with Sovos Compliance since 2011, and his main areas of focus are on U.S. Transaction Tax Law which includes special expertise in the taxation of technology and the taxation mechanisms that apply throughout the Colorado home rule jurisdictions. Erik is a member of the Massachusetts Bar, has a B.A. from York College of Pennsylvania, a J.D. from New England School of Law, and an LL.M. in Taxation from Boston University.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

EMEA VAT & Fiscal Reporting
August 4, 2020
New VAT Rules for Online Marketplaces and Imports of Goods into the UK

The United Kingdom’s HMRC has issued new guidance on the VAT treatment of cross-border sales of goods and online marketplaces beginning 1 January 2021, following the end of the transition period. Cross-Border Sales under £135 New rules will apply when a business sells goods for £135 or less to a UK customer and the goods […]

EMEA VAT & Fiscal Reporting
August 3, 2020
New EU Tax Package: VAT Priorities

On 15 July 2020, the European Commission (EC) adopted a new Tax Package, intended to increase tax compliance while reducing administrative burden on businesses. The Tax Package contains a number of proposals related to VAT, of which three in particular stand out: A single EU VAT registration for taxpayers; Modernized VAT reporting obligations; and Facilitated […]

IPT
August 3, 2020
Should Insurers Receive an IPT Holiday From Their Governments?

It’s been a tough year for businesses. Whilst many have accepted that 2020 is likely to be a year to forget, unfortunately tax still needs filing and paying. Tax authorities have been understanding – nobody could have foreseen this – and there has been a concerted effort to provide SMEs with tax relief and postponements […]

Asia Pacific E-Invoicing Compliance EMEA India
July 31, 2020
India: Last-Minute Changes to the Proposed E-Invoicing System

The October deadline is fast approaching for the Indian CTC invoicing mandate, but it remains a moving target. In a swift move that was published just two months prior to go-live, authorities have now changed the scope of who is affected by the reform, as well as updated the JSON format. Why the change? The […]

ShipCompliant United States
July 30, 2020
2020 DtC Wine Shipping Mid-Year Report

Since we released the annual Direct-to-Consumer Wine Shipping Report in partnership with Wines Vines Analytics back in January, a lot has changed when it comes to how consumers are getting their wine. The COVID-19 pandemic swayed buying channels drastically, shifting traditional retail and on-premise sales over to ecommerce sales. With brick-and-mortar retailers being closed down […]