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.

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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.
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