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New South Dakota Sales and Use Tax Impacts Remote Sellers
Effective May 1, 2016, South Dakota has adopted an economic nexus standard that requires out-of-state sellers with no physical presence in the state to register to collect and remit sales and use tax. The law impacts entities that exceed annual sales of $100,000 or more, or have made at least 200 transactions under the following conditions:
- If you made gross sales of tangible personal property, products that were transferred electronically, or services going into South Dakota exceeding $100,000 based on the previous calendar year’s sales; or
- If you sold tangible personal property, products transferred electronically, or services for delivery into South Dakota in at least 200 separate transactions.
Confusion behind the new rule
South Dakota is one of many states trying to recoup lost sales tax due in part to the rise of remote businesses and online retailers such as Amazon. Many other states, including Minnesota, have similar legislation proposed. Alabama already approved an economic nexus rule effective January 1, 2016, with a $250,000 sales threshold.
Getting in the way of these state actions is a 1992 U.S. Supreme Court ruling (Quill v. North Dakota) that requires physical presence for sales tax nexus to be established. However, current Supreme Court Justice Anthony Kennedy, in Direct Marketing Assoc. v. Brohl, indicated his support for Quill being reexamined by stating in his concurrence that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” This has opened the door for states to challenge the physical location rule.
A taxpayer who voluntarily complies with the expanded nexus provisions may not seek a refund of any taxes paid on the basis of the physical presence requirement — even if the state were to lose this challenge. The South Dakota law also prohibits any state entity from enforcing the obligation for the period in which the constitutionality of the expanded nexus requirements are being challenged, and prohibits the tax from being imposed retroactively.
“The South Dakota law is a direct challenge to Quill opened up by Justice Kennedy’s ruling, however Quill has not been overturned, leaving confusion around the South Dakota registration requirement,” says Ellen McCabe, state and local tax principal with CLA.
Both sides appear to be digging in. South Dakota filed a lawsuit against four of the largest online retailers, seeking to push them to comply with the law. Meanwhile trade associations for e-commerce and catalog retailers are challenging the constitutionality of the state law in a separate law suit of their own.
What is a business to do?
While this political football gets kicked around, how should a business respond to the South Dakota nexus legislation?
“Some remote businesses may choose to wait until a Supreme Court or congressional action overturns Quill. Others have chosen to register by May 1. If you voluntarily register based on the economic nexus requirements recently enacted, you give up your right to seek a refund should the physical presence standard ultimately be upheld,” says McCabe.
She adds that if the injunction is lifted, the sales and use tax will be imposed on those that didn’t voluntarily register from that day forward, not from May 1, 2016.
How we can help
Opposition and potential litigation of this South Dakota law is expected. Every business that may be affected should evaluate the law and look at its specific situation to determine how to proceed. Our tax professionals can help you determine your state nexus situation based on your unique circumstances.