United States

South Dakota takes aim at Quill

State supreme court rejects economic sales and use tax nexus standard


Update: On Sept. 13, 2017, the South Dakota Supreme Court issued its decision in South Dakota v. Wayfair, Inc., unanimously agreeing with a state circuit court finding that Senate Bill 106, the state’s economic sales and use tax nexus standard, violated the 1992 U.S. Supreme Court decision Quill v. North Dakota. The decision had been highly anticipated after oral arguments were held in late August. Recall that Senate Bill 106 was enacted in the spring of 2016 and required remote sellers with no physical presence in the state to collect and remit South Dakota sales taxes when the seller met certain sales thresholds of $100,000 or 200 more separate transactions. A declaratory judgment action triggered an injunction of the law while under litigation.

It has been reported that the state intends to appeal the decision to the U.S. Supreme Court. Whether the court accepts the appeal will likely not be known until 2018.

Since enactment of Senate Bill 106, a number of other states have enacted or promulgated similar remote seller economic sales and use tax nexus provisions. Alabama promulgated a regulation effective in 2016, and in 2017, Indiana, Maine, North Dakota, Tennessee, Vermont and Wyoming also addressed remote seller nexus. Many of those provisions have been challenged or are not yet effective. For more information on these remote seller provisions, please read the article Economic sales and use tax nexus laws.   

Update: On March 6, 2017, the Hughes County Circuit Court struck down South Dakota’s economic sales and use tax nexus law when it granted summary judgment for the three remote-seller defendants, Wayfair, Inc., Overstock.com, Inc. and Newegg, Inc., subject to the state’s declaratory judgment action. The court found that Quill’s physical presence requirement was the controlling law that prohibited the state from imposing a collection and remittance requirement on the defendants. The court also recognized that the law directed the circuit court to act as ‘expeditiously as possible’ when reviewing the action.

The economic sales and use tax law remains enjoined. The state may appeal the circuit court decision to the South Dakota Supreme Court, which it is expected to do. While litigation is pending in two other economic sales and use tax nexus states, Alabama and Tennessee, this is the first decision of a state court on the merits of an economic sales and use tax nexus law.

Update: In an effort to push its attack on Quill up to the U.S. Supreme Court as quickly as possible, the South Dakota Department of Revenue has utilized the procedures laid out in SB 106 to file suit against at least four remote sellers, Newegg Inc., Overstock.com Inc., Systemax Inc., and Wayfair LLC in the Hughes County Circuit Court.  These suits trigger an injunction against the enforcement of the state’s remote seller nexus law pursuant to Section 3 of SB 106, which provides that “The filing of the declaratory judgment action […] by the state operates as an injunction during the pendency of the action […], prohibiting any state entity from enforcing the obligation [for remote sellers to collect and remit sales tax] against any taxpayer who does not affirmatively consent or otherwise remit the sales tax on a voluntary basis.”  Litigation is expected to move quickly through the South Dakota judiciary.

Update: The South Dakota Department of Revenue is wasting no time in implementing Senate Bill 106, and is already mailing letters to remote sellers indicating that they must voluntarily collect and remit sales tax on taxable sales to their South Dakota customers or they will be subject to a declaratory judgment action. This will quickly put remote sellers in the difficult position of having to weigh the cost of collecting and remitting tax against the cost of defending their reliance on the physical presence nexus standard in court. Depending on timing and targeting for these letters, it is possible that many smaller businesses will have decided that compliance is in their best interests by the time a larger remote seller has an opportunity to respond, and that the state will be able to reasonably call into question the continued validity of the U.S. Supreme Court’s concern in Quill that requiring remote sellers to collect and remit sales tax was too burdensome.

On March 22, 2016, South Dakota Gov. Dennis Daugaard signed Senate Bill 106, requiring certain remote sellers with no physical presence in the state to collect and remit sales tax on sales to South Dakota customers effective on May 1, 2016.

Pursuant to Senate Bill 106, a seller that does not have a physical presence in South Dakota will be required to collect and remit South Dakota sales tax as if the seller had a physical presence within the state, if the seller meets either of the following criteria in the previous calendar year or the current calendar year:

  1. The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000
  2. The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions

The provisions of Senate Bill 106 directly contravene the United States Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, which has been broadly interpreted to mean that an out-of-state seller must have some physical presence in a state in order to be subject to a sales tax collection and remittance requirement. Recognizing this constitutionally problematic position, the South Dakota legislature provided that enforcement of the state’s economic nexus standard for sales tax will be “[…] stayed by the courts until the constitutionality of [Senate Bill 106] has been clearly established by a binding judgment, including, for example, a decision from the Supreme Court of the United States abrogating its existing doctrine, or a final judgment applicable to a particular taxpayer.” Accordingly, remote sellers are spared from having to make the difficult decision between following the physical presence standard set forth by the Supreme Court and risk the imposition of tax, penalties and interest should that standard ultimately be overruled, or to incur the cost to follow South Dakota’s economic nexus standard for sales tax purposes in spite of its constitutional infirmity.

However, this respite may be short-lived. Senate Bill 106 allows the state, without audit or any attempt at tax collection, to bring a declaratory judgment action in any South Dakota circuit court against any seller that it believes meets the above-described criteria that does not voluntarily collect and remit tax. In the case of such an action, the circuit court is required to try the case as expeditiously as possible, and permits the circuit court to proceed based on the presumption that the matter can be fully addressed through a motion for dismissal or summary judgment. Right of appeal from the circuit court’s decision is direct to the South Dakota Supreme Court. This procedure will fast-track any action to a petition for certiorari to the United States Supreme Court, which South Dakota presumes will accept based upon Justice Kennedy’s call for a test case to reconsider the Quill physical presence standard in his concurrence to the Court’s 2015 decision in Direct Marketing Association v. Brohl. For more information regarding this decision and its aftermath, please read our article, DMA’s Colorado sales and use tax information reporting saga continues.

Senate Bill 106’s approach to nexus expansion is part of a developing trend sparked by the failure of the federal government to push through remote seller sales tax legislation, such as the Marketplace Fairness Act or its progeny, and the United States Supreme Court’s recent willingness to grant certiorari in cases involving the application of the Commerce Clause of the United States Constitution in a state tax context. It follows on the heels of Alabama’s 2015 regulation, which instituted a similar economic presence approach for sales tax purposes effective on Jan. 1, 2016. Furthermore, similar bills have been proposed in other states, and it is possible that more states will follow in the footsteps of Alabama and South Dakota over the course of 2016. At this point, it only remains to be seen which state wins the race to develop a case for the United States Supreme Court to consider.

At this time, remote sellers making sales into South Dakota should determine whether they meet the state’s sales tax collection and remittance thresholds, and should consider whether to voluntarily collect and remit tax on sales to their South Dakota customers as if Senate Bill 106’s economic presence rules were in force or to wait to see how aggressive South Dakota will be in searching for remote sellers to subject to a declaratory judgment action.


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