South Dakota Adopts Sales and Use Tax, Economic Nexus Law

State and Local Tax|Tax

By Jack Stewart

Effective May 1, 2016, any seller who does not have a physical presence in the state of South Dakota and meets one of the following criteria in the previous or current calendar year is deemed to have nexus for sales and use tax with the state:

  1. Has gross revenue from the sale of tangible personal property into the state, has products transferred electronically, or services delivered into South Dakota that exceed $100,000; or
  2. The seller sells tangible personal property, has any product delivered electronically, or services delivered into South Dakota in 200 or more separate transactions.

The new law is unusual from the standpoint that it acknowledges that it is in direct conflict with physical presence nexus standard established by the United States Supreme Court in Quill v. North Dakota.  Furthermore, it includes language justifying the law’s enactment, the need for the United States Supreme Court to reconsider the physical presence requirement upheld in Quill and the harm that will occur to South Dakota without the law.  The law also provides an expedited appeals process directly to the South Dakota Supreme Court and presumably to the United States Supreme Court.

Perhaps most importantly to vendors meeting the above criteria for economic nexus in South Dakota, the law has language that creates an injunction barring the state from enforcement until the law has been established as being constitutional.  Should the law be ruled constitutional by the United States Supreme Court, it will only be enforced prospectively from the date the injunction is lifted.  Vendors meeting the economic nexus standards above who voluntarily register and remit South Dakota sales tax will not be permitted to seek a refund based upon a lack of physical presence in the state should it be determined that the law is unconstitutional.

Clearly, this new law is in response to Justice Anthony Kennedy’s concurring opinion in DMA v. Brohl, (the statute references Justice Kennedy’s opinion) where the Justice suggested that it might be time to re-evaluate the physical presence standard that was first established in Bellas Hess and later upheld in Quill.  Given the expedited language in the law, one wonders how long it will take to get an appeal to the United States Supreme Court.  Would it get to the Court before Justice Scalia’s vacancy is filled or another vacancy occurs?  What would happen if the case results in a 4 to 4 decision?  Would the lower court’s ruling stand?  If the lower court was the South Dakota Supreme Court and that court ruled that the law was constitutional, would South Dakota be the only state allowed to impose an economic nexus standard for sales and use tax?  Will Congress finally act before the Supreme Courts rules?  Will the issue of sales and use tax nexus finally be resolved?

Only time will tell whether this new law provides the clarity everyone is hoping for or additional mayhem and confusion.

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