United States: South Dakota Enacts Legislation Challenging Quill's Physical Presence Requirement

On March 22, 2016, South Dakota Governor Dennis Daugaard signed legislation, S.B. 106, requiring certain remote sellers that do not have a physical presence in South Dakota to collect sales tax on sales made in the state.1 The collection and remittance duties are triggered if certain gross revenue or transaction thresholds are met. S.B. 106 is noteworthy not only for clearly laying out South Dakota's policy reasons for enacting the legislation but also for expressing the state's clear directive to quickly produce a test case to challenge the physical presence requirement stated by the U.S. Supreme Court in Quill Corp. v. North Dakota.2

Economic Presence

Effective May 1, 2016,3 certain remote sellers that sell tangible personal property, products transferred electronically, or services for delivery into South Dakota will be subject to the state's provisions governing the retail sales and service tax and uniform municipal non-ad valorem tax and will be required to remit sales tax as if they had physical presence in the state. Remote sellers will be subject to these new provisions if they meet one of two thresholds in either the previous calendar year or the current calendar year:

  • 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; or
  • The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.4

Procedures Governing Challenges to Law in State Courts

The legislation allows South Dakota to bring a declaratory judgment action in a circuit court against any person it believes meets the above criteria to establish that the obligation to remit sales tax is applicable and valid under state and federal law. The legislation directs the circuit court to act on the declaratory judgment "expeditiously" and to presume that the matter can be resolved through a motion to dismiss or a motion for summary judgment.5

If these motions are not sufficient to resolve the issue, discovery is subject to the limited and simplified discovery procedures contained in S.D. Codified Laws Sec. 15-6-73(2) and Sec. 15-6-73(4), which deal with motions for leave of court. Additionally, any provision authorizing attorney's fees does not apply to any action, or appeal from any action, brought under S.B. 106.6

Most importantly, S.B. 106 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 sales tax remittance obligations against any taxpayer who does not comply.7 Furthermore, S.B. 106 contains a provision that allows any appeal to go directly to the state's Supreme Court.8 The legislation specifically provides that the obligation to remit sales tax under S.B. 106 may not be applied retroactively.9 However, if the injunction provided by S.B. 106 is lifted or dissolved generally, or specifically with respect to a taxpayer, the state is prospectively allowed to assess and apply the sales tax on any taxpayer covered by the injunction.10

Finally, the legislation emphasizes that a taxpayer in compliance with S.B. 106 may seek recovery of taxes, penalties or interest by following established recovery procedures under the uniform administrative provisions applicable to the sales tax (and certain other state taxes).11 The refund claim cannot be granted on the basis that the taxpayer lacked physical presence in South Dakota and complied with S.B. 106 voluntarily while covered by the injunction provided in S.B. 106.12

South Dakota's Policy Objectives Explained

S.B. 106 contains a detailed explanation by the legislature on why the bill is vital to South Dakota's economy.13 The legislature explains that the inability of South Dakota to collect sales or use tax from remote sellers has eroded the state's sales tax base leading to critical funding shortages for state and local services.14 Because South Dakota has no state income tax and relies heavily on its sales and use tax, the impact of this revenue loss has hit the state particularly hard.15 Compounding this issue is the fact that many remote sellers "actively market sales as tax free or no sales tax transactions."16

The legislature explains that the erosion of South Dakota's sales tax base is expected to continue due to the ongoing popularity of online sales coupled with the structural advantages built into the remote seller model.17 For example, although remote sellers benefit from the state's markets, economy and infrastructure, they do not have to deal with point-of-sale tax collection.18 The legislature points out that, as the harm to the state from exempting remote sellers from sales tax collection duties has grown, the compliance costs to remote sellers has decreased with advances in modern computing and software options.19

Legislation Outlines Direct Challenge to Quill

Citing to Justice Kennedy's concurrence in DMA,20 the legislature clearly spells out its desire to directly challenge Quill with this legislation.21 The legislature notes that "expeditious review" of the constitutionality of S.B. 106 is necessary because the refusal by remote sellers to collect the sales tax, while reasonable under current federal constitutional doctrine, is causing "imminent harm" to South Dakota.22 Because existing constitutional doctrine calls S.B. 106 into question, and thereby places remote sellers in a "complicated position," the legislature provides that the obligations created by S.B. 106 would be stayed by the courts "until the constitutionality of this law 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."23

The legislature specifically states its intent to apply South Dakota's sales and use tax obligations "to the limit of federal and state constitutional doctrines" and to clarify that South Dakota law allows the state to immediately argue in any litigation that constitutional doctrine should be changed to permit the collection obligations under S.B. 106.24

Commentary

South Dakota's sales tax nexus legislation marks the most recent challenge to the U.S. Supreme Court's 1992 decision in Quill, which held that, for Commerce Clause nexus purposes, out-of-state retailers must have physical presence in a state before a state can require the retailer to collect sales tax.

The South Dakota legislation comes on the heels of an Alabama regulation which, effective January 1, 2016, requires certain out-of-state sellers making retail sales into Alabama to collect and remit sales and use tax even though such sellers do not have a physical presence in the state.25 The Alabama regulation appears to be the first instance in which a regulation promulgated by a state tax authority contradicts the Quill decision by requiring out-of-state sellers to collect and remit sales taxes even though they may not have actual physical presence in the state.

However, neither the enactment of South Dakota's legislation nor the promulgation of Alabama's regulation may be unique for much longer. As of the middle of March, 35 sales tax nexus bills have been introduced by state legislatures in their 2016 legislative sessions, addressing the sales and use tax collection and remittance requirements of remote sellers in various ways.26 Many of these bills have made significant progress in their state legislatures.27

The flurry of activity at the state level can be attributed to the lack of action at the federal level, Justice Kennedy's request in DMA28 that the "legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess,"29 and the substantial amounts of tax revenue lost to sales by remote sellers.

Alabama's promulgation of a regulation in late 2015 to challenge Quill rather than engaging in an effort to enact legislation may have reflected the difficulty that proponents might have faced using the legislative process at that point in time. Things have shifted markedly in a span of less than a year, as reflected by the relative ease with which the South Dakota legislation was passed. Sen. Deb Peters, former president of the Streamlined Sales Tax Governing Board and sponsor of S.B. 106, had tried for years to pass legislation imposing collection and remittance duties on remote sellers with little success.30 However, in what may be a reflection of the current climate on this issue in the wake of Justice Kennedy's comments in DMA, S.B. 106 faced little opposition in both the South Dakota House and Senate.31

S.B. 106 is notable for its undisguised desire to quickly produce a South Dakota case challenging Quill in light of the state's declared emergency in this area. Nearly half of the legislation is made up of language setting forth the state's legislative intent and how the state would proactively litigate the issue upon discovery of a noncompliant business. However, certain things are beyond South Dakota's control. Even if a test case were to emerge in South Dakota, barring federal legislative action, the U.S. Supreme Court would be the sole arbiter in determining whether the physical presence standard in Quill should be eliminated. This may prove challenging given that 2016 marks both an election year and the beginning of a potentially contentious nomination process to fill the empty seat created by Justice Scalia's death.

Footnotes

1 S.B. 106, Laws 2016.

2 504 U.S. 298 (1992).

3 S.B. 106 contains an emergency clause providing that "[t]his Act shall be in full force and effect on the first day of the first month that is at least fifteen calendar days from the date this Act is signed by the Governor."

4 S.B. 106, Laws 2016, § 1.

5 S.B. 106, Laws 2016, § 2.

6 Id.

7 S.B. 106, Laws 2016, § 3.

8 S.B. 106, Laws 2016, § 4.

9 S.B. 106, Laws 2016, § 5.

10 S.B. 106, Laws 2016, § 6.

11 S.B. 106, Laws 2016, § 7.

12 Id.

13 S.B. 106, Laws 2016, § 8.

14 S.B. 106, Laws 2016, § 8(1).

15 S.B. 106, Laws 2016, § 8(2).

16 S.B. 106, Laws 2016, § 8(3).

17 S.B. 106, Laws 2016, § 8(4).

18 S.B. 106, Laws 2016, § 8(4), (5).

19 S.B. 106, Laws 2016, § 8(6).

20 Direct Marketing Ass'n v. Brohl, 135 S. Ct. 1124 (2015) (Kennedy, J., concurring).

21 "As Justice Kennedy recently recognized in his concurrence in Direct Marketing Association v. Brohl, the Supreme Court of the United States should reconsider its doctrine that prevents states from requiring remote sellers to collect sales tax, and as the foregoing findings make clear, this argument has grown stronger, and the cause more urgent, with time." S.B. 106, Laws 2016, § 8(7).

22 S.B. 106, Laws 2016, § 8(8), (9).

23 S.B. 106, Laws 2016, § 8(10).

24 S.B. 106, Laws 2016, § 8(11).

25 ALA. ADMIN. CODE R. 810-6-2-.90.03. For a discussion of this regulation, see GT SALT Alert: New Alabama Regulation to Require Out-of-State Sellers to Collect Sales and Use Tax Contrary to Supreme Court Precedent.

26 Liz Malm, Update: What's New in the World of Sales Tax Nexus Legislation?, MULTISTATE INSIDER, March 17, 2016.

27 Id.

28 Direct Marketing Ass'n v. Brohl, 135 S. Ct. 1124 (2015) (Kennedy, J., concurring). For a discussion of this case, see GT SALT Alert: U.S. Supreme Court Holds Challenge to Colorado's Sales and Use Tax Notice and Reporting Requirements Not Barred by Tax Injunction Act.

29 National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967).

30 Maria Koklanaris, South Dakota Governor Signs Nexus Bill, Other Sales Tax Changes, TAX ANALYSTS STATE TAX TODAY, March 24, 2016. "After trying for years to get a bill passed that would expand the definition of nexus to require remote sellers to collect and remit sales tax, Peters shepherded the measure through this time with virtually no obstacles. The governor had said from the outset that he would sign such a bill if it reached his desk. It passed the Senate 33 to 0 and the House 64 to 2."

31 Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.