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


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.


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.

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