United States: South Dakota: The Next Frontier Of Sales Tax Nexus

This morning, a declaratory action was filed challenging the constitutionality of South Dakota's sales and use tax economic nexus legislation, which is scheduled to take effect Sunday, May 1, 2016. In American Catalog Mailers Association and NetChoice v. Gerlach, the plaintiffs are asking the South Dakota state courts to declare the legislation unconstitutional, as it violates the physical presence rule from Quill Corp. v. North Dakota1. This client alert details South Dakota's legislation, analyzes the complaint filed by American Catalog Mailers Association and NetChoice, and highlights the challenges other taxpayers face in South Dakota and other jurisdictions.

S.B. 106

On March 22, South Dakota passed S.B. 106 and adopted an economic nexus standard to determine whether out-of-state retailers are required to collect and remit sales tax for sales made to South Dakota purchasers. Specifically, the law requires that an out-of-state seller must collect sales tax on its sales to South Dakota purchasers if one of two conditions is satisfied:

  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; or
  2. The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.2

This standard radically deviates from the physical presence standard reaffirmed by the U.S. Supreme Court in Quill Corp. v. North Dakota.3 In Quill, the U.S. Supreme Court held that sales and use tax collection obligations could only be imposed on entities physically present in the state. S.B. 106 reaches out-of-state sellers with $100,000 of sales to South Dakota purchasers or 200 or more separate transactions to South Dakota purchasers, regardless of whether the seller is physically present in South Dakota.

The legislation provides unique procedural rules in an effort to expedite review by the South Dakota Supreme Court. First, the legislation provides that enforcement will be "stayed by the courts until the constitutionality of [S.B. 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."4 This section restricts the ability of the South Dakota Department of Revenue to assess remote sellers that meet either threshold established in S.B. 106. Furthermore, if the legislation is upheld, remote sellers will not face retroactive liability for their sales prior to S.B. 106's affirmance by the U.S. Supreme Court. The legislation provides that "[i]f an injunction provided by this Act is lifted or dissolved, in general or with respect to a specific taxpayer, the state shall assess and apply the obligation established in section 1 of this Act from that date forward with respect to any taxpayer covered by the injunction."5

In addition to staying enforcement of the legislation until a final determination of its constitutionality, the legislation requires the South Dakota Department of Revenue to seek a declaratory action in circuit court against a taxpayer that allegedly meets either or both of S.B. 106's economic nexus thresholds. When such an action is filed, S.B. 106 urges circuit courts to act "as expeditiously as possible," and the action must "proceed with priority over any other action presenting the same question in any other venue."6 Moreover, the circuit court is not only encouraged to resolve the case as expeditiously as possible, but is also required to adopt expedited discovery procedures provided for in SDCL 15-6-73. The legislation is set to take effect May 1, 2016.

Complaint Filed by American Catalog Mailers Association and NetChoice

In its complaint filed this morning, American Catalog Mailers and NetChoice (collectively, "Plaintiffs") argue that S.B. 106 violates the Commerce Clause of the U.S. Constitution.7 Because S.B. 106 adopts an economic nexus standard instead of the physical presence standard announced in Quill, the legislation usurps settled U.S. Supreme Court precedent. The Complaint alleges that "Because SB 106 violates the Quill physical presence requirement, usurps the role of Congress in regulating interstate commerce, and unlawfully expands the State's taxing authority over companies, individuals, and organizations located throughout the United States, and potentially the world, based solely on their having customers in South Dakota, the law is plainly unconstitutional."8 Plaintiffs are trade associations incorporated in Washington, D.C., comprising sellers not physically present in South Dakota.9 They allege that because the legislative findings of S.B. 106 "expressly acknowledge that 'existing constitutional doctrine calls this law into question' and that established constitutional doctrine under Quill would have to be 'changed to permit the collection obligations of this Act,'" S.B. 106 is clearly unconstitutional under current U.S. Supreme Court precedent.10

What's Next?

The Plaintiffs did not wait to receive a declaratory action by the South Dakota Department of Revenue, choosing instead to seek a declaratory action against S.B. 106's enforcement. Accordingly, Department's enforcement of S.B. 106 is not stayed by the Plaintiff's Complaint. It is unclear whether the Department will file its own declaratory action against a remote seller after the May 1 effective date of S.B. 106. Nevertheless, remote sellers can take solace in the fact that until a remote seller receives a declaratory action by the Department, it does not need to affirmatively change its procedures to begin collecting sales tax on its sales to South Dakota purchasers.

Although no taxpayer is accruing tax liability for sales to South Dakota purchasers as a result of the new nexus standard in S.B. 106, taxpayers should review their collection procedures to prepare for the eventuality that S.B. 106 is upheld. If the constitutionality of the legislation is affirmed, the Department will require out-of-state sellers that meet the economic nexus thresholds in S.B. 106 to collect and remit sales tax for sales to South Dakota purchasers. In addition to reviewing their collection procedures, taxpayers should examine their reserves—and not just for South Dakota. The outcome of South Dakota's legislation will produce ripples felt nationwide.

Economic Nexus Positions Beyond South Dakota

South Dakota is not the only state targeting remote sellers. Earlier this year, a regulation adopted by the Alabama Department of Revenue in late 2015 that applies economic nexus to out-of-state retailers with substantial sales in the state went into effect.11 Specifically, remote sellers who lack physical presence in the state must collect and remit sales tax if they make retail sales of tangible personal property into the state exceeding $250,000 and conduct one of a host of other "doing business in the State" activities specified in the Regulation, such as solicitation of sales through agents in the state or contracting with a broadcaster, or—notably—distributing catalogs and accepting orders from purchasers located in the state. Some out-of-state retailers have already received—and appealed—tax assessments from the Alabama Department of Revenue, and we expect that additional remote sellers will receive tax assessments until the constitutionality of the regulation is decided by the Alabama Supreme Court and, perhaps eventually, the U.S. Supreme Court.

In addition to Alabama, other states have either considered legislation or revenue regulations that would create an economic nexus for remote sellers. Iowa, Utah, and New York have each either considered or expanded their doing-business regulations in the past year, with the goal of expanding the scope of the regulations to include remote sellers with sales into these states that exceed certain thresholds. Even in states with no pending economic nexus legislation or regulation, the taxing authorities have been taking the position that the activities of a remote seller established nexus with the state for sales and use tax purposes. For example, the Chief Administrative Law Judge of the West Virginia Office of Tax Appeals recently ruled that independent contractors who performed property maintenance and landscaping services within the state on behalf of a company with no physical presence in West Virginia created substantial nexus for the out-of-state company.12

The takeaway from today's judicial challenge in South Dakota and the flurry of activity in other states that are trying to expand their tax jurisdiction over remote sellers is that retailers now need re-evaluate their sales and activities in all states, including states in which the traditional markers of physical presence under Quill are lacking.

If you have questions about whether your company should be collecting sales and use tax, please contact one of the authors of this Alert or the Reed Smith attorney with whom you usually work.

Footnotes

1. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

2. S.B. 106, § 9, 2016 Leg., 91st Sess. (S.D. 2016).

3. Quill, 504 U.S. 298.

4. Id. at § 8(10).

5. Id. at § 6.

6. Id. at § 2.

7. Complaint, American Catalog Mailers Association and NetChoice v. Gerlach, 32CIV16-__ (6th Circuit, S.D.) (April 29, 2016) (hereinafter, the "Complaint").

8. Id.

9. Complaint at ¶¶ 2-3.

10. Id. at ¶ 16.

11. Ala. Reg. 810-6-2-.90.03, effective January 1, 2016.

12. Redacted Decision – DK#'s 12-432 U, 12-433 CU, 12-434 C, 12-435 NFN, West Virginia Office of Tax Appeals, Jan. 30, 2015 (released Jan. 27, 2016).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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.