South Dakota Governor Signs Anti-Quill “Economic Presence” Nexus Law

On March 22, 2016, South Dakota Governor Dennis Daugaard signed into law SB 106, legislation that adopts an “economic presence” approach to requiring remote catalog and Internet sellers to report South Dakota sales tax. The law provides that “any seller selling tangible personal property, products transferred electronically, or services for delivery into South Dakota, who does not have a physical presence in the state” is required to remit sales tax if the seller, in the prior or current year, meets either of two, alternative criteria: (a) the seller’s gross revenue from sales delivered into South Dakota exceeds $100,000; or (b) the seller made sales for delivery into South Dakota in two hundred (200) or more separate transactions. SB 106, § 1, available here. In other words, any remote seller of taxable goods (including digital goods) or services exceeding the thresholds is subject to sales tax, regardless of whether or not the seller has a “physical presence” as defined by the United States Supreme Court in Quill Corp v. North Dakota, 504 U.S. 298 (1992). The new law takes effect on effect on May 1, 2016.

The South Dakota Department of Revenue has already started sending notices to out-of-state retailers it believes are likely subject to the new sales tax obligation, inviting them to register for sales tax and noting that, if a retailer chooses not to file, it may be the subject of a declaratory judgment action, even without the Department first assessing the tax. The new law gives the Department the power to sue any retailer it believes meet the “economic nexus” standards of the statute. SB 106, § 2. The filing of such a lawsuit by the State, however, results in an automatic injunction preventing enforcement of the new law against any retailer that does not voluntarily collect the tax, pending the outcome of litigation over the validity of the new statute. Id., § 3.

Retailers should be aware that the South Dakota statute’s provisions are plainly inconsistent with the holding of Quill that prohibits a state, based on the Commerce Clause of the United States Constitution, from requiring a retailer to report state sales/use tax if the seller lacks a physical presence with the state. Indeed, the legislative findings set forth in the South Dakota statute acknowledge that “existing constitutional doctrine call this law into question” and that it is reasonable for remote sellers not to collect the state’s sales in light of existing constitutional doctrine. Id., § 8(9), (10). Thus, the statute itself highlights its conflict with Quill.

We will be actively monitoring developments regarding the South Dakota law.