South Dakota Internet Tax Goes to Court
South Dakota is about to get sued and it couldn’t be happier. It is one of many states prepared to fight for Internet sales tax revenue; being taken to court over its new Internet sales tax law is a welcome first battle.
The new law maintains that remote sales tax collection is essential for South Dakota and provides several reasons why this is so:
- The lack of an income tax makes sales tax revenue indispensable
- The state’s inability to collect sales tax revenue from remote sellers is “seriously eroding the sales tax base”
- South Dakotans rarely remit use tax on remote sales as required
Beginning May 1, 2016, remote sellers making at least 200 sales of tangible personal property or services in South Dakota or earning more than $100,000 from South Dakota customers over a 12-month period are required to collect and remit South Dakota sales and use tax.
ACMA (American Catalog Mailers Association) and NetChoice (ecommerce and online consumers trade association) have announced their legal challenge on the NetChoice website:
“The state of South Dakota’s new Internet sales tax mandate – to force out-of-state sellers to collect South Dakota sales tax – is an unconstitutional expansion of state tax powers and directly conflicts with precedent set by the Supreme Court of the United States.”
They argue that “South Dakota has imposed unconstitutional and unworkable burdens on remote sellers,” standing in “direct contravention of the Supreme Court’s Quill decision.”
The pivotal 1992 Supreme Court decision in Quill Corp. v. North Dakota prohibits states from requiring sales tax collection by out-of-state sellers lacking a physical presence in the state. The justices based their decision in part on the Commerce Clause. However, they invited Congress to “disagree with our conclusions” and insisted that “Congress may be better qualified to resolve” the issue. The need to reconsider Quill was also voiced last year, in a concurring opinion penned by Justice Kennedy regarding Colorado’s use tax notification requirement.
In announcing the legal battle, NetChoice and ACMA do not mention the Court’s invitations to challenge Quill. Instead, they maintain, “South Dakota is showing wanton disregard for established Supreme Court precedent…. States simply don’t have the authority to pick and choose the Supreme Court decisions they will follow.”
Yet challenging the precedent established in Quill and ending up in court is exactly what South Dakota planned. SB 106 makes that abundantly clear:
- “Given the urgent need for the Supreme Court of the United States to reconsider this doctrine, it is necessary for this state to pass this law clarifying its immediate intent to require collection of sales taxes by remote sellers, and permitting the most expeditious possible review of the constitutionality of this law.”
- “Expeditious review is necessary and appropriate because, while it may be reasonable notwithstanding this law for remote sellers to continue to refuse to collect the sales tax in light of existing federal constitutional doctrine, any such refusal causes imminent harm to this state.”
- “At the same time, the Legislature recognizes that the enactment of this law places remote sellers in a complicated position, precisely because existing constitutional doctrine calls this law into question. Accordingly, the Legislature intends to clarify that the obligations created by this law would be appropriately 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.”
- “It is the intent of the Legislature to apply South Dakota’s sales and use tax obligations to the limit of federal and state constitutional doctrines, and to thereby clarify that South Dakota law permits the state to immediately argue in any litigation that such constitutional doctrine should be changed to permit the collection obligations of this Act.”
The gauntlet has been thrown down by South Dakota and taken up by ACMA and NetChoice. The situation is proceeding exactly as South Dakota intended. And the eyes of the nation will be watching the proceedings with keen interest.
The case introduced in the South Dakota Sixth Judicial Circuit may or may not kill Quill as intended. If not, other states, such as Alabama, are waiting in line to take a swing at the case that prohibits remote sales tax collection.
Businesses would be wise to prepare for any eventuality. Learn more about the fallout for sellers if South Dakota or another state succeeds in killing Quill.
The 2021 sales tax changes report: midyear update
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