South Dakota Can Sue Internet Retailers Under New Tax Law

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By Chris Marr

April 26 — South Dakota’s Department of Revenue could begin suing Internet retailers any time under the state’s new remote seller sales tax law, as the state looks to seed a case that might overturn federal tax policy.

Under the state’s recently enacted S.B. 106, retailers that sell at least $100,000 of products into the state or complete at least 200 separate transactions into the state annually must collect and remit sales tax, despite their lack of a physical presence in the state.

The new law will take effect May 1, while a new South Dakota sales tax rate of 4.5 percent takes effect June 1, up from the current rate of 4 percent.

State the ‘Aggressor.'

The DOR notified out-of-state retailers to register with or notify the state by April 25 if they are exempt because they don’t meet the thresholds.

The law authorizes the state to sue those that fail to register seeking a declaratory judgment, without having to first levy tax assessments and wait for the taxpayer to contest them.

“South Dakota’s legislation was written to create a path for the state to be the aggressor and sue the retailers,” Stephen P. Kranz, a tax attorney with McDermott Will & Emery LLP, told Bloomberg BNA April 26, calling it an “unusual” provision of the new law.

Roughly 40 businesses have obtained sales tax licenses under S.B. 106, said DOR spokesman Jonathan Harms. He didn’t respond further to Bloomberg BNA’s inquiries about potential litigation.

Multistate Attack on ‘Quill.'

The new law and not-so-subtle litigation strategy are part of a multistate effort to inspire a lawsuit that could wend its way to the U.S. Supreme Court, where some state tax officials hope to see the court’s 1992 Quill decision overturned. That decision reaffirmed the standard that states can only impose sales tax obligations on companies with a physical presence there (63 DTR H-1, 4/1/16).

“It’s clear South Dakota is joining the list of states that have declared Quill to be dead and is moving quickly to test that legal theory,” Kranz said.

South Dakota’s legislation follows in the footsteps of Alabama’s economic nexus standard.


In Alabama, the standard was created via a state Department of Revenue rule that took effect Jan. 1 and requires out-of-state vendors with at least $250,000 of annual sales into the state to collect and remit sales taxes. Alabama is waiting for taxpayers to file litigation challenging the rule in response to taxpayer assessments—a lawsuit that also could come at any time .

Although Alabama’s rule took effect first, South Dakota tax officials could jump to the front of the line for litigation that directly challenges Quill, thanks to language in their statute that lets them bypass normal administrative procedure and take a case directly to court, said Bruce Ely, a tax attorney with Bradley Arant Boult Cummings LLP in Birmingham, Ala.

“They clearly want their statute to be tested quickly. They may leap-frog Alabama and at least reach the stage of seeking certiorari first,” Ely told Bloomberg BNA April 26.

Most states are hoping the brewing legal challenges will prompt Congress to act on the issue of taxing Internet commerce, Ely said.

“Unfortunately, I think there’s going to be a lot of chaos over the next few years,” he said. “This uncertainty is not a good thing for Internet retailers or Internet commerce in general.”

To contact the reporter on this story: Chris Marr in Atlanta at

To contact the editor responsible for this story: Ryan Tuck at

For More Information

Details on and text of South Dakota's S.B. 106 are at

Text of South Dakota's notice to remote sellers is at