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A bill requiring sales tax collection from sellers without an in-state physical footprint has become law in North Dakota—but it won’t take effect without a change in federal law.
On April 10, North Dakota Gov. Doug Burgum (R) signed into law S.B. 2298, which requires remote retailers to collect and remit sales tax if their annual sales in the state exceed $100,000 or amount to 200 or more separate transactions. The “economic nexus” measure mirrors a South Dakota statute enacted in 2016 that has reached the South Dakota Supreme Court after a lower circuit court ruled the law unconstitutional March 6.
However, North Dakota’s law has an effective date contingent on the U.S. Supreme Court overturning a 25-year-old decision restraining states’ taxing authority over out-of-state sellers or “otherwise confirming a state may constitutionally impose its sales or use tax upon an out-of-state seller in circumstances similar to those specified” in the bill.
The sales-based nexus standard has become the favored approach for states seeking to challenge the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. States have increasingly crafted laws or regulations to trigger a lawsuit that officials hope will lead to a “kill Quill“ ruling.
Given that its law is now conditioned on the high court’s authorization, North Dakota likely will avoid litigation. But while Quill‘s home state may not become embroiled in a courtroom battle, the nearby South Dakota case could bring the resolution that lawmakers are awaiting.
Sen. Dwight Cook (R), sponsor of the North Dakota bill, told Bloomberg BNA in an email that he is optimistic South Dakota will prevail and “it will happen in the next couple years.”
As originally passed by the state Senate, S.B. 2298 would have been effective July 1.
Cook explained that the House of Representatives had fiscal reservations that led to the chamber revising the effective date.
“Current state finances are requiring a 20% cut in state budget,” he said, noting that the House “was concerned about legal costs.”
The House approved S.B. 2298 as amended April 4, with which the Senate concurred April 5.
North Dakota’s Tax Commissioner, Ryan Rauschenberger, told Bloomberg BNA that he is very supportive of the measure. With a modern economy that is increasingly defined by an online marketplace and changing consumer habits, states are asking either the U.S. Supreme Court or Congress to intervene and allow states to recover revenue lost to online sales.
“Part of the misconception is that this is a new tax that states are trying to impose,” Rauschenberger said. “But the tax is already owed. It is simply to enable a method for collecting the tax.”
States commonly cite lost revenue and fairness as the motivations behind digital sales tax legislation. But Rauschenberger said the primary issue for North Dakota is fairness—leveling the playing field for those local brick-and-mortar businesses that must collect and remit sales tax.
“Even when North Dakota revenue was coming in a lot more quickly when we had the influx of oil activity, we still were pressing this issue,” he said. “It wasn’t because we were short on revenue or needed that additional revenue. We’ve always been supportive of the federal government allowing the states to force collection of online sales because of the fairness issue.”
And with software available to retailers, Rauschenberger said that remote sellers aren’t facing the same burdens with collecting and remitting sales tax. For example, certified service providers (CSP) under the Streamlined Sales and Use Tax Agreement—of which North Dakota is a member—can handle the sales and use tax computations for those retailers registered through the Streamlined system.
With North Dakota’s economic threshold in S.B. 2298, the “truly small operators won’t be impacted,” Rauschenberger said. He added that for those medium and large retailers, the sales volume is worth the effort to utilize a CSP through the Streamlined system or individually manage collection and remittance through software.
Although North Dakota’s digital sales tax is effectively delayed, practitioners advise that remote retailers remain ready for a future change in federal precedent.
“Remote sellers that deliver over $100,000 of tangible personal property or make 200 or more sales transactions into the state should be prepared if the Supreme Court addresses Quill,” according to an April 11 tax alert from RSM US LLP. “However, it is not clear whether the Supreme Court would accept a Quill challenge—the South Dakota law is currently the most likely candidate for review.”
Legal challenges also are advancing in Alabama and Tennessee over their economic nexus rulemaking.
Almost 20 states, through administrative rule or statute, have pushed for economic nexus models this year. Wyoming’s H.B. 19, which also established a $100,000/200 transactions threshold, became law in early March. Bills in Arkansas, Georgia, Mississippi, New Mexico and Utah have died this legislative session, many falling victim to internal politics.
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Text of S.B. 2298 is at http://src.bna.com/nP2.
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