South Dakota Special Session to Decide Future of Online Sales Tax (1)

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Ryan Prete

9/12 + 11/1 = $$$?

That is, for South Dakota, a Sept. 12 special session and a bill to circle Nov. 1 for online sales tax collections could be all that stands in the way of the state reaping the benefits of the U.S. Supreme Court’s groundbreaking Wayfair ruling.

South Dakota Gov. Dennis Daugaard (R) on Aug. 30 introduced two bills the special session will consider—including one that would allow the state to require remote sellers to collect and remit sales tax starting Nov. 1—saying the proposed measures “allow the State of South Dakota to benefit from the national tax fairness victory that we led.”

In South Dakota v. Wayfair, the court tossed out Quill Corp. v. North Dakota, the 1992 physical presence threshold for when states could tax remote sales, and suggested strongly that South Dakota’s law would pass constitutional muster.

The court stopped short of formally declaring South Dakota’s law valid in the absence of Quill. A South Dakota circuit court still has to bless the state’s economic nexus model, unless the bills pass—lifting the injunction blocking the state from enforcing its law—and the parties settle.

What About Wayfair?

The e-commerce companies involved in the case—Wayfair Inc., Inc., and Newegg Inc.—are exempted from the bills, however, meaning they would either have to settle with South Dakota or allow the circuit court to decide on the injunction.

Matthew Schaefer, a lawyer with Brann & Isaacson in Lewiston, Maine, who has represented multiple e-retailers, told Bloomberg Tax that Daugaard’s bill “has no effect upon the defendants in the Wayfair case.”

“I expect that discussion between the parties on next steps, in light of the Supreme Court’s decision, will continue,” Schaefer said.

Mark Nachbar, a principal at Ryan LLC in Chicago, told Bloomberg Tax the parties will most certainly settle.

“This will never make it to the circuit court. Both parties will agree to move forward and have Wayfair and the other involved companies move forward with the Nov. 1 start date,” Nachbar said. “This issue is finished, and in my opinion this is something the Supreme Court will never take up again.”

Nachbar said both bills will pass the South Dakota Legislature and act as the “nail in the coffin” for the Wayfair case to all taxpayers except the three e-commerce companies.

Similar litigation is pending in other states, and Bloomberg Tax provides an update on each case below.

The Proposals

The first bill, S.B. 1, seeks to:

  • Remove the injunction against all remote sellers, except the defendants in South Dakota v. Wayfair and clarify how the injunction applies to the defendants.
  • Allow South Dakota to require remote sellers to collect and pay tax starting Nov. 1.
  • Eliminate the state’s ability to sue remote sellers, as it would no longer be necessary.
  • Deem Wayfair litigants exempt under the proposal, leaving the court system to resolve the matter.

The first and last clauses of the bill declare the situation an “emergency.”

The second bill, S.B. 2, would:

  • Define key terms: marketplace, marketplace provider, marketplace seller.
  • Require marketplace providers to collect and pay sales tax on all sales made through the platform if certain thresholds are met.
  • Require marketplace providers to collect and pay sales tax on all sales made through the platform beginning March 1, 2019.
  • Allow marketplace providers to voluntarily comply at any time before March 1, 2019.

S.B. 2 also would create a sales tax license for remote marketplace facilitators like Etsy Inc. and eBay Inc., requiring them to collect and remit the sales tax on behalf of their sellers.

Pending Lawsuits to Follow South Dakota

Similar lawsuits are pending in Ohio, Virginia (over a Massachusetts regulation), Tennessee, and Wyoming.

Nachbar said he is confident that the remaining lawsuits will follow whatever the result is in South Dakota.

An attorney for Crutchfield Corp. in Charlottesville, Va., told Bloomberg Tax Aug. 29 that there has been no update in its litigation with the Massachusetts Department of Revenue.

In Tennessee, a spokeswoman for the state attorney general told Bloomberg Tax that a status conference is scheduled for Sept. 4 in its remote seller case.

Steve DelBianco, president and CEO of NetChoice, told Bloomberg Tax Aug. 29 that its lawsuit in Tennessee is “still pending and we have scheduled discussions.” But regardless of the outcome, the Legislature has to act before collections can be required from remote sellers operating in that state, which won’t happen before January 2019, he said. The Tennessee Legislature is scheduled to reconvene Jan. 8, 2019.

In Indiana, remote sellers struck a deal with state regulators allowing for enforcement of the state’s 7 percent sales tax on online transactions starting in October.

States Ahead of South Dakota

If South Dakota enacts S.B. 1, the state’s economic nexus model would take effect Nov. 1. However, there are numerous states with economic nexus models that will take effect or have already taken effect before Nov. 1, including:

  • Alabama (Oct. 1, 2018), $250,000 in in-state sales;
  • Hawaii (July 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Illinois (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Indiana (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Kentucky (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Massachusetts (Oct. 1, 2017), 100 transactions and $500,000 in in-state sales;
  • Michigan (Oct. 1, 2018) 200 transactions or $100,000 in in-state sales;
  • Minnesota (Oct. 1, 2018), 100 transactions or $100,000 in in-state sales in at least 10 transactions;
  • Mississippi (Dec. 1, 2017), $250,000 in in-state sales;
  • North Dakota (Oct. 1, 2018, or 60 days after a remote retailers meets the state’s threshold—whichever is later), 200 transactions or $100,000 in in-state sales;
  • Ohio (June 30, 2017), $500,000 in in-state sales;
  • Oklahoma (July 1, 2018), $10,000 in in-state sales;
  • Pennsylvania (April 1, 2018), $10,000 in in-state sales;
  • Rhode Island (Aug. 17, 2017), 200 transactions or $100,000 in in-state sales;
  • Vermont (July 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Washington (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Wyoming (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales.

Request Daily Tax Report: State