State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
________________________________________________________
South Dakota Enacts Legislation Challenging Quill’s Physical
Presence Requirement
On March 22, 2016, South Dakota Governor Dennis Daugaard signed legislation, S.B.
106, requiring certain remote sellers that do not have a physical presence in South Dakota
to collect sales tax on sales made in the state.1 The collection and remittance duties are
triggered if certain gross revenue or transaction thresholds are met. S.B. 106 is noteworthy
not only for clearly laying out South Dakota’s policy reasons for enacting the legislation
but also for expressing the state’s clear directive to quickly produce a test case to challenge
the physical presence requirement stated by the U.S. Supreme Court in Quill Corp. v. North
Dakota.2
Economic Presence
Effective May 1, 2016,3 certain remote sellers that sell tangible personal property, products
transferred electronically, or services for delivery into South Dakota will be subject to the
state’s provisions governing the retail sales and service tax and uniform municipal non-ad
valorem tax and will be required to remit sales tax as if they had physical presence in the
state. Remote sellers will be subject to these new provisions if they meet one of two
thresholds in either the previous calendar year or the current calendar year:
•
•
The seller’s gross revenue from the sale of tangible personal property, any
product transferred electronically, or services delivered into South Dakota
exceeds $100,000; or
The seller sold tangible personal property, any product transferred electronically,
or services for delivery into South Dakota in 200 or more separate transactions.4
Procedures Governing Challenges to Law in State Courts
The legislation allows South Dakota to bring a declaratory judgment action in a circuit
court against any person it believes meets the above criteria to establish that the obligation
to remit sales tax is applicable and valid under state and federal law. The legislation directs
the circuit court to act on the declaratory judgment “expeditiously” and to presume that
1
S.B. 106, Laws 2016.
504 U.S. 298 (1992).
3 S.B. 106 contains an emergency clause providing that “[t]his Act shall be in full force and effect on
the first day of the first month that is at least fifteen calendar days from the date this Act is signed
by the Governor.”
4 S.B. 106, Laws 2016, § 1.
2
.
Release date
March 31, 2016
States
South Dakota
Issue/Topic
Sales and Use Tax
Contact details
Dan Bartholet
Minneapolis
T 612.677.5286
E [email protected]
John Stowe
Minneapolis
T 612.677.5310
E [email protected]
Jamie C. Yesnowitz
Washington, DC
T 202.521.1504
E [email protected]
Chuck Jones
Chicago
T 312.602.8517
E [email protected]
Lori Stolly
Cincinnati
T 513.345.4540
E [email protected]
Priya D. Nair
Washington, DC
T 202.521.1546
E [email protected]
www.GrantThornton.com/SALT
Grant Thornton LLP - 2
the matter can be resolved through a motion to dismiss or a motion for summary
judgment.5
If these motions are not sufficient to resolve the issue, discovery is subject to the limited
and simplified discovery procedures contained in S.D. Codified Laws Sec. 15-6-73(2) and
Sec. 15-6-73(4), which deal with motions for leave of court. Additionally, any provision
authorizing attorney’s fees does not apply to any action, or appeal from any action,
brought under S.B. 106.6
Most importantly, S.B. 106 provides that the filing of the declaratory judgment action by
the state operates as an injunction during the pendency of the action, prohibiting any state
entity from enforcing the sales tax remittance obligations against any taxpayer who does
not comply.7 Furthermore, S.B. 106 contains a provision that allows any appeal to go
directly to the state’s Supreme Court.8 The legislation specifically provides that the
obligation to remit sales tax under S.B. 106 may not be applied retroactively.9 However, if
the injunction provided by S.B. 106 is lifted or dissolved generally, or specifically with
respect to a taxpayer, the state is prospectively allowed to assess and apply the sales tax on
any taxpayer covered by the injunction.10
Finally, the legislation emphasizes that a taxpayer in compliance with S.B. 106 may seek
recovery of taxes, penalties or interest by following established recovery procedures under
the uniform administrative provisions applicable to the sales tax (and certain other state
taxes).11 The refund claim cannot be granted on the basis that the taxpayer lacked physical
presence in South Dakota and complied with S.B. 106 voluntarily while covered by the
injunction provided in S.B. 106.12
South Dakota’s Policy Objectives Explained
S.B. 106 contains a detailed explanation by the legislature on why the bill is vital to South
Dakota’s economy.13 The legislature explains that the inability of South Dakota to collect
sales or use tax from remote sellers has eroded the state’s sales tax base leading to critical
funding shortages for state and local services.14 Because South Dakota has no state income
tax and relies heavily on its sales and use tax, the impact of this revenue loss has hit the
state particularly hard.15 Compounding this issue is the fact that many remote sellers
“actively market sales as tax free or no sales tax transactions.”16
The legislature explains that the erosion of South Dakota’s sales tax base is expected to
continue due to the ongoing popularity of online sales coupled with the structural
5
S.B. 106, Laws 2016, § 2.
Id.
7 S.B. 106, Laws 2016, § 3.
8 S.B. 106, Laws 2016, § 4.
9 S.B. 106, Laws 2016, § 5.
10 S.B. 106, Laws 2016, § 6.
11 S.B. 106, Laws 2016, § 7.
12 Id.
13 S.B. 106, Laws 2016, § 8.
14 S.B. 106, Laws 2016, § 8(1).
15 S.B. 106, Laws 2016, § 8(2).
16 S.B. 106, Laws 2016, § 8(3).
6
Grant Thornton LLP - 3
advantages built into the remote seller model.17 For example, although remote sellers
benefit from the state’s markets, economy and infrastructure, they do not have to deal
with point-of-sale tax collection.18 The legislature points out that, as the harm to the state
from exempting remote sellers from sales tax collection duties has grown, the compliance
costs to remote sellers has decreased with advances in modern computing and software
options.19
Legislation Outlines Direct Challenge to Quill
Citing to Justice Kennedy’s concurrence in DMA,20 the legislature clearly spells out its
desire to directly challenge Quill with this legislation.21 The legislature notes that
“expeditious review” of the constitutionality of S.B. 106 is necessary because the refusal by
remote sellers to collect the sales tax, while reasonable under current federal constitutional
doctrine, is causing “imminent harm” to South Dakota.22 Because existing constitutional
doctrine calls S.B. 106 into question, and thereby places remote sellers in a “complicated
position,” the legislature provides that the obligations created by S.B. 106 would be 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.”23
The legislature specifically states its intent to apply South Dakota’s sales and use tax
obligations “to the limit of federal and state constitutional doctrines” and to clarify that
South Dakota law allows the state to immediately argue in any litigation that constitutional
doctrine should be changed to permit the collection obligations under S.B. 106.24
Commentary
South Dakota’s sales tax nexus legislation marks the most recent challenge to the U.S.
Supreme Court’s 1992 decision in Quill, which held that, for Commerce Clause nexus
purposes, out-of-state retailers must have physical presence in a state before a state can
require the retailer to collect sales tax.
The South Dakota legislation comes on the heels of an Alabama regulation which,
effective January 1, 2016, requires certain out-of-state sellers making retail sales into
Alabama to collect and remit sales and use tax even though such sellers do not have a
physical presence in the state.25 The Alabama regulation appears to be the first instance in
17
S.B. 106, Laws 2016, § 8(4).
S.B. 106, Laws 2016, § 8(4), (5).
19 S.B. 106, Laws 2016, § 8(6).
20 Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015) (Kennedy, J., concurring).
21 “As Justice Kennedy recently recognized in his concurrence in Direct Marketing Association v. Brohl,
the Supreme Court of the United States should reconsider its doctrine that prevents states from
requiring remote sellers to collect sales tax, and as the foregoing findings make clear, this argument
has grown stronger, and the cause more urgent, with time.” S.B. 106, Laws 2016, § 8(7).
22 S.B. 106, Laws 2016, § 8(8), (9).
23 S.B. 106, Laws 2016, § 8(10).
24 S.B. 106, Laws 2016, § 8(11).
25 ALA. ADMIN. CODE R. 810-6-2-.90.03. For a discussion of this regulation, see GT SALT Alert:
New Alabama Regulation to Require Out-of-State Sellers to Collect Sales and Use Tax Contrary to
Supreme Court Precedent.
18
Grant Thornton LLP - 4
which a regulation promulgated by a state tax authority contradicts the Quill decision by
requiring out-of-state sellers to collect and remit sales taxes even though they may not
have actual physical presence in the state.
However, neither the enactment of South Dakota’s legislation nor the promulgation of
Alabama’s regulation may be unique for much longer. As of the middle of March, 35 sales
tax nexus bills have been introduced by state legislatures in their 2016 legislative sessions,
addressing the sales and use tax collection and remittance requirements of remote sellers in
various ways.26 Many of these bills have made significant progress in their state
legislatures.27
The flurry of activity at the state level can be attributed to the lack of action at the federal
level, Justice Kennedy’s request in DMA28 that the “legal system should find an
appropriate case for this Court to reexamine Quill and Bellas Hess,”29 and the substantial
amounts of tax revenue lost to sales by remote sellers.
Alabama’s promulgation of a regulation in late 2015 to challenge Quill rather than engaging
in an effort to enact legislation may have reflected the difficulty that proponents might
have faced using the legislative process at that point in time. Things have shifted markedly
in a span of less than a year, as reflected by the relative ease with which the South Dakota
legislation was passed. Sen. Deb Peters, former president of the Streamlined Sales Tax
Governing Board and sponsor of S.B. 106, had tried for years to pass legislation imposing
collection and remittance duties on remote sellers with little success.30 However, in what
may be a reflection of the current climate on this issue in the wake of Justice Kennedy’s
comments in DMA, S.B. 106 faced little opposition in both the South Dakota House and
Senate.31
S.B. 106 is notable for its undisguised desire to quickly produce a South Dakota case
challenging Quill in light of the state’s declared emergency in this area. Nearly half of the
legislation is made up of language setting forth the state’s legislative intent and how the
state would proactively litigate the issue upon discovery of a noncompliant business.
However, certain things are beyond South Dakota’s control. Even if a test case were to
emerge in South Dakota, barring federal legislative action, the U.S. Supreme Court would
be the sole arbiter in determining whether the physical presence standard in Quill should
be eliminated. This may prove challenging given that 2016 marks both an election year and
26
Liz Malm, Update: What’s New in the World of Sales Tax Nexus Legislation?, MULTISTATE INSIDER,
March 17, 2016.
27 Id.
28 Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015) (Kennedy, J., concurring). For a discussion
of this case, see GT SALT Alert: U.S. Supreme Court Holds Challenge to Colorado’s Sales and Use
Tax Notice and Reporting Requirements Not Barred by Tax Injunction Act.
29 National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967).
30 Maria Koklanaris, South Dakota Governor Signs Nexus Bill, Other Sales Tax Changes, TAX ANALYSTS
STATE TAX TODAY, March 24, 2016. “After trying for years to get a bill passed that would expand
the definition of nexus to require remote sellers to collect and remit sales tax, Peters shepherded the
measure through this time with virtually no obstacles. The governor had said from the outset that
he would sign such a bill if it reached his desk. It passed the Senate 33 to 0 and the House 64 to 2.”
31 Id.
Grant Thornton LLP - 5
the beginning of a potentially contentious nomination process to fill the empty seat created
by Justice Scalia’s death.
________________________________________________________
The information contained herein is general in nature and based on authorities that are subject to change.
It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by
Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific
circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant
Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant
Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that
could affect information contained herein. No part of this document may be reproduced, retransmitted or
otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying,
facsimile transmission, recording, re-keying or using any information storage and retrieval system without
written permission from Grant Thornton LLP.
This document supports the marketing of professional services by Grant Thornton LLP. It is not written
tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject
of this document should contact Grant Thornton or their tax advisor to discuss the potential application of
this subject matter to their particular facts and circumstances. Nothing herein shall be construed as
imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter
addressed.