South Dakota Clashes With Online Retailers in Sales Tax Battle

In a legal battle that could influence existing federal tax policy, the State of South Dakota is suing four big internet retailers to force them to comply with the state’s new remote seller sales tax law.

On March 22, South Dakota Gov. Dennis Daugaard signed Senate Bill 106 into law. It requires out-of-state online retailers that sell a minimum of $100,000 or complete at least 200 separate sales transactions annually within South Dakota to register with the state and collect and remit sales tax, Internet Retailer reports.

The remote seller sales tax law, which takes effect May 1, is an effort by the State of South Dakota to level the playing field for the state’s brick-and-mortar retailers and big online retailers.

According to the complaint, the state is missing out on $48 million to $58 million a year in state and municipal tax revenues from online sales by out-of-state retailers, the Washington Times reported.

According to IR, South Dakota is suing Newegg Inc., Overstock.com Inc., Systemax Inc. and Wayfair LLC to get them to comply with the new law.

South Dakota’s legal battle with online retailers could end up in the U.S. Supreme Court because the state’s new law appears to conflict with the high court’s 1992 ruling in Quill Corp. v. North Dakota, which declared that states can impose sales tax obligations solely on companies with a physical presence in a state.

(Amazon, which collects sales tax in 28 states, but not in South Dakota, was not included in the lawsuit, IR noted.)

“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,” Stephen P. Kranz, a tax attorney with McDermott Will & Emery LLP, told Bloomberg BNA.

Kranz said more than 12 state legislatures have enacted laws that challenge the 1992 Quill decision. He said the number of states challenging the ruling will continue to grow this year.

Matt Strathman, associate general counsel at Newegg told IR that he believes South Dakota’s new law is unconstitutional.

“This lawsuit is a direct attack on established U.S. Supreme Court precedent that retailers around the nation have relied upon for decades,” Strathman explained.

South Dakota sent notices to 206 online retailers that it believes meet the criteria laid out in the law. So far, just 40 of those retailers registered and agreed to collect the sales tax, IR reports.

Two trade associations for catalog and online retailers — American Catalog Mailers Association and NetChoice — have filed suit against South Dakota, calling the state’s new sales tax law “blatantly unconstitutional,” according to a press release.

“South Dakota is showing wanton disregard for established Supreme Court precedent,” said Hamilton Davison, president and executive director of the ACMA. “This statute is blatantly unconstitutional and flies in the face of law that has been settled for decades. States simply don’t have the authority to pick and choose the Supreme Court decisions they will follow.”

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