States Hungry For Online Sales Tax Looking At Challenge To South Dakota Law

Image courtesy of Mike Seyfang

Amazon now collects sales tax in more than half the states, but that still leaves a substantial portion of the country not paying taxes on their purchases. Even in states where Amazon is collecting taxes, some other online retailers say they don’t have to collect taxes because they have no physical presence in the state. A new South Dakota law is a direct attack on these companies, and if it stands up to legal scrutiny it could have nationwide implications.

The basis for the current rationale for many online sales tax rules — that a retailer must collect tax if it has a physical presence in a state — comes from a 1992 Supreme Court ruling involving the other Dakota.

In Quill Corp. v. North Dakota, the state tried to argue that Quill — a mail-order office supply company — should have collected sales tax on purchase in the state because it provided software to customers that allowed them to place orders and check Quill’s inventory.

The Supreme Court disagreed, saying that the software didn’t create a nexus sufficient enough to allow the state to require that Quill collect taxes.

(This is where we pause to remind you that if your state has a sales/use tax, you are obligated to pay it. States will occasionally go after individual consumers that they know made purchases from out-of-state sellers, but it’s preferable to collect all the sales tax from the original seller, so many online purchases go untaxed.)

Given that a retail website is effectively no different than that software — a website might look nicer than the Quill floppy disk, but both let you see if something is in stock and place an order — states have generally passed laws that comply with the Quill SCOTUS ruling.

Then in April, South Dakota governor Dennis Daugaard signed SB 106 [PDF], which throws out any sort of physical presence requirement and instead uses sales revenue and volume to argue for the existence of a nexus.

Rather than worry about whether or not a distribution center or an affiliate counts as a physical presence, SB 106 says you must collect sales tax if your gross revenue from the sale of “tangible personal property, any product transferred electronically, or services delivered” into South Dakota exceeds $100,000.

Similarly, if someone’s sales revenue doesn’t reach that mark, but they nonetheless make at least 200 transactions in the state, then they too are required to collect sales tax.

South Dakota is one of a handful of states that doesn’t have income tax, and the text of SB 106 makes no attempt to gloss over the fact that revenue from the online sales tax is needed.

“The inability to effectively collect the sales or use tax from remote sellers… is seriously eroding the sales tax base of this state, causing revenue losses and imminent harm to this state through the loss of critical funding for state and local services,” reads the statute. “The harm from the loss of revenue is especially serious in South Dakota because the state has no income tax, and sales and use tax revenues are essential in funding state and local services.”

Almost immediately after the law passed, the American Catalog Mailers Association and online retail trade group NetChoice filed suit [PDF] in a South Dakota court, seeking to have the law blocked.

“Because SB 106 violates the Quill physical presence requirement, usurps the role of Congress in regulating interstate commerce, and unlawfully expands the State’s taxing authority over companies, individuals, and organizations located throughout in the United Sates, and potentially the world, based solely on their having customers in South Dakota, the law is plainly unconstitutional,” reads the complaint.

Considering the precedent set by Quill, it’s likely that the state will not prevail in the lower court, or in the state appeals courts. As Pew’s Stateline blog points out, this is a law that was written with the goal of ultimately forcing the Supreme Court to revisit Quill, a ruling that Justice Anthony Kennedy recently stated was “questionable even when decided.”

Much has changed since that 1992 ruling. At the time, mail-order was a relatively small subset of the retail sphere, so the amount of uncollected sales tax was not crippling to governments that relied on the tax revenue. E-commerce is now an integral part of the retail landscape, but the sales tax issue is applied unevenly and in a patchwork fashion.

At the same time, calculating and collecting sales tax has become less onerous. Remote sellers no longer need to pull out a binder with all the various local sales tax rates to determine what to charge. For most sellers, this information can be figured out when the customer enters a shipping address.

“The argument against it is that it will hurt the small online sellers,” J. Craig Shearman of the National Retail Federation tells Stateline. “That might have been true in 1992, but that was a generation ago. As the saying goes, there’s an app for that.”

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