On March 22, 2016, Governor Dennis Daugaard signed into law SB 106, making South Dakota the second state (after Alabama) to establish an economic nexus standard for sales and use tax collection purposes. As acknowledged by the legislature, the new law directly exceeds the currentphysical presence standard for use tax collection, as articulated by the US Supreme Court (Court) in the 1967 National Bellas Hess¹ and the 1992 Quill decisions.²

Under the new law, and effective May 1, 2016, a seller that sells tangible personal property, products transferred electronically or taxable services (collectively, goods) for delivery into South Dakota must follow all applicable sales and use tax collection and remittance procedures as if the seller had a physical presence in the state, provided that the seller meets either of the following in the previous calendar or the current calendar year: (1) the seller's gross revenue from delivery of such goods into South Dakota exceeded $100,000; or (2) the seller sold such goods for delivery into South Dakota in 200 or more separate transactions.

Provisions of SB 106 include an appeal process and procedures that direct the courts to act as expeditiously as possible in regard to taxpayer challenges to these new provisions, and provide that an appeal of a circuit court ruling will be made directly to the South Dakota Supreme Court. Further, a filing of a declaratory judgment action by the state operates as an injunction during the pendency of the action, prohibiting state entities from enforcing the collection and remittance requirements against any taxpayer that does not affirmatively consent to remit the tax on a voluntary basis. If an injunction is lifted or dissolved, the state will assess and apply the collection and remittance requirement on that date going forward (i.e., no obligation to remit the sales tax will be applied retroactively).

Further, SB 106 lists the legislature's reasoning for enacting these provisions, which include the state's inability to effectively collect sales or use tax on transactions involving remote retailers, the revenue losses to the state from this inability, the structural advantages of remote sellers over instate, brick-and-mortar retailers, the benefit remote sellers receive from the state's market (e.g., economic and infrastructure), the decrease in the costs of sales tax collection and reporting due to modern computer software, Justice Kennedy's concurring opinion in Direct Marketing Association (DMA),³ and the urgent need for the US Supreme Court to reconsider the physical presence nexus requirement. South Dakota's new law is modeled after a similar model law offered up by the National Council of State Legislatures (NCSL).⁴

Implications

Given that the jurisdictional standards set forth in the new law exceed current Commerce Clause standards for sales and use tax collection purposes as established by the US Supreme Court, it is likely that the law will face legal challenges. More significantly, however, is the possibility that the Court might once again take up the issue and this law might be the vehicle for it to reconsider the physical presence test in light of Justice Anthony Kennedy's concurring opinion in DMA, indicating that it is "unwise to delay any longer a reconsideration of the Court's holding in Quill." Obviously, if the Court were to hear such a challenge, it may ultimately affect how nexus is determined for remote sales. Similar state action throughout the early 1980s (the so-called anti-Bellas Hess laws) eventually led to the 1992 Quill decision. The economic landscape is far different today, however, particularly due to the dramatic rise in remote sellers using the global reach of the Internet. Thus, a similar result (i.e., affirmation of the physical presence standard) is no longer a foregone conclusion.

Finally, it is worth noting that, should a number of states begin to adopt similar requirements, Congress may be forced to act through one of the remote seller nexus bills currently pending in both chambers in order to provide some uniformity.⁵ Given that states are enacting a complex variety of sales and use tax nexus requirements, having Congress enact a national, uniform nexus standard for sales and use tax collection may prove to be a better compliance alternative for remote sellers throughout the US. With Alabama's independent enactment of remote seller nexus rules by regulation, South Dakota's legislative enactment and the NCSL model law, we anticipate accelerated activity by the states in this area in 2016.

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ENDNOTES

¹ National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967).

² Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

³ Direct Marketing Association v. Brohl, 575 U.S. ___, U.S. Sup. Ct., Slip Op. 13-1032 J. Kennedy concurring (March 3, 2015).

⁴ Available on the Internet here (Iast accessed on March 8, 2016).

⁵ See S. 698 "The Marketplace Fairness Act" and H.R. 2775 "The Remote Transactions Parity Act," which would authorize Streamlined Sales Tax Full-Member states, and states that adopt specified simplification provisions to require certain remote seller to collect and remit tax on sales to local customers regardless of whether the seller has in-state physical presence.