By Mike Herold
April 04, 2017
A ruling in a recent South Dakota court case will likely prove beneficial to taxpayers. The State of South Dakota v. Wayfair, Inc., Overstock.com, Inc., and NewEgg, Inc. case (SD v Wayfair, Inc.) challenged the physical presence requirement of Quill Corp. v. North Dakota, which prohibited requiring out-of-state retailers to collect sales taxes on behalf of a state without some minimum connection with that state.
Quill Corporation, an out-of-state office supply company that sold products to North Dakota customers, was not collecting sales tax on such sales. North Dakota audited Quill and assessed sales tax. Quill appealed to the United States Supreme Court claiming they were not required to collect sales tax since they did not have a presence in North Dakota. The U.S. Supreme Court agreed with Quill that North Dakota cannot impose a sales tax requirement on an out-of-state retailer who does not have a substantial presence in the state. Substantial presence is defined as physical presence.
South Dakota Sales Tax
South Dakota law requires sales tax to be collected on sales made in the state under one of the following circumstances:
The South Dakota trial court held in the SD v. Wayfair, Inc. case that South Dakota may NOT impose sales tax collection and remittance obligations on sellers who do not have an in-state presence in accordance with Quill requirements. To have an in-state presence, according to the Quill decision, a business must be physically present in a state, with either a physical location, a warehouse or employees. Only then could the business be required to collect sales and use tax on behalf of the state.
Businesses without a physical location, a warehouse or employees in South Dakota, but making sales in the state, do not need to collect and remit sales tax. The case has been appealed to the South Dakota Supreme Court. If the South Dakota Supreme Court decides not to hear the case, the state could appeal to the United States Supreme Court. Time will tell, but, it's a hot topic with big impact on business.
Outlook of Quill and South Dakota Rulings
Other states that are in the process of passing (or have passed) similar laws to South Dakota include Arkansas, Indiana, Michigan, New Mexico, South Carolina, Washington and Wyoming. If the South Dakota law is found constitutional, they will be prepared to collect sales tax given the above provisions of more than $100,000 of gross revenue and more than 200 separate sales transactions.
Impact on Your Business
If your business operates in multiple states, without having a physical presence in those states, you could be impacted by the decision of the South Dakota case. Either way, there are considerations and steps to take before registering with a state and collecting and remitting sales tax. A nexus study, used to analyze your business activities and presence in a state to determine if sales or income tax should be filed, may need to be considered.