On June 21, 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, overturning the physical presence standard espoused in Quill v. North Dakota[1], holding that the respondents had established substantial nexus in this case through “extensive virtual presence.” This case stemmed from a 2016 bill that South Dakota passed which requires online sellers without a physical presence in South Dakota to collect and remit South Dakota sales tax. The law applies to online sellers with more than $100,000 in sales to South Dakotans or 200 or more transactions, and is a departure from the Constitutional Commerce Clause and Due Process protections for out-of-state businesses.

Prospective Compliance

The obligations created by the 2016 South Dakota sales tax economic nexus law were appropriately stayed by the courts until the constitutionality of the law has been clearly established by the Court. The Court cautioned that other Commerce Clause and Due Process concerns could conceivably invalidate the state’s attempts to impose sales tax collection responsibilities on remote sellers, and remanded the case to South Dakota’s high court for consideration of those issues.

South Dakota’s Pre-June 2018 economic nexus standard has not been fully ruled constitutional in a binding decision, however, South Dakota will likely enforce its economic nexus regime prospectively for remote online sellers who have made sales to South Dakota customers. There is uncertainty as of today’s date on whether or not South Dakota will enforce remote seller nexus standards on a retroactive (to Wayfair) basis, although due to language in the South Dakota statute, retroactive (retroactive to June 22, 2018) enforcement appears to be unlikely. Included here is an excerpt from South Dakota Department of Revenue’s website:

“While the U.S. Supreme Court ruled in South Dakota’s favor, the South Dakota Department of Revenue is currently unable to enforce 2016’s remote seller taxation law due to the State Circuit Court’s injunction that is still in place. The U.S. Supreme Court’s decision set aside the South Dakota Supreme Court’s decision and the case will return to the South Dakota court system for further legal proceedings.

It is expected the injunction will soon be lifted, requiring sellers meeting certain thresholds of sales or transactions into South Dakota to get a sales tax license. The South Dakota Department of Revenue is partnering with other states and the business community to ensure the transition is as smooth as possible once the law takes effect.”

The probable timeline for the Courts’ decisions post-Wayfair are that the U.S. Supreme Court will return the case to the South Dakota Supreme Court in July 2018. The South Dakota Supreme Court will return the case to the South Dakota Circuit Court in August 2018. The South Dakota Circuit Court is expected to dissolve the statutory injunction in September 2018. At that point, the Court will decide how the nexus regulations will be enforced. It is expected South Dakota will take a prospective approach to enforcement of the economic nexus sales tax regulations.

A number of states already have economic nexus laws in place for online retailers, or have onerous use tax reporting requirements for remote sellers. Several states have offered guidance regarding the impact of the Wayfair decision. Businesses who prepare themselves for future implementation of new multi-state sales and use tax reporting will benefit from minimizing tax exposure and risk, as well as positioning themselves to be prepared for the internal process of moving into compliance from an IT perspective, identifying potential service providers, and controlling compliance expenses.

Contact Us

The Barnes Dennig Tax Team will keep you informed of any updates and changes as they occur, please reach out if you have any questions about the  changes above, and a member of the tax team will contact you.

[1] South Dakota V. Wayfair, Inc., Dkt. No. 17-494 (U.S. S. Ct. June 21, 2018).