We should all be well aware of South Dakota Senate Bill 106 [CTL1], which Governor Daugaard signed into law on March 22, 2016, that specifically challenges the longstanding bright line nexus rule affirmed inQuill. SB 106 provides that remote sellers must collect sales tax if their annual sales into the state exceed $100,000, or if the remote seller made sales to South Dakota residents by conducting at least two hundred separate transactions with South Dakota customers irrespective of any physical presence in the state. This sales tax nexus threshold is the most aggressive that any state has adopted to date.

SB 106 also includes language that allows South Dakota to sue any remote sellers that do not comply with the new statute directly in court. That is, South Dakota will not conduct an audit of those not in compliance, it will immediately sue and bring the defendants to South Dakota Circuit Court. To that end, South Dakota began sending out notices within days of the adoption of SB 106 to remote sellers that may have more than $100,000 in sales into the state.

A number of our clients have already received these notices; we suspect that the state is sending them to every online seller with a significant amount of online sales not currently filing in South Dakota. These notices require that the remote seller register with the state and begin collecting tax before the end of April. Failure to do so, according to the notice, may result in the state initiating legal action against the remote seller without undertaking any other administrative process. The notices also note that the legal action brought by the state will not result in any fees, penalties, or retroactive tax liability against the remote seller; instead, if the state is successful, the remote seller will be required to begin collecting tax on a prospective basis. 

Given the unique circumstances of each taxpayer, we have found that there is no uniform answer as to how to respond to South Dakota's extremely aggressive stance on sales tax nexus. What is clear, however, is that the legality of SB 106 will be decided by the South Dakota courts sooner rather than later. Due to the unambiguous conflict between SB 106 andQuill, South Dakota clearly intends to take this case as far as the United States Supreme Court, if it can. However, in addition to the legislation's violation of the Supreme Court's physical presence standard, SB 106 also likely violates taxpayers' Constitutional Due Process rights as well.  In attacking theQuillnexus standard, South Dakota has effectively removed all jurisdictional standards, which we do not think will withstand judicial scrutiny. 

South Dakota, while certainly the most aggressive currently, is not the only state challenging theQuillnexus standard.  Alabama has similarly been pursuing taxpayers, and its regulations attackingQuillare also likely to be the subject of litigation. Other states currently have legislation pending that establish nexus standards that do not require a physical presence. Whether any of these cases make their way to the Supreme Court remains to be seen; however, we fully anticipate a significant increase in litigation regarding these developments over the coming years.