On March 22nd, South Dakota Governor Daugaard signed into law Senate Bill 106 (S.B. 106), the passage of which may be the ultimate vehicle to challenge Quill1 at the U.S. Supreme Court. With landslide support in the South Dakota Senate and House of Representatives, S.B. 106 adopts an economic nexus standard for sales tax remittance and allows for an expedited challenge by the state. Because the bill will take effect on “the first day of the first month that is at least fifteen calendar days from the date” it is signed by Governor Daugaard,2 the bill will be effective May 1, 2016.
Economic Nexus for Sales Tax Remittance
Beginning May 1, 2016, S.B. 106 will require a remote seller to remit sales tax on its sales of tangible personal property, products transferred electronically, and services for delivery into South Dakota, if the remote seller meets either of the following criteria in the previous calendar year or the current calendar year:
- The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000; or
- The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.3
S.B. 106’s economic nexus standard for sales and use tax is similar to state economic nexus standards for corporate income tax. For example, Colorado law states that substantial nexus for the corporate income tax is established if the taxpayer exceeds any of the following thresholds during the tax period: (1) $50,000 of property; (2) $50,000 of payroll; (3) $500,000 of sales; or (4) 25% of total property, total payroll, or total sales.4
Speedy Route to a Final Decision
In order to prevent a delay in addressing the constitutionality of S.B. 106, the law contains an expedited judicial review mechanism. The Act permits the state to bring a declaratory judgment action in any South Dakota circuit court against “any person [that South Dakota] believes meets the criteria of section 1 of [S.B. 106] to establish that the obligation to remit sales tax is applicable and valid under state and federal law.”5 The circuit court is required to act “as expeditiously as possible,” and the action must “proceed with priority over any other action presenting the same question in any other venue.”6 An appeal from the circuit court may be made only to the South Dakota Supreme Court.7 Further, South Dakota may bring the declaratory judgment action regardless of whether it “initiates an audit or other tax collection procedure.”8 Thus, S.B. 106 does not require South Dakota to attempt to collect sales tax from a remote seller under the Act’s economic nexus standard prior to bringing the declaratory judgment action.
The Road to Review
The Legislature provided taxpayers with some protections by delaying the enforcement of S.B. 106. The law provides that enforcement will be “stayed by the courts until the constitutionality of [S.B. 106] has been clearly established by a binding judgment, including, for example, a decision from the Supreme Court of the United States abrogating its existing doctrine, or a final judgment applicable to a particular taxpayer.”9 The filing of the declaratory judgment action will operate as an injunction during the pendency of the action, prohibiting South Dakota from enforcing the sales tax remittance obligation “against any taxpayer who does not affirmatively consent or otherwise remit the sales tax on a voluntary basis.”10Further, South Dakota is barred from applying S.B. 106 retroactively.11
S.B. 106’s delayed enforcement provision may undermine one of the U.S. Supreme Court’s rationales of the physical presence standard in Quill: stare decisis and reliance interests.12
A Quill-ver Full of Arrows
S.B. 106 is part of a recent trend of state efforts to challenge Quill in lieu of waiting for federal legislation to be enacted. Recently, numerous states have introduced legislation or enacted regulations that serve to expand sales and use tax nexus standards and reporting obligations in contravention of Quill.13 For example, last fall, Alabama put into place a new sales tax economic nexus standard by regulation that became effective January 1, 2016.14 While it has failed to pass, Utah S. 65 would have required the owner of a selling platform to file quarterly reports with the State Tax Commission stating the name and physical or email address of each non-collecting seller that used the selling platform during the previous calendar quarter. Additionally, proposed Oklahoma H. 2531 would require marketplace providers to collect and remit sales tax on sales facilitated by it to Oklahoma customers.
As states, including South Dakota, enact legislation that contravenes Quill’s physical presence nexus standard, it becomes more likely that the U.S. Supreme Court will consider whether Quill’s physical presence standard should continue or be abandoned and replaced by some other standard.