South Dakota’s Economic Nexus Law for Sales and Use Tax is Unconstitutional

South Dakota Circuit Court has recently ruled that the state’s economic nexus law for sales and use tax is unconstitutional, in light of the US Supreme Court’s 1992 ruling in Quill, which formalized the physical presence requirement. South Dakota v. Wayfair Inc., Overstock.com, Inc. and Newegg Inc., No. 32CIV16-000092 (S.D. Cir. Ct., 6th Cir., March 6, 2017).

By way of background, in 2016, South Dakota enacted a law which required a remote seller selling tangible personal property, electronically transferred products or taxable services for delivery into South Dakota to register, collect and remit South Dakota sales taxes on those sales as if the seller had a physical presence in the state. For more details of the law see:

• https://weaver.com/blog/update-south-dakota-remote-seller-nexus-law
• https://www.weaver.com/blog/south-dakota-enacts-sales-and-use-tax-law-physical-presence-not-required

The Court stated that the statute: “by requiring remittance of sales tax by sellers who ‘do[] not have a physical presence in the state,’ fails as a matter of law to satisfy the physical presence requirement that remains applicable to state sales and use taxes under Quill and its application of the Commerce Clause (U.S. Const., Art. I, s. 8, cl. 3).”  

Take Away

Provisions of the South Dakota law includes an appeal process and procedures that direct the courts to act as expeditiously as possible in regard to taxpayer challenges and provide further that an appeal of a circuit court ruling must be made directly to the South Dakota Supreme Court. Should the South Dakota Supreme Court rule on the court’s decision before the end of the year, an expected appeal to the US Supreme Court could be filed in the October 2017 term.

Note: A similar challenge to Alabama’s economic nexus regulation is currently before that state’s Tax Appeals Tribunal, and is not expected to be heard until later in 2017. A challenge to Tennessee’s economic nexus regulation was filed in February 2017.