South Dakota Internet Tax: Sue Me, Sue You

There’s a new Internet sales tax in South Dakota that requires certain remote retailers to collect and remit tax on sales to South Dakota consumers. Yet before the law officially took effect on May 1 of this year, a handful of businesses decided to not comply with it. In response, the state of South Dakota is seeking declaratory judgment action.

Sue you

The defendants in the case are Newegg Inc. (California), Overstock.com Inc. (Utah), Systemax Inc. (New York), and Wayfair Inc. (Massachusetts). At least one of the companies, Overstock.com, is no stranger to lengthy legal battles over Internet taxes. That’s good, because South Dakota is prepared to go all the way to the United States Supreme Court to enforce its law.

The summary of the case explains it succinctly:

“The state—through this declaratory judgment action—seeks a determination that it may require Defendants to collect and remit state sales tax on sales of tangible personal property and services for delivery into South Dakota. The State acknowledges that a declaration in its favor will require abrogation of the United States Supreme Court’s decision in Quill. Corp. v. North Dakota, 504 U.S. 298 (1992), and ultimately seeks a decision from the United States Supreme Court to that effect in this case.”

The case file further notes that declaratory judgment is merited if the facts of a case indicate imminent conflict. The state holds that, in this case, “The conflict between the State and the Defendants is not only imminent but present: This suit will determine whether or not Defendants must collect and remit state sales tax the day after it is decided.”

Sue me

Meanwhile, the state of South Dakota is being taken to court over the new Internet sales tax law. In announcing their legal challenge, the American Catalog Mailers Association (ACMA) and NetChoice (trade association of ecommerce and online consumers) said, “The state of South Dakota’s new Internet sales tax mandate… is an unconstitutional expansion of state tax powers and directly conflicts with precedent set by the Supreme Court of the United States.”

Lengthy legal battle

Swift resolution of this issue is unlikely. For one, both South Dakota and the retailers opposed to the South Dakota law have legitimate points, concisely presented in the legislation itself (SB 106):

• South Dakota is dependent on sales tax revenue; sales tax revenue is eroding because remote sales are growing and most remote retailers do not collect tax.
• Current constitutional doctrine calls the law into question, thereby putting “remote sellers in a complicated position.”

For two, all parties involved in this case are prepared to argue their points in front of the Supreme Court — and many judges stand between that day, if it arrives, and now.

Another option

Not all businesses have the appetite for lengthy legal battles. Blue Nile, which also opposes the new remote sales tax, is taking a different approach: It has stopped doing business with South Dakota. As explained by a spokesman for the online jeweler:

“Unfortunately, South Dakota’s law is in direct contradiction to federal law and we made the difficult decision to temporarily suspend shipping to South Dakota until this unconstitutional law can be addressed.”

Other businesses, such as the Florida-based department store chain Bealls Inc., may follow suit. But some will comply with the law. According to the South Dakota Department of Revenue, at least 40 businesses have already registered to collect the tax.

On hold

Right now, however, the point is moot. When South Dakota filed the declaratory judgment action with the Sixth Circuit Court, it triggered an injunction. All state entities are prohibited from enforcing the remote seller compliance law “against any taxpayer who does not affirmatively consent or otherwise remit the sales tax on a voluntary basis.”

Nonetheless, this issue will not just fade away. Many states are making concerted efforts to obtain remote sales tax revenue. If South Dakota is shot down, other states will take its place. Alabama is already on deck, just waiting for Amazon or another large Internet business to sue it over its remote sales tax law. And similar policies are under consideration in other states, like Oklahoma.

Federal solution

Resolution could arrive from federal lawmakers instead of the courts. Three remote sales tax bills are awaiting consideration on Capitol Hill, and a vote has been promised for this year. One way or another, this issue will come to a head.

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