An unusual pairing in South Dakota: the higher the remote sales tax revenue, the lower the tax on food – Wacky Tax Wednesday

A bill under consideration in South Dakota would link the sales tax rate on food to the amount of sales tax revenue collected and remitted by remote sellers. For some reason, this makes me think of pairing wine with a meal.

Tax on food sales

Currently, food and food ingredients are subject to the full rate of state sales tax in South Dakota — 4.5 percent — plus applicable local taxes. This is unusual. South Dakota is one of few states to apply any tax to sales of food and food ingredients, and one of just seven (along with Alabama, Hawaii, Idaho, Kansas, Mississippi, and Oklahoma) that taxes grocery items at the full rate.

Tax on remote sales

South Dakota is also one of a growing number of states attacking the issue of untaxed remote sales. As of May 1, 2016, the state’s economic nexus law (SB 106) requires remote sellers with no physical location in South Dakota to collect and remit sales tax if their gross revenue from South Dakota sales exceeds $100,000, or they make 200 or more separate sales transactions in the state.

The law is currently under an injunction because it’s in litigation. It directly challenges the physical presence standard upheld by the Supreme Court of the United States in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that a state cannot tax a business that doesn’t have a physical presence in the state. After speeding through state courts, the case is awaiting review by the Supreme Court, which agreed to reconsider Quill in South Dakota v. Wayfair, Inc. Arguments are tentatively set for April and a decision is expected in June.

There’s no way of knowing what the court will decide. It could overturn Quill’s physical presence standard and let South Dakota’s tax on remote sales stand, which could allow other states to tax remote sales as well. It could uphold the physical presence standard, or do something else.

In the meantime, state budgets must be made.

Cabernet Sauvignon and steak, sales tax revenue and food sales tax

While awaiting the Supreme Court decision, South Dakota lawmakers have to do what they do best: legislate.

Under SB 106, any sales tax revenue remitted by remote sellers must be used to reduce other taxes. Accordingly, current law stipulates that the sales tax rate on certain items be lowered by 0.1% for each $20 million in remote sales tax revenue collected; however, the rate on such items is not to drop below 4 percent.

SB 159 proposes amending the law to decrease the rate by a full 1 percent each year that remote retailers remit an additional $10 million of net revenue. In addition, it would limit the sales tax reduction to sales of food, and remove the 4 percent minimum tax.

The measure has the backing of many Democratic lawmakers, though, as yet, not one Republican. It’s also supported by Bread for the World, a Christian nonprofit working to end hunger at home and abroad. In a brochure supporting the bill it calls SB 159 “the logical way to lift SD’s food tax burden,” noting that, for 14 years, South Dakotans have been paying “more grocery tax than before in anticipation of collecting sales tax on online sales.” It also points out that the state taxes formula and baby food, but not food for horses or pigs.

There have been previous calls to reduce or eliminate the tax on food sales in South Dakota, but no consensus on the matter: When there was a ballot initiative to exempt food from the sales tax in the early 2000s, more than 70 percent of South Dakotans voted against it. In 2012, a measure seeking to gradually decrease the tax on food by a half cent until the rate reached zero failed, as did HB 1216, which proposed simply eliminating the tax on sales of food. That same year, the legislature repealed a program that refunded the sales tax qualifying residents paid on food.

SB 159 isn’t the only possible route to a food sales tax reduction in 2018. HB 1238, introduced January 30, would eliminate the state sales and use tax on most food items and increase the general state sales tax rate from 4.5 percent to 4.85 percent. Sales of alcoholic beverages, candy, dietary supplements, and soft drinks would remain taxable under HB 1238, as would food sold through vending machines.

In other words, South Dakota could reduce the tax on food no matter what the Supreme Court decides on South Dakota v. Wayfair, Inc. Or, it could not. This makes it tricky for businesses in South Dakota to plan — kind of like buying wine for a meal without knowing what will be served.

Learn more about state efforts to tax remote sales at the Avalara Resource Center.