Noem wins chance to become South Dakota’s first female governor. Will her plan to tax online sales succeed, too?

With four times more cattle than people, South Dakota isn’t often seen as a linchpin in national politics. That’s why it’s so interesting that the Mount Rushmore State is at the forefront of the national online sales tax debate, both at home and in Washington, D.C.

Precedent holds that a state cannot impose a tax collection obligation on a business unless that business has a physical presence in the state. Physical presence nexus was upheld by the Supreme Court of the United States in Quill Corp. v. North Dakota in 1992, several years before the birth of ecommerce.

While many states oppose the physical presence limitation (Quill stemmed from North Dakota’s attempt to tax sales by an out-of-state catalog seller), not all think the court is the best venue for change. Some believe Congress should intervene and grant states the authority to tax remote sales (or definitively prohibit interstate sales tax).

Is one path better than the other? The two people who just spent months vying to become South Dakota’s Republican gubernatorial candidate seem to think so. Will the path forward change now that there’s a winner?

Gubernatorial candidates vied over who has best solution for untaxed online sales

Both Attorney General Marty Jackley and U.S. Congresswoman Kristi Noem have worked for years to expand South Dakota’s right to tax remote sales, but they’ve taken different approaches. Jackley has pursued the issue in the courtroom. Noem has done the same on Capitol Hill.

Jackley in the Supreme Court

As attorney general, Jackley has led South Dakota’s assault on Quill’s physical presence limitation. His efforts landed him at the Supreme Court, where on April 17, 2018, he presented the oral argument on behalf of the state in South Dakota v. Wayfair, Inc. — a case that could abrogate the court’s decision in Quill and allow the state to enforce its 2016 economic nexus law. The court is expected to issue a ruling this month.

Jackley’s efforts in this area were a focus of his gubernatorial campaign, throughout which he stressed the need for marketplace fairness: “[O]ur argument is firmly rooted in the idea that out-of-state internet retailers like Amazon, Wayfair, and Overstock should have the same sales tax requirements as our South Dakota businesses.”

His opponent’s position was a talking point, too. He’s called out the “critics [i.e., Noem] who say that winning this case for South Dakota will lead to catastrophe.” The link is his, and it leads to Noem’s statement on the Supreme Court’s acceptance of South Dakota v. Wayfair, Inc.

Noem in the House

Noem thinks Congress needs to get involved, even if Jackley wins his case: “[T]he need for legislative action on e-fairness is more urgent than ever before. If the Supreme Court rules in South Dakota’s favor, it could become a marketplace free-for-all.”

She’s referring to the fact that there are thousands of taxing jurisdictions in the United States. If South Dakota wins its case, she notes, South Dakota businesses “could be immediately responsible for collecting sales taxes from buyers and then remitting it to states.”

Fortunately, she notes, “My legislation provides a necessary fix.”

South Dakota’s one and only Congressional representative is a primary sponsor of the Remote Transactions Parity Act of 2017 (H.R. 2193), which would authorize certain states to tax remote sales. There are caveats: States must adopt “minimum simplification requirements relating to the administration of the tax, audits, and streamlined filing,” and provide a small seller exception.

Mixed messages

Yet Noem has also expressed support for Jackley’s effort to overturn Quill. In November 2017, she submitted a Brief of Amicus Curiae of Four United States Senators and Two United States Representatives in Support of the Petition asking the Supreme Court “to overturn its decision in Quill Corp. v. North Dakota.”

The brief reads, in part, “Not only does Quill cause a loss in revenue to their States, but it also places merchants with physical locations in their States at an economic disadvantage because they must, in effect, charge a higher price for a product also sold by an out-of-state retailer that does not have to collect a tax that is imposed on in-state buyers and must be collected by in-state sellers.”

Jackley’s campaign pointed out the discrepancy.

For his part, Jackley says he’s “supportive” of Noem’s efforts to solve the online sales tax problem legislatively. However, he doesn’t express much faith in Congress’s ability to get it done: “[T]hey’ve been talking about this since 1992, and we would need something to actually pass.”

He’s also pointed out that Noem failed in her most recent attempt to enact her bill. In early January, after the Supreme Court agreed to hear South Dakota’s case, Noem said she was working to attach the Remote Transactions Parity Act (RTPA) to “some kind of ‘must pass’ legislation.” She said at the time that she had the support of Treasury Secretary Steven Mnuchin and President Trump himself. Yet despite her best efforts, her legislation has remained in the wings.

The path forward

There are still unknowns, and much will depend on how the Supreme Court rules in South Dakota v. Wayfair, Inc. If South Dakota is prevented from enforcing its economic nexus law, both Jackley and Noem are likely to continue to advocate for states’ right to tax remote sales — in their own way.

Now that Noem has won the Republican primary, her path forward could change. If she ends up in Pierre, she won’t return to Congress and a Congressional solution, if necessary, will have to be pursued by someone else. Whether she would join forces with Jackley to come up with an in-state solution remains to be seen.

Learn more about the online sales tax debate.