PIERRE, S.D. (CN) — A new law requiring online retailers to pay state sales tax has made South Dakota the newest player in a national legal battle over online sales taxes and it looks like the taxes are winning.
South Dakota's SB 106 took effect May 1. It applies only to online retailers who make more than $100,000 a year from South Dakota customers, or more than 200 transactions a year in the state.
The state's Department of Revenue says 206 retailers qualify, and that 40 already have complied.
Just over a month after Gov. Dennis Daugaard signed the bill into law, the state sued four online retailers — Wayfair, Systemax, Overstock.com, and Newegg — for failing to register to collect the state's 4 percent sales tax on orders from South Dakota.
The state's April 28 lawsuit in Hughes County Circuit Court acknowledges that a declaration in the state's favor would contradict 1992 Supreme Court precedent in North Dakota v. Quill, which held that online and catalog retailers without a physical presence in a state did not have to remit that state's sales tax.
South Dakota enacted the legislation fully intending to challenge the Supreme Court: "The State recognizes that a change in federal constitutional doctrine will be necessary for the state to prevail in this case," it states in its 20-page lawsuit.
Opponents of the Quill ruling claim it is no longer relevant due to the explosive success of online retailers. The state cites Justice Anthony Kennedy's argument for re-examining the issue in Direct Marketing Association v. Brohl, a 2015 Supreme Court ruling on a Colorado tax-reporting law that grappled with similar issues.
"When the Court decided Quill, mail-order sales in the United States totaled $180 billion. But in 1992, the Internet was still in its infancy. By 2008 e-commerce sales alone totaled $3.16 trillion per year in the United States," Kennedy wrote, South Dakota says in its lawsuit.
On April 29 — one day after the state filed suit — the American Catalog Mailers Association and Netchoice, representing the interests of online retailers, sued back, asking the Hughes County Court to declare the new law unconstitutional. The trade associations sued South Dakota Department of Revenue Secretary Andy Gerlach.
South Dakota is not the first state to enact legislation that flies in the face of Supreme Court precedent. Alabama adopted a similar statute, which took effect on Jan. 1.
Alabama, too, is ready and willing to tackle a Supreme Court battle.
"We'll be in court before long," Joe Garrett, with Alabama's Department of Revenue, said in an interview.
But so far, no one has sued the Alabama.
Garrett said his state is contacting online retailers that do more than $250,000 worth of business in Alabama and are not compliant, and going through an assessment process to bring them in line.