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South Dakota Preps Online Sales Tax Fight for SCOTUS

The South Dakota Supreme Court unanimously ruled Wednesday that a 2016 state law requiring out-of-state merchants to pay state sales tax on goods and services purchased by South Dakotans is unconstitutional – and the official who defended the law was pleased with the result.

PIERRE, S.D. (CN) – The South Dakota Supreme Court unanimously ruled Wednesday that a 2016 state law requiring out-of-state merchants to pay state sales tax on goods and services purchased by South Dakotans is unconstitutional – and the official who defended the law was pleased with the result.

“The court did the three things I asked them to,” state Attorney General Marty Jackley said by phone Thursday morning. “They affirmed the district court’s ruling, they did it as respectfully quickly as possible, and they made us eligible for the October 2017 Supreme Court docket.”

Jackley argued the case before the South Dakota high court on Aug. 29 and hopes the U.S. Supreme Court will pick it up in order to right what he sees as an outdated interpretation of the Commerce Clause – dating to mail-order tax remittances – that now govern internet sales.

“We’re already working hard on an application for cert with Republican and Democrat attorneys general,” Jackey said.

Writing for the unanimous court, South Dakota Supreme Court Justice Glenn Severson opened his opinion stating, “South Dakota has no state income tax and relies on retail sales and use taxes for much of its revenue.” At the issue’s heart, however, is a 1967 U.S. Supreme Court case, National Bellas Hess v. Illinois, where the court ruled 6-to-3 that Illinois could not collect sales tax from a mail-order catalog business located in neighboring Missouri because the business had no physical presence in Illinois. A 1992 case in North Dakota, Quill Corp. v. North Dakota, limited the breadth of Bellas Hess, but upheld the “physical presence” requirement.

“We see no distinction between the collection obligations invalidated in Quill and those imposed by Senate Bill 106,” Severson wrote, “and hold that the circuit court correctly applied the law when it granted sellers’ motion for summary judgment.”

Now the stage is set for a showdown at the nation’s highest court. And it’s one low-tax states like South Dakota are desperate to win.

A 2016 report from the South Dakota Department of Revenue shows of the $1.9 billion hauled in from taxes, just under 70 percent came from sales, use, and contractor’s excise taxes. While other low-tax states like neighboring Montana have a lower sales tax rate than South Dakota’s 4.5 percent, few states depend as heavily on retail sales as South Dakota. And in the past year, budgets have tightened as a result of a slumping agriculture economy and stagnant sales tax as online sales soar.

The 2016 Remote Seller Compliance bill passed the South Dakota Legislature nearly unanimously and was signed by Gov. Dennis Daugaard. It mandated sales tax remittance from sellers grossing over $100,000 or who racked up more than 200 separate transactions to consumers in South Dakota. The Department of Revenue reported over 100 merchants had applied for sales tax licenses and over $500,000 in revenue came in for cities and the state. But it’s only a shadow of internet sales.

“I’m concerned about a flattening sales tax, yes,” said state Sen. Reynold Nesiba, a Democrat representing Sioux Falls and an economics professor at Augustana University. “It really sets up a fundamental unfairness between brick-and-mortar businesses and online entities. They use our wireless infrastructure and roads to purchase and deliver these goods, but don’t have to chip in on the sales tax portion.”

“It’s a bipartisan issue.”

Wade LaRoche of the Department of Revenue, said he “appreciates the court’s swift decision” and now aims for “tax fairness throughout South Dakota and the rest of the nation.”

Jackley believes the time is ripe for a new reading of interstate commerce in the digital age, and says he expects other states – neighboring Wyoming, North Dakota, and Colorado – to join as friends of the court as sagging sales tax revenue hurts their local businesses. In Colorado, state law requires internet vendors to report sales to the state, which then collects the tax.

“Legitimate concerns have been expressed by several justices about the status quo,” said Jackley.

In Thursday’s ruling, Justice Severson noted a concurring opinion from U.S. Supreme Court Justice Anthony Kennedy in a 2015 sales tax case from Colorado, in which Kennedy questioned continuing to follow precedent “in view of the dramatic technological and social changes that [have] taken place in our increasingly interconnected economy.”

In an appellate ruling in the Colorado case, then-10th Circuit Judge Neil Gorsuch – now a Supreme Court Justice – wrote Quill is “surrounded by a sea of contrary law” and may “disappear when reliance interests never form around them or erode over time.”

A spokeswoman for defendant Wayfair, an online home goods retailer, declined to comment on the ruling.

In a lengthy statement, a representative from defendant Overstock.com said the company doesn't view the ruling as a win for states.

"The South Dakota Supreme Court has dealt a blow to states’ winner-take-all, bet-the-house gambit to get the U.S. Supreme Court to allow states to regulate interstate commerce by imposing tax collection obligations on out-of-state retailers. For some odd reason, the states are crowing about it," the representative said. "States have long sought to shift their burden to collect state sales tax to out-of-state retailers. This is another example of states failing to get their way. While Supreme Court precedent stands in the way, it appears states think their promised land lies only through overturning constitutional law.

"States would do better to better to work with Congress to find a fair and workable solution to their tax collection problem.”

Defendant NewEgg, a computer electronics company, did not reply to requests for comment by press time.

In a tough agriculture economy, low-tax states rely heavily on sales tax and will try to plug holes. In August, South Dakota reached an agreement with home-sharing website Airbnb to remit sales and tourism tax.

Meanwhile, the Department of Revenue announced a tourism tax on a farmer’s market near a waterfall in Sioux Falls before backing off following outcry from vendors.

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