March 28, 2017

South Dakota's Economic Nexus Provision Standard Held Unconstitutional

Contributor Zacarias Quezada, Staff Accountant, Tax & Business Services

Related Service Tax & Business

South Dakota's Economic Nexus Provision Standard Held Unconstitutional Tax & Business

On March 6, 2017, the South Dakota Sixth Judicial Circuit, as a result of South Dakota v. Wayfair LLC., enjoined the state from enforcing the sales tax economic nexus provision previously adopted in March 2016.

The statute requires online retailers with annual in-state sales exceeding $100,000 or 200 separate in-state transactions to collect and remit sales tax. The named defendants – Wayfair LLC, Overstock.com Inc., and Newegg Inc. – argued the provision was unconstitutional. This line of argumentation, supported by the Quill decision, was upheld as the Court concluded the defendant’s lack of physical presence in South Dakota prohibits the state from imposing a sales tax collection and remittance obligation. The Court went on to express that the statute fails the physical presence requirement applicable to sales and use taxes under Quill. The decision by the South Dakota Sixth Judicial Circuit, if upheld by the South Dakota Supreme Court, has the potential to lead to a U.S. Supreme Court appeal.

This is the second time in the last year an appellate court was faced with addressing Quill. In November 2016, the Ohio Supreme Court upheld the constitutionality of the Ohio Commercial Activity Tax’s (CAT) bright-line nexus standard in three consolidated tax cases: Crutchfield, Newegg, and Mason Companies. The Court concluded in these cases that physical presence in Ohio is not required because the Ohio CAT is a business-privilege tax and that Quill, a use tax case, does not apply.

Should either or both of these cases reach the U.S. Supreme Court, there may finally be guidance as to the application of the Quill standard to online sales.

Please contact your dedicated Marcum professional to address any questions regarding this case or any other tax matter.