United States

South Dakota: Quill Challenge Meets Challenges

Aug 01, 2016
From KPMG TaxWatch

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Earlier this year, Senate Bill 106, establishing economic nexus provisions for sales and use tax purposes, was signed into law in South Dakota. Effective May 1, 2016, sellers with over $100,000 of gross revenue from sales of tangible personal property, products delivered electronically, or sales of services into South Dakota, or sellers engaging in two hundred or more separate South Dakota sales transactions, are required to collect and remit sales and use tax as if the seller had a physical presence in the state. The law deliberately contradicts the physical presence rule articulated in the 1992 Quill decision. Last year, in a concurring opinion in the DMA case, U.S. Supreme Court Justice Kennedy suggested that he would welcome an opportunity to revisit the Quill decision. This statement prompted certain states, including South Dakota and Alabama, to take actions, to get a case in the pipeline.

Shortly after Senate Bill 106 became effective, South Dakota, following the procedures specified in the bill, filed a complaint in state court alleging that certain online retailers met the criteria in Senate Bill 106 and seeking a declaratory judgment that the new law was constitutional and that the defendant retailers should be required to collect and remit tax on sales into the state.  Per Senate Bill 106, the filing of a declaratory action operated as an injunction against the state enforcing the collection obligation (unless the seller consents to collect or voluntarily remits) during the pendency of the action. The defendants, the out of state sellers required to collect sales and use tax under Senate Bill 106, quickly had the case removed to federal district court. On July 22, 2016, the state filed a motion seeking to have the case transferred back to the Hughes County, South Dakota state circuit court. The state’s motion argues that, based on two Supreme Court cases, this case should be in state court. First, South Dakota argues that federal courts lack jurisdiction in declaratory judgment cases when a state seeks a declaration that its own law is consistent with federal requirements. The state is also asserting that state tax cases such as this one belong in state courts as a matter of federal-state comity. On the same day, July 22, the defendants filed a motion and supporting brief in federal district court to have the matter resolved by summary judgment. By the end of August, briefing on the question of whether the matter should be remanded to the state court or decided on summary judgment in the federal district court, is to be complete. Please stay tuned to TWIST for future updates on the South Dakota litigation.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.