United States

South Dakota: Quill Challenge Remanded to State Circuit Court

Jan 23, 2017
From KPMG TaxWatch

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Recently, the U.S. District Court for the District of South Dakota determined that it lacked jurisdiction to hear South Dakota’s lawsuit to enforce the state’s economic nexus statute against select remote sellers. Specifically, the court held that South Dakota’s lawsuit does not raise a “federal question” over which the court would have jurisdiction. Thus, the court granted the state’s motion to remand the case back to the state circuit court.

As a refresher, Senate Bill 106, which became effective May 1, 2016, requires 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, to collect and remit state and local sales and use tax. The economic nexus law sparked controversy, as it contradicts the in-state physical presence requirement for sales and use tax collection articulated in Quill. Under procedures set forth in Senate Bill 106, South Dakota sought a declaratory judgment in state court that it may require select remote sellers to collect and remit sales tax. In its complaint, the state acknowledged that a declaration in its favor will require an overturning Quill, and that it ultimately seeks a decision from the U.S. Supreme Court to this effect. The state court action operated as an injunction against the enforcement of the collection obligation during the pendency of the lawsuit. The defendants, the retailers, promptly had the case removed to federal district court. On July 22, 2016, the state filed a motion seeking to have the case remanded to state court.

The U.S. district court ruled it lacked jurisdiction over the lawsuit because there was no “federal question” present in the state’s complaint. Under federal question jurisdiction, U.S. district courts have jurisdiction over all civil actions arising from the laws or Constitution of the United States. However, the federal question must appear on the face of the plaintiff’s complaint, rather than in an anticipated defense. The court determined that South Dakota’s complaint―asking for a declaratory judgment that the state may require select remote sellers to collect and remit sales tax pursuant to Senate Bill 106―did not involve a federal question. While the issue of whether South Dakota can require remote sellers to collect sales tax will ultimately depend on an interpretation of the U.S. Constitution, this issue did not appear on the face of South Dakota’s complaint. Rather, it is a defense that will be raised by the retailers.

As specified in Senate Bill 106, an appeal from the state circuit court will go directly to the South Dakota Supreme Court, and both courts must act “as expeditiously as possible.” Please stay tuned to TWIST for 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.