South Dakota Latest State to Challenge Quill
South Dakota Governor Dennis Daugaard has signed into law new sales and use tax nexus guidelines for the state of South Dakota. The new guidelines indicate that an out-of-state seller has nexus in the state for sales tax collection purposes if at least one of the following criteria is met:
The seller’s gross revenue from the sales of tangible personal property, any product transferred electronically, or services delivered into South Dakota in the previous calendar year or current calendar year exceeds $100,000; or
The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.
These guidelines intentionally conflict with the nexus ruling of the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) ("Quill"), in which the Court affirmed that physical presence in the state is required to meet the substantial nexus prong of the Commerce Clause. The South Dakota legislature was undoubtedly encouraged by the suggestion in Justice Kennedy’s concurring opinion in Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015), that the Court should reconsider its decision in Quill. The bill enacting the new law expressly referenced the opinion.
The South Dakota legislation contains a rather unique provision regarding the enforcement of the new law by the Department of Revenue. The legislation provides that enforcement will be stayed by the courts until the constitutionality of the law is finally determined by the courts and, if the law is upheld, provides that sellers be assessed only for periods after the ruling upholding the law. The new law requires the South Dakota Department of Revenue to file a declaratory judgment action in circuit court and urges the court to act expeditiously. It also provides for a direct appeal to the South Dakota Supreme Court.
Instead of waiting for the South Dakota Department of Revenue to file, on April 29, 2016, two trade associations filed a declaratory judgment action in circuit court challenging the constitutionality of the law. The Department of Revenue filed its declaratory judgment action the following day and also requested the court to grant an injunction against enforcement of the law. Even though the industry’s action was filed first, the legislation provides that the state’s action is to proceed with priority over any other action challenging the law.
South Dakota is the first state that has enacted legislation in response to Justice Kennedy’s invitation of a challenge requesting the Supreme Court to revisit its holding in Quill. The Alabama Department of Revenue adopted a regulation applying a similar economic nexus standard to remote sellers, which became effective January 1, 2016. Minnesota and Oklahoma have similar economic nexus bills pending in their legislatures that require remote sellers to collect sales tax on sales into the state based solely on having a specific level of sales into the state, without having any physical presence in the state.
With multiple states jumping on the bandwagon to challenge the Quill ruling, it is likely that the Supreme Court will be asked to reevaluate its decision sooner than later. If the Court does reconsider and overturn its decision in Quill, it would almost certainly result in economic nexus being sufficient for states to impose its other taxes on businesses.