Recently, Forbes magazine named South Dakota as one of the top 10 states for business, particularly since it ranked number one in the cost of doing business. A new state law will likely keep South Dakota in first place for in-state business statistics, to the detriment of out-of-state sellers. Last month, South Dakota Governor Dennis Daugaard signed into law a bill that requires many out-of-state sellers to register with the state and begin collecting sales tax. All sellers conducting more than 200 transactions with South Dakota purchasers, or making more than $100,000 in gross sales to South Dakota, must register with the state.
The South Dakota Department of Revenue recently sent letters to out-of-state sellers requiring them to either register with the state and begin collecting sales tax where applicable, or notify the state that they do not meet the gross sales or transactions requirements. Though some sellers may have no physical presence, or “nexus,” with South Dakota, every seller who receives such a letter must respond. Silence will be interpreted as intent to fail to comply with the law.
Steps have been taken to determine whether the law is valid, whether it will be retroactive, and whether refunds will be available once the dust settles. However, without answers yet, many out-of-state sellers are left wondering what to do immediately. If they collect and pay over the sales tax, they may lose a competitive edge. If they fail to register with South Dakota and collect the tax, they are at risk of violating the current law. Since consumers in South Dakota are responsible for paying over the use tax on out-of-state purchases for which no sales tax was charged, there is likely no harm to the approximately 850,000 residents of South Dakota who will either pay at the time of purchase or pay when they file their state income tax returns, but given the reality of the tax gap that occurs by consumers failing to report and pay use tax, the realization of a tax loss is significant to South Dakota and burdensome to its out-of-state sellers.