Not surprisingly, a recent declaratory action has challenged South Dakota’s bold move to require many out-of-state sellers to register with the state and begin collecting sales tax (previously discussed here). American Catalog Mailers Associations and NetChoice v. Gerlach questions the constitutionality of the economic nexus legislation based upon the physical presence rule from Quill Corp. v. North Dakota.

The US Supreme Court made it clear in Quill that state sales and use tax collection obligations can only be imposed upon entities with a physical presence in the state. However, S.B. 106, passed on March 22, 2016, requires that any out-of-state sellers who collect gross revenue exceeding $100,000, or conduct 200 or more separate transactions for transfer or delivery into South Dakota, must register with the state and collect and pay out sales tax.

The new legislation will not currently be enforced, despite a so-called effective date of May 1, 2016. Lawmakers included specific language providing that enforcement of S.B. 106 will be “stayed by the courts until the constitutionality of [S.B. 106] has been clearly established by a binding judgment.” American Catalog Mailers Associations’ legal action just may expedite the establishment of such a judgment.

It is unclear which direction the judgment will take. Several other states have already established economic nexus rules for out-of-state sellers. For instance, Alabama adopted a regulation in late 2015 regarding activities related to “doing business in the State,” which seems to shift the definition of business activity from the seller/service provider’s perspective to the receiving end of the transaction.