South Dakota passes economic nexus bills, lifts Wayfair injunction


John Stowe
T +1 612 677 5310

Jamie C. Yesnowitz
Washington, DC
T +1 +1 202 521 1504

Chuck Jones
T+1 312 602 8517

Lori Stolly
T+1 513 345 4540

Metisse Lutz
T +1 303 813 3973
On Sept. 12, 2018, South Dakota Gov. Dennis Daugaard signed into law S.B. 1 and S.B.2 following a one-day special legislative session, enacting economic nexus provisions on remote sellers and marketplace providers.1 This action lifts the long-standing injunction that had resulted from S.B. 106, the original 2016 South Dakota legislation which led to litigation that culminated in the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.2 With these bills being signed into law, South Dakota is now formally aligning with the substantial number of states that have adopted sales and use economic nexus standards.

Background On March 22, 2016, Gov. Daugaard signed S.B. 106 into law, under which certain remote sellers, selling tangible personal property, products transferred electronically, or services for delivery into South Dakota became subject to the state’s provisions governing the retail sales and service tax and uniform municipal non-ad valorem tax. As a result, such sellers were required to collect and remit sales tax as if they had a physical presence in the state3. Remote sellers became subject to these provisions if they met one of two thresholds in either the previous or the current calendar year:

  • The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeded $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.4

The legislation was slated to go into effect on May 1, 2016, based upon an emergency clause that provided, “[t]his Act shall be in full force and effect on the first day of the first month that is at least fifteen calendar days from the date this Act is signed by the governor.” However, South Dakota filed a declaratory judgment action in late April 2016 against several remote sellers that also served to immediately enjoin the collection and remittance requirements.5 Following this action, the case went to the U.S. District Court, and was then remanded back to the South Dakota circuit court, where the court granted the remote sellers’ motion for summary judgment, holding that the legislation “fails as a matter of law to satisfy the physical presence requirement that remains applicable to state sales and use taxes under Quill and its application of the Commerce Clause.” 6

Because the remote sellers lacked physical presence in the state, South Dakota acknowledged that it was prohibited from imposing the sales tax collection and remittance requirements against these remote sellers under Quill. Based on the U.S. Supreme Court’s holdings in National Bellas Hess, Inc. v. Department of Revenue of Illinois 7 and Quill, the South Dakota Supreme Court held that S.B. 106 could not impose an obligation on the sellers to collect and remit sales tax because none of them had a physical presence in the state. The South Dakota Supreme Court did not find a “distinction between the collection obligations invalidated in Quill and those imposed by Senate Bill 106.” Accordingly, the South Dakota Supreme Court held that a law requiring certain remote sellers to collect sales tax on sales made in the state was unconstitutional because it violated the physical presence requirement for sales and use taxes under Quill Corp. v. North Dakota 8 and its application of the Dormant Commerce Clause.9

On April 17, 2018, the U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair. On June 21, 2018, in an opinion drafted by Justice Anthony Kennedy, the U.S. Supreme Court expressly overruled Quill, stating that the physical presence rule is “unsound and incorrect.” The Court concluded that the South Dakota statute satisfies the substantial nexus standard that is a component of determining whether a tax can survive Dormant Commerce Clause scrutiny. The Court vacated the South Dakota Supreme Court’s decision and remanded the case to consider whether the South Dakota statute could be challenged on an alternative basis under the Commerce Clause.

Enactment of 2018 legislation Immediately following the U.S. Supreme Court’s decision, South Dakota issued a notice, stating that the state was evaluating the effective date and would provide an update as they released information.10 Shortly thereafter, the South Dakota Department of Revenue’s Remote Seller website posted the following statement:

“Part of the Supreme Court’s decision was that they vacated the South Dakota Supreme Court decision and remanded it back to the state. This means the injunction is still in place and the South Dakota Department of Revenue is currently unable to enforce the Economic Nexus set by SDCL ch. 10-64. It is expected the injunction will soon be lifted, requiring sellers meeting the thresholds of sales into South Dakota to register for tax collection. Please watch this webpage for updates as they are available.”11

On Sept. 4, 2018, South Dakota introduced two sales and use tax bills in response to the U.S. Supreme Court’s decision in Wayfair, affecting remote sellers and marketplace providers. Gov. Daugaard submitted both bills and called for a special legislative session to hear the bills on September 12, 2018.

S.B. 1, the remote seller bill, amends certain aspects of the original 2016 legislation, but retains the substantive economic nexus thresholds endorsed in Wayfair. S.B. 1 sets a Nov. 1, 2018, date on which remote sellers who met at least one of the economic nexus thresholds would be required to collect sales tax.12 The legislation made particular reference to the Wayfair litigants, noting that they would be excluded from this new deadline to collect.13 Those litigants’ tax collection requirements would still be either subject to judicial determination, as their case continued to move through the South Dakota court system, or be governed by a potential settlement agreement currently being pursued by the litigants.

S.B. 2 expands the concepts introduced in S.B. 106 to marketplace providers.14 On or after March 1, 2019, S.B. 2 requires marketplace providers to acquire a sales tax license and collect and remit sales tax on behalf of sellers using their services, to the extent that the marketplace provider meets one of three conditions:

  • The marketplace provider is a seller subject to the South Dakota economic nexus thresholds;
  • The marketplace provider facilitates sales of at least one marketplace seller subject to the South Dakota economic nexus thresholds; or
  • The marketplace provider facilitates sales of two or more marketplace sellers that in the aggregate would be subject to the South Dakota economic nexus thresholds.15

The South Dakota legislature passed S.B. 1 and S.B. 2 at the end of the one-day special legislative session. Gov. Daugaard immediately signed the bills into law, dissolving and lifting the injunction against the collection of sales tax on remote sellers.

Commentary South Dakota made headlines by having their 2016 economic nexus legislation taken up by the U.S. Supreme Court. More than two years later and with a decision in their favor, the state is finally able to constitutionally enact their own economic nexus law. In the time that the original legislation preceding local court actions were left in suspension as a result of the injunction, the traditional Quill nexus doctrine was overturned and more than 30 states have, as a result, rapidly enacted similar legislation or other guidance to the South Dakota legislation. This likely ensures that unless Congressional legislation supplants these policies, the states as a whole will have modeled economic nexus guidance from a state that could not have been expected to lay the foundation for this effort prior to the adoption of S.B. 106. The effect of these rules is widespread, capturing the attention of internet-based sellers, as well as sellers with broad national and international presence.

South Dakota’s adoption of economic nexus rules to cover marketplace transactions could presage a similar rush by states to pass legislation or adopt guidance that requires marketplace providers to collect and remit sales taxes on internet platforms and the like. The question that may arise, however, is whether states have the power to require marketplace providers that are not the selling or purchasing parties with respect to items subject to sales and use tax to serve as collection and remittance agents. While some states have acted as early adopters in this area, S.B. 106 and Wayfair did not directly address that question. Therefore, moving forward with marketplace provider legislation could invite legal challenges in the future. If this method of collection proves tenable, moving towards a fuller taxation of marketplace regimes could substantially expand the net that states can use to capture sales tax revenue from the digital economy.

1 S.B. 1 and 2, Laws 2018.
2 U.S. Supreme Court, No. 17-494, June 21, 2018.
3 S.D. CODIFIED LAWS §§ 10-64-1 to 10-64-9, as enacted by S.B. 106, Laws 2016. For a discussion of this legislation, see GT SALT Alert: South Dakota Enacts Legislation Challenging Quill’s Physical Presence Requirement.
4 S.D. CODIFIED LAWS § 10-64-2.
5 South Dakota v. Wayfair, Inc., No. 32CIV16-000092 (S.D. 6th Cir. Ct.), filed April 27, 2016.
6 South Dakota v. Wayfair, Inc., No. 32CIV16-000092 (S.D. 6th Cir. Ct.), order granting defendant’s motion for summary judgment, March 6, 2017. For a discussion of the circuit court’s order, see GT SALT Alert: South Dakota Circuit Court Holds Law Challenging Quill’s Physical Presence Requirement Is Unconstitutional.
7 386 U.S. 753 (1967).
8 504 U.S. 298 (1992).
9 901 N.W.2d 754 (S.D. 2017), cert. granted, 199 L. Ed. 2d 602 (2018).
10 U.S. Supreme Court Rules in South Dakota’s Favor, Office of Gov. Dennis Daugaard, South Dakota, June 21, 2018.
11 Remote Seller’s webpage, South Dakota Department of Revenue,
12 See S.D. CODIFIED LAWS § 10-64-4. The legislation confirmed that such an obligation would not be imposed on a retroactive basis. S.D. CODIFIED LAWS § 10-64-6.
13 See S.D. CODIFIED LAWS § 10-64-7.
14 The term “marketplace provider” is defined as a person facilitating a sale for a marketplace seller (i.e. a retailer selling items on a platform) through a marketplace (i.e., the platform) by meeting two conditions: (i) the marketplace seller must offer for sale items for delivery into South Dakota; and (ii) collect payment from a purchaser and transmit the payment to the marketplace seller, either directly or through a third party agreement. S.B. 2, Laws 2018, §§ 1-3.
15 S.B. 2, Laws 2018, § 5, 7. A sales tax liability relief provision is available under certain circumstances to marketplace providers in the event that the failure to collect or remit sales tax was due to incorrect or insufficient information provided by unaffiliated marketplace sellers. S.B. 2, Laws 2018, § 6.

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.