If you are selling goods or products online to customers located in South Dakota, you should be aware of South Dakota’s Internet sales tax rules. These rules have been a matter of some debate in South Dakota, as well as in other states and at the federal level. More particularly, in 2011, South Dakota enacted special legislation aimed at requiring large-volume Internet retailers to at least assist in getting their customers to pay tax on sales.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in South Dakota. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For basic guidance on how physical presence is defined specifically under South Dakota law, consult Section 10-46-1 (12) of the South Dakota Codified Laws (S.D.), which defines the phrase “retailer maintaining a place of business in the state.” The definition includes maintaining a place of business directly or by a subsidiary.
In addition, a South Dakota Department of Revenue webpage on the state’s use tax (a complementary tax to sales tax; see below) states, “Internet and catalog companies that charge South Dakota sales tax typically have a business location, employees, or sales representatives that enter South Dakota. This establishes a physical presence within the state, which requires them to become licensed with South Dakota and charge the applicable taxes,” but “Companies without a physical presence can not be required to be licensed . . . .”
The last point highlights the corollary to the physical-presence rule; namely, that if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Example 1: You are operating solely out of a warehouse in Burlington, Vermont and make a sale to a customer in Pierre, South Dakota—a state where your business has no physical presence: You are not required to collect sales tax from the Pierre customer.
Example 2: You are operating solely out of an office in Aberdeen, South Dakota and make a sale to a customer in Brookings, South Dakota: You are required to collect sales tax from the Brookings customer.
Example 3: After several years of operating solely out of a warehouse in Burlington, Vermont, you open a one-room satellite office just outside of Sioux Falls, South Dakota—a state where previously you had no physical presence. A day later, you make a sale to a customer in Rapid City, South Dakota: You are required to collect sales tax from the Rapid City customer.
In limited cases, items sold via the Internet to South Dakota customers may be exempt from sales tax under South Dakota law. For example, repair parts for farm machinery are sometimes exempt from sales tax. For a brief, plain-English list of many exemptions, check the DOR’s 2011 Sales and Use Tax Guide.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” Section 64:09:01:01 of the South Dakota Administrative Rules concisely summarizes the use tax law: “If property is purchased from a nonresident seller who is not licensed to collect use tax, the buyer shall pay the tax directly to the department [of revenue] when the property is brought into the state.”
The DOR has several easy-to-read publications on the use tax, including a tax fact sheet and a use tax form with instructions. One illustrative example on the fact sheet states that “Businesses purchasing products from unlicensed Internet vendors [i.e., Internet sellers who are not required to register for and collect sales tax] owe use tax on their purchases.” The use tax form emphasizes that “most out-of-state businesses are not required to pay tax in a state where they have no physical presence,” and, therefore, “It becomes the purchaser’s responsibility to pay the use tax that is due.”
South Dakota’s Modest “Amazon Law”
In 2011, the South Dakota legislature enacted a new law intended to increase the amount of taxes collected on items purchased by South Dakota residents from large out-of-state Internet retailers. Similar, and generally stronger, laws have been at least considered, and sometimes enacted, in various states around the country; they are commonly known as “Amazon Laws.” As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.
The South Dakota law focuses on “noncollecting retailers” (i.e. retailers who do not need to collect and remit sales tax; this will often be out-of-state retailers) with annual gross sales in South Dakota of $100,000 or more. According to the law, these high-volume retailers must provide “readily visible” “notice” in certain locations on those parts of their websites that relate to facilitating, confirming, and/or checking out transactions; the notices must state that:
- The noncollecting retailer is not required to collect, and does not collect, South Dakota sales or use tax
- The purchase is subject to state use tax unless it is specifically exempt from taxation
- The purchase is not exempt merely because the purchase is made over the Internet, by catalog, or by other remote means
- The state requires each South Dakota purchaser to report any purchase that was not taxed and pay tax on the purchase; the tax may be reported and paid on the South Dakota use tax form, and
- The use tax form and corresponding instructions are available on the South Dakota Department of Revenue website.
The DOR has published a special public notice with detailed set of instructions on this new law. However, because of the $100,000 minimum gross sales requirement, it is clear that the law is likely only to be applicable to larger retailers like Amazon.com and Overstock.com.
For most small online businesses, it is the long-established “physical presence” rule that provides primary guidance on collecting tax on sales to customers in South Dakota. However, the issue is contentious, as demonstrated by the law requiring use tax notice that South Dakota enacted in 2011. Therefore, you should consider checking in periodically with the South Dakota Department of Revenue to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.