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.
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, physical presence means having:
For basic guidance on how physical presence is defined 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 2011 South Dakota Department of Revenue fact sheet on the state’s use tax (a complementary tax to sales tax; see below) states: Internet businesses usually do not have the necessary physical contact in the state to be required to collect sales tax.
The last point highlights the corollary to the physical presence rule. Namely, 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.
Examples of Physical Presence
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.
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 enacted in various other states; they are commonly known as Amazon Laws.
The South Dakota law focuses on noncollecting retailers (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 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.
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 2012 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.”
Proposed Federal Legislation
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act 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.
For most small online businesses, it is the long established physical presence rule that will apply. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the South Dakota Department of Revenue to see if the rules have changed.
Updated: April 14, 2016