ACMA and NetChoice File Legal Challenge against South Dakota’s “Blatantly Unconstitutional” Internet Sales Tax Law

The state of South Dakota’s new Internet sales tax mandate – to force out-of-state sellers to collect South Dakota sales tax – is an unconstitutional expansion of state tax powers and directly conflicts with precedent set by the Supreme Court of the United States.  That’s according to a suit filed today by the American Catalog Mailers Association (ACMA) and NetChoice in South Dakota’s Sixth Judicial Circuit Court. Andy Gerlach, Secretary of the South Dakota Department of Revenue, is the named defendant.

In 1992, the Supreme Court of the United States upheld in Quill Corp. v. North Dakota that, under the Commerce Clause of the Constitution, states do not have the power to require sales tax collection by out-of-state sellers having no physical presence in that state.  Under Quill, a company whose only contact with the state is communicating with customers via remote means—such as mail, common carrier, or the Internet—lacks a “physical presence” in the state.

In direct contravention of the Supreme Court’s Quill decision, South Dakota approved a statute (SB 106) that creates new sales and use tax collection obligations on remote sellers. This novel “economic presence” classification defines retailers as having nexus within the state if they exceed $100,000 in annual sales or 200 remote sales transactions with South Dakota customers. Moreover, this applies not only to physical sales, but also sales of digital goods and online services.

“South Dakota has imposed unconstitutional and unworkable burdens on remote sellers,”

The new law takes effect May 1 and the State began circulating demand notices in March.

“South Dakota is showing wanton disregard for established Supreme Court precedent,” said Hamilton Davison, president and executive director of the ACMA.  “This statute is blatantly unconstitutional and flies in the face of law that has been settled for decades.  States simply don’t have the authority to pick and choose the Supreme Court decisions they will follow.”

“South Dakota has imposed unconstitutional and unworkable burdens on remote sellers,” said Steve DelBianco, executive director of NetChoice.  “Left unchecked, this misguided tax law could set the course for enormous tax and administrative burdens on businesses across the country.  Irresponsible state laws are not the way to make new national policies for interstate commerce.”

The plaintiff trade associations seek a declaratory judgment against the South Dakota Department of Revenue.  If granted, this would mean that the statute is unconstitutional and therefore unenforceable.

If not addressed, this new law will impose significant upfront costs on retailers. Research by the TruST coalition estimates that a mid-market retailer collecting taxes for states with multiple taxing jurisdictions and definitions would spend $80,000 – $290,000 in setup and integration costs and $57,500 to $260,000 in ongoing maintenance, updates, audits and service fees charged by “free” software providers.

“South Dakota is showing wanton disregard for established Supreme Court precedent,”

ACMA and NetChoice represent eCommerce businesses, catalog and remote sellers who will be directly and adversely affected by South Dakota’s new sales tax law. They are also co-founders of the TruST coalition, which represents American businesses in the fight to keep interstate commerce and competition free from unfair tax burdens imposed by states where businesses have no operations or representation.

South Dakota is not the only state considering such unconstitutional sales tax laws.  Other states have passed or are considering similar legislation to define economic presence and undermine Quill, including Alabama, Utah, and Colorado.

“This is equivalent to malpractice,” said Davison. “It represents exactly the type of bad governance that makes Americans cynical of big government. While US Supreme Court precedent gives Congress the right to make new rules for interstate commerce in this area, State legislatures do not have this right.”

Congress is currently working to create a federal solution to Internet and remote sales tax. The ACMA and NetChoice support a legislative approach laid out by the Chairman of the House Judiciary Committee, Bob Goodlatte, which would administer sales taxes based on the location of the seller, not the buyer. This is the system already in place for brick and mortar retailers, who collect only where they are physically located, and would put Internet sellers, catalog stores, and big-box retailers on a level playing field.