South Dakota will start collecting sales taxes from many out-of-state online retailers this fall under a law signed Wednesday after a special legislative session.
Lawmakers gathered at the state Capitol for the special session and overwhelmingly approved Gov. Dennis Daugaard’s legislation, which will allow the collections to start Nov. 1. A second measure that passed will require marketplaces that handle payments, such as eBay, to collect sales taxes for sellers on their platforms.
Daugaard later signed the measures into law. Before the votes, he urged legislators to support the measures, which he said were the “culmination of the decades-long fight South Dakota has led for tax fairness.”
It was a South Dakota case that led to the U.S. Supreme Court’s decision in June to overturn two decades-old high court decisions that made it tougher for states to collect sales taxes for certain purchases online. Daugaard said that a lot has changed since the Supreme Court’s 1992 ruling that retailers had to have a physical presence in a state before officials could make them collect sales tax.
“Back then, we all thought of Amazon as a river in South America,” Daugaard said. “The internet was in its infancy back in the early ’90s.”
But even after this year’s court victory, South Dakota hasn’t been able to enforce its online sales tax requirement because of an injunction in place under state law.
That injunction will be lifted under the new law that allows the state to start collecting the sales taxes, with the companies involved in the state’s case exempted as court proceedings continue.
The state’s sales tax obligation applies to sellers outside the state who do more than $100,000 of business in South Dakota or more than 200 transactions annually with state residents under a law passed in 2016.
The law addressing marketplaces such as eBay will make sales tax collections more efficient for online sellers and the state, Daugaard said. Republican state Sen. Stace Nelson, who opposed the bills, said South Dakotans are taxed enough already.
“For those of us that claim to be limited government, this is the exact antithesis of that,” Nelson said.
South Dakota has estimated that it loses about $50 million annually to e-commerce. But any future sales tax windfall may not result in major new state spending because current state law aims to give gains from the new collections back to taxpayers.
The special session didn’t address a provision in state law that requires a 2016 sales tax hike for teacher pay to be scaled back if the state is able to collect tax on online purchases. Under the law, the state’s 4.5 percent rate is to be rolled back by one-tenth of a percent for every additional $20 million the state reaps, with a floor of 4 percent.
Decisions on changing or enforcing that law will fall to a new governor and set of state lawmakers after Daugaard leaves office in January 2019. Department of Revenue Secretary Andy Gerlach said he believes new legislation would be required for the tax reductions to take effect.
Lawmakers also approved an unrelated third bill on the timing of the new governor’s inauguration in January. The state’s last special session was held in 2017 to create rules governing the use of lakes on private land for recreation.
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