Internet sales tax Bill could land state in high court
South Dakota could be on the road to a U.S. Supreme Court challenge with a bill that allows the state to collect sales taxes from out-of-state Internet retailers.
The bill in question requires those businesses to remit sales taxes if they sell more than $100,000 in the state or have 200 or more transactions in a year.
But the bill, which passed out of a Senate committee on a 9-0 vote Wednesday, appears to directly contradict a 1992 Supreme Court decision which held that businesses weren’t required to pay sales tax in a state unless they had a physical presence in the state. South Dakota lawmakers say it’s time for the court to address the issue again.
Part of the argument used in 1992 against allowing states to collect sales tax from what was then mainly catalog companies was the complexity businesses would face in calculating hundreds of different state and local tax combinations. But Shawn Lyons, the executive director of the South Dakota Retailers Association, said Wednesday that software has existed for a decade that can automatically calculate those rates, and he said smart phones can perform the task.
In addition to better computing power, the nature of out-of-state sales has changed dramatically with the Internet. Sen. Deb Peters, a Hartford Republican who is sponsoring the bill, said the sluggish growth in state sales tax revenues can be blamed in part on the increase in Internet sales.
“This is showing the shift in commerce not just in South Dakota but in our country and the globe,” Peters said.
Lyons and others say South Dakota retailers, who have to collect and remit the tax, are at a competitive disadvantage with online retailers who don’t have to charge sales tax.
Tony Venhuizen, Gov. Dennis Daugaard’s chief of staff, said the issue has been at the forefront of almost every legislative session that the governor has participated in the past 20 years. Daugaard served in the Legislature and as lieutenant governor before becoming governor.
In theory, state residents are required by law to pay state and local sales and use taxes on Internet purchases, but it doesn’t happen. Supporters say it’s not an issue of raising taxes but closing a tax avoidance loophole.
“This is a tax that is already owed,” Venhuizen said.
Closing that loophole would mean tens of millions of dollars for the state – money that some lawmakers say could be used to lower the overall sales tax rate.
There was no opposition testimony on Wednesday. However, a coalition of conservative groups, including Americans for Prosperity and Americans for Tax Reform, have sent lawmakers a letter asking them to oppose the bill.
The letter argues that requiring out-of-state businesses to collect and remit South Dakota sales taxes is “constitutionally suspect.”
“It’s constitutionally suspect because the interstate commerce clause exists precisely to empower Congress to prevent such activities and because Supreme Court precedent underscores the importance of physical presence,” the letter said. “It’s practically unwise because it could subject South Dakota businesses to the tax collectors of states that don’t share your generally conservative governance, like California, New York, and Illinois.”
The 1992 Supreme Court decision did suggest that Congress could address the issue. But there hasn’t been enough support in Congress to pass such a measure. The lack of congressional action is prompting South Dakota and other states to challenge the 1992 decision head-on.
