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Why You Might Not Want to Sell to South Dakota

A recent effort by South Dakota to compel out of state online sellers to collect sales tax from its residents now faces a legal challenge. The state sued 4 large merchantsseeking them to comply with its new law. The next day, the American Catalog Mailers Association (ACMA) and Washington DC-based ecommerce trade association NetChoice filed a lawsuit to thwart the recently enacted statute, SB 106.

NetChoice invoked the 1992 Quill v North Dakota Supreme Court decision as a basis for their litigation. That decision famously found states could only require sales tax collection by businesses with a physical presence in a state. South Dakota instead refers to companies doing online business with its residents as having an “economic presence” and are thus subject to sales tax collection under the new law.

“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,” NetChoice said in a statement.

“Because SB 106 violates the Quill physical presence requirement, usurps the role of Congress in regulating interstate commerce, and unlawfully expands the State’s taxing authority over companies, individuals, and organizations located throughout in the United States, and potentially the world, based solely on their having customers in South Dakota, the law is plainly unconstitutional,” reads part of the nine-page court filing.

As the PMA (Performance Marketing Association) explains, the legislation is different from laws in other states that have passed affiliate nexus laws. “To be clear, this law is not tied to affiliate marketers. Therefore, dropping affiliates from programs will not protect online retailers from the reach of this new law.”

Despite the agitation from NetChoice and ACMA, states have been and will likely continue to seek internet sales taxes in order to bolster flagging tax revenues. California added millions of dollars starting in 2012 to their coffers by sunsetting sales tax freedom and compelling Amazon.com and others to collect taxes from its residents.

Many other states have followed suit since then, and NetChoice and its allies will see continued demand for such sales tax collection from the brick and mortar world. Conventional retailers want to see legislation like the Marketplace Fairness Actbecome reality and impose online sales tax collection uniformly across the United States.

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David A Utter
David A Utter
David A. Utter is a freelance writer based in Lexington, KY. He has covered technology topics from search to security to online business and has been quoted in places like ZDNet and BusinessWeek. He considers his appearance on NPR's "All Things Considered" with long-time host Robert Siegel a delightful highlight. You can find him on Twitter @davidautter and on LinkedIn.