BREAKING NEWS: Sales Tax Battle Breaks Out in South Dakota; Quill’s Last Stand?

By and on April 29, 2016

This post is a follow-up to a previous post on McDermott’s Inside SALT blog from April 21, 2016.


On March 22, 2016, South Dakota Governor Dennis Daugaard signed into law Senate Bill 106, which requires any person making more than $100,000 of South Dakota sales or more than 200 separate South Dakota sales transactions to collect and remit sales tax. The requirement applies to sales made on or after May 1, 2016.

The law clearly challenges the physical presence requirement under Quill, and that’s precisely what the legislature intended. The law seeks to force a challenge to the physical presence rule as soon as possible and speed that challenge through the courts.

As we discussed in our earlier post, the big question in response to the legislation was whether taxpayers should register to collect tax.  For those who did not register, an injunction is now in place barring enforcement of the provisions until the litigation is resolved.

Last night and this morning two different declaratory judgment suits were filed in the Sixth Judicial Circuit Court of South Dakota regarding S.B. 106’s constitutionality, and more may follow. As has already been reported in a few outlets, one of these cases is American Catalog Mailers Association and NetChoice v. Gerlach (the ACMA Suit).  In ACMA, the plaintiffs are trade associations representing catalog marketers and e-commerce retailers.  The complaint can be found here.

What has yet to be widely reported is the other suit.  This suit (the State Suit) was filed by South Dakota.  Letters sent by South Dakota indicated that identified retailers needed to register by April 25.  Because the new law does not become effective until May 1, many observers thought that South Dakota might wait to file until after that date.  However, the suits have already been filed.

Analysis of the Complaints

The ACMA Suit complaint is fairly straightforward.  ACMA and NetChoice seek an order declaring that SB 106 is unconstitutional under two alternative counts: (1) SB 106 violates the Commerce Clause under Quill; or (2) SB 106 violates the Due Process Clause.

The State Suit complaint is more substantial.  For those not listed as defendants in the complaint, the most important parts concern retroactive liability.

The complaint starts off by providing the well-understood background of National Bellas Hess, Quill, Congress’s lack of action, and Justice Kennedy’s concurrence in DMA v. Brohl. The complaint then argues that South Dakota has personal jurisdiction over the defendants under the state’s long-arm statutes. The complaint then addresses the Circuit Court’s subject matter jurisdiction. Notably, in this section, the complaint says:

Under the structure of the Act, the State cannot currently enforce the Act’s collection obligation against the Defendants unless the State prevails in this suit. Were the State to prevail, the Act will immediately apply to Defendants, requiring them to collect and remit the state sales tax on a going-forward basis.

The State’s discussion of the issue is important because one of the biggest concerns for retailers is the potential retroactive implications of any Quill overturn.  Based on several statements throughout the complaint, the State appears confident that no liability will accrue on any sales until after the State’ Suit is decided.

For example, the complaint notes that SB 106 “contains three provisions designed to protect taxpayers from accruing any tax liability – retroactive or otherwise – during the pendency of this action.” The State says that it “filed this suit immediately before the May 1, 2016, effective date of the Act to trigger [the Act’s] injunction and prevent any uncertainty for taxpayers.” The State also says that it “has simultaneously filed with this Complaint an application for an injunction which records and makes certain the effect of [the injunction provided for in] the Act,” and requests that the Circuit Court “immediately grant” the injunction “without a hearing.” Finally, the State says that these provisions “ensure that any seller not complying voluntarily with the Act will face tax liability only prospectively from the date on which a court holding makes clear that the Act validly applies to the seller.”

As we noted in our earlier post, voluntarily complying with the Act can create problems.  SB 106’s automatic injunction does not protect any sellers who have voluntarily complied, and these sellers are prohibited from raising constitutional nexus issues in any subsequent refund claim. As we mentioned in our previous post, this prohibition may not pass constitutional muster.

One question that sellers may still have, however, is when exactly the obligation to collect will kick in. SB 106 provides that “if any injunction provided by this Act is lifted or dissolved, … the state shall assess any apply the obligation established in … this Act from that date forward with respect to any taxpayer covered by the injunction.” Throughout the complaint, South Dakota says that a seller’s obligation to collect will commence as soon as a judgment in this case is handed down. In its prayer for relief, South Dakota asks the Circuit Court to “dissolve [the automatic injunction] upon the entry of a declaratory judgment in favor of the State.” Sellers should monitor the suit to make sure that the injunction remains in place during the pendency of the various appeals that are sure to occur with this suit.


Because South Dakota has filed its suit, sellers should be able to relax – a little – now that an injunction is likely in place.  But sellers should monitor the case to make sure the injunction remains in place during what is likely to be a prolonged piece of litigation.

In his concurrence in DMA, Justice Kennedy said, “The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”  Time will tell as to whether either of these cases is the case sought by Justice Kennedy.

McDermott Will & Emery

Stephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen P. Kranz's full bio.




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