Online Sales Tax Windfall Fizzling in Complications

Bob Mercer notes a couple of interesting documents from the state providing details on the online remote sellers’ sales tax that the United States Supreme Court authorized us to collect in its Wayfair decision in June.

First, the Department of Revenue has posted to its website guidance on how the state will implement this extraterritorial sales tax, once our Sixth Circuit Court gets around to lifting the injunction prohibiting implementation of SDCL 10-46. DOR positively answers the concerns that drove Vladimir Gendelman of Michigan to stop selling folders to South Dakotans, explaining that online vendors don’t even have to get a South Dakota sales tax license, let alone collect any tax, until they’ve sold $100,000 worth of goods to South Dakotans or made 200 sales to South Dakotans:

Once a business meets either of the thresholds of SDCL 10-64-2 in the previous calendar year, the business is required to become licensed and remit South Dakota sales tax for the following year.

When a business meets either the thresholds of SDCL 10-64-2 during the current calendar year, the business is required to become licensed and remit South Dakota sales tax from that point forward.

However, the Department is legally precluded from enforcing retroactive tax collection on remote sellers per SDCL 10-64-6 [South Dakota Department of Revenue, “Remote Sellers,” retrieved 2018.08.06].

My friend Wayne was right! Tax is only due once a vendor gets a license. Remote online vendors have to get a license only after they reach the $100K/200-sale criterion. Those first sales are thus exempt from South Dakota sales tax. Vladimir, come back! We want your folders, and you want our money!

But watch out: once a remote seller has a sales tax license, it appears the Department of Revenue expects sales tax on every subsequent sale, this year and in following years:

If the seller met the $100,000 gross sales threshold or the 200 transaction threshold in 2017, the seller will need to get licensed and pay applicable sales taxes for all 2018 transactions that occur after the injunction is lifted in 2018.

…If the seller meets the $100,000 gross sales threshold or the 200 transaction threshold for the first time in 2018, the seller will need to get licensed and pay applicable sales taxes:

• For all 2018 transactions that occur after either threshold is met in 2018 and that occur after the injunction is lifted in 2018; and
• For all 2019 transactions [S.D. Department of Revenue, “Remote Seller Law—Thresholds—SDCL 10-64-2: How to Apply the Thresholds,” retrieved 2018.08.06].

Notice that the $100K/200 sales threshold does not apply to local vendors, who must obtain a sales tax license before making sale #1. So while the thrust of Wayfair is that physical presence no longer matters, physical presence still creates a greater tax obligation—collection of sales tax on every sale—than that borne by e-sellers like Vladimir, who get a $4,500 exemption from state sales tax and a $2,000 exemption from the usual local sales tax.

Mercer also notes the complications discussed in the Bureau of Finance and Management memo presented two weeks ago to Joint Appropriations and mused upon swiftly and aptly by the Displaced Plainsman. BFM notes that SDCL 10-64-9, the 2016 Partridge Amendment intended to turn every $20 million in remote-seller sales tax into 0.1-percentage-point sales tax relief doesn’t make clear how to count those twenty millions. Recall first the wording of the Partridge Amendment:

If the state is able to enforce the obligation to collect and remit sales tax on remote sellers who deliver tangible personal property, products transferred electronically, or services directly to the citizens of South Dakota, the additional net revenue from such obligation shall be used to reduce the rate of certain taxes. The rate of tax imposed by §§ 10-45-2, 10-45-5, 10-45-5.3, 10-45-6, 10-45-6.1, 10-45-6.2, 10-45-8, 10-45-71, 10-46-2.1, 10-46-2.2, 10-46-58, 10-46-69, 10-46-69.1, 10-46-69.2, 10-46E-1, and 10-58-1 shall be reduced by one-tenth percent on July first following the calendar year for which each additional twenty million dollar increment of net revenue is collected and remitted by such remote sellers. However, the rate of tax imposed by §§ 10-45-2, 10-45-5, 10-45-5.3, 10-45-6, 10-45-6.1, 10-45-6.2, 10-45-8, 10-45-71, 10-46-2.1, 10-46-2.2, 10-46-58, 10-46-69, 10-46-69.1, 10-46-69.2, 10-46E-1, and 10-58-1 may not be reduced below four percent pursuant to the provisions of this section [SDCL 10-64-9, enacted June 1, 2016].

BFM says we won’t have to deal with the question right away, since South Dakota will probably collect less than $20 million between the lifting of the injunction and December 31 of this year. But even next year, BFM says the law doesn’t make clear whether “additional net revenue” should count the money Amazon and others are already voluntarily collecting for us or only the tax we get from remote sellers who get licenses after the law takes effect.

Secondly, the Partridge Amendment doesn’t make clear what to do with additional net revenue in excess of a $20-million increment. Do we roll that over to next year, adding it to $50 million collected next year to produce $60 million total and 0.3 percentage points off our sales tax? Or do we not only not get tax relief from that overage but reduce our chances of more tax relief the next year by including that $10 million in the new base for calculating “additional” net revenue the next year?

I’d suggest “additional net revenue” refers to all revenue we get in each calendar year from SDCL 10-64 that wouldn’t be flowing into our coffers otherwise. Those voluntary sellers wouldn’t be paying if it weren’t for SDCL 10-64, so their collections count. We should also look at each calendar year independently, without carryovers of any sort. If in 2019 we collect $39 million in remote-seller tax, then on July 1, 2020, we drop our state sales tax rate by 0.1 percentage point. If in 2020 we collect only $18 million in remote-seller tax, then on July 1, 2021, our state sales tax rate remains unchanged.

Thirdly, the Partridge Amendment doesn’t make clear if it executes itself:

The law provides that the sales tax rate “shall be reduced” but it is unclear whether this provision is selfexecuting. Who reduces the tax rate? If the Department of Revenue determines that the law requires it to lower the tax rate, does the law require that the Department automatically adjust the tax rate, or must the Department of Revenue wait for the Legislature to take action and amend the tax rate in statute? An analogy could be drawn to the inflation factor in the school funding formula. Although it requires an inflationary increase, that increase is not automatic – the Legislature has to enact it each year [Bureau of Finance and Management, memo to Joint Appropriations, 2018.07.23].

This is what happens when you use the passive voice. Always say who does the reducing; otherwise, the Legislature can grammatically ignore what the law says shall happen.

We don’t have a date for a special session yet, but Senator Jim Bolin (R-16/Canton) is on WNAX this morning saying we need to “accelerate” the clarification of the above issues to so we can make some money on the Christmas shopping season.

Special session or not, listen closely to your gubernatorial and Legislative candidates this fall. If they start spinning tales of how we can fund this or that priority with the new Wayfair money, remind them that we still aren’t collecting that money, and we still have to settle how that money will offset existing sales tax.

Oh, and as a bonus (or anti-bonus, depending on whether you take the perspective of appropriator or taxpayer), we’re on schedule to lose $12 million to $15 million in sales tax on Internet access charges come 2020:

At present, South Dakota is one of seven states that assess a sales tax on internet access charges. States such as South Dakota that taxed internet access prior to October 1, 1998, could continue to implement those taxes pursuant to a grandfather clause included in the federal Internet Tax Freedom Act (1998). The federal Trade Facilitation and Trade Enforcement Act of 2015 temporarily extended that grandfather clause through June 30, 2020. Absent further intervention by Congress, which is unlikely, South Dakota will no longer be able to enforce its internet access tax, which will result in a loss of revenue to the state. Based on the FY2017 numbers, the loss of net revenue in FY2021 is estimated to be between $12M-$15M for the state and $7M-$10M for the municipalities/tribes [BFM, 2018.07.23].

It sounds like the safest fiscal route right now is to assume that we’re not going to see any real change in total state revenues. There is no honeypot, only more hard fiscal decisions ahead.

Related Reading: Alabama and Georgia are granting remote online sellers a $250,000 sales threshold to trigger sales tax collection. Expect the business lobby to be roaming the Capitol seeking an upward (indexed?) change in South Dakota’s Wayfair tax threshold.