At least one major online retailer has stopped doing business in South Dakota as a direct result of the state’s new online sales tax collection law.
A spokesman for online jeweler Blue Nile Inc., No. 82 in the Internet Retailer 2016 Top 500 Guide, says the company won’t ship to the state for the foreseeable future.
“Unfortunately, South Dakota’s law is in direct contradiction to federal law and we made the difficult decision to temporarily suspend shipping to South Dakota until this unconstitutional law can be addressed,” the spokesman says. “I can’t comment on specific sales figures, but we are disappointed we can no longer ship to our customers in South Dakota.”
The new law aims to force the U.S. Supreme Court to reconsider its 1992 ruling in Quill Corp. v. North Dakota, which effectively had allowed web-only retailers to avoid collecting sales tax in most states. That case found that only a company with a physical presence in a state—such as a store, office or warehouse—could be required to collect sales tax from state residents. The South Dakota lawsuit says in the first paragraph of the summary, “The State acknowledges that a declaration in its favor will require abrogation of the United States Supreme Court’s decision in Quill Corp. v. North Dakota.”
As of Sunday, large online retailers that sell in South Dakota had to begin complying with a new law that requires them to collect sales tax and remit it even if the retailer does not have a physical presence in the state. The Remote Seller Compliance law (Senate Bill 106) was signed into law by Gov. Dennis Daugaard on March 22 and requires all retailers who do more than $100,000 in sales in South Dakota or complete at least 200 electronic transactions in a calendar year to collect sales tax, even if they do not have a physical presence. South Dakota’s sales tax rate is currently 4%; it will go up to 4.5% on June 1.
Top500Guide.com data shows Blue Nile had $480.1 million in web sales in 2015, up 1.4% from $473.5 million. A spokesman for the South Dakota Department of Revenue did not return a request for comment on Blue Nile’s decision to stop shipping to the state.
More retailers may follow Blue Nile’s lead, however.
David Escobar, senior manager of digital marketing for Florida-based department store chain Bealls Inc. (No. 359 in the Top 500), says he was never notified about the change in South Dakota’s online sales tax collection policy. He says if he had been notified, he would have acted swiftly.
“If we are now on the hook for sales tax, the first thing we will do is fire all affiliates and marketing partners who reside in the state,” he says. “We would then do anything else to reduce/eliminate nexus there.” Nexus is a legal term for a physical presence in the state. Some states have passed laws declaring that an online retailer is deemed to have nexus if it works with online affiliates based in the state.
South Dakota sent notices to 206 retailers informing them that they might be affected by the new law.
Online wine retailer NakedWines.com Inc. (No. 322) began shipping to South Dakota in January, before the legislation went into effect. NakedWines.com winemaker Ryan O’Connell says the company was required to register to collect and remit sales tax in South Dakota before being able to obtain its direct wine shipper’s permit to the state.
At the beginning of this year, South Dakota began requiring all wineries shipping to its residents to obtain a $100 annual permit, which requires wineries to collect any city sales tax in addition to state sales tax.
“We’ve taken taxes into account for sales into South Dakota since the beginning of shipping to that state, so there won’t be any difference for our (customers),” O’Connell says.
David Wolfe, CEO of online-only mattress retailer Leesa, learned of the new law when Internet Retailer contacted him.
“We are now looking at it,” he says. “If it applies to us we will register.”
A spokesman for the South Dakota Department of Revenue says more than 40 remote sellers have registered for a South Dakota Sales Tax License because of the new law, though he declined to say which ones.
Online retail group Etailz Inc. (No. 267) did register with South Dakota. Etailz owns and operates several retail websites, including GreenCupboards.com, EcoMom.com and Vault Electronics.com.
Chief financial officer Bill Kinzel says the state first reached out to Etailz about two months ago to inform the retailer of the new law.
“It was just a letter that they mailed out that said effective X date, you have to be registered and collecting sales tax in the state,” he says. “They were pretty aggressive in reaching out from what I can tell. That’s one of the first states that’s reached out to Etailz directly and said, ‘We want you to register.’”
Etailz registered because collecting the tax felt almost inevitable, Kinzel says. “The alternative is to put your head in the sand and either pretend that it doesn’t exist or fight it in the courts,” he says. “It’s a gamble that we don’t want to take.”
Scott Peterson, director of government relations for tax compliance software vendor Avalara, says his company hasn’t heard anything from its clients about the new law, though he says it is a bit early for that.
“There’s a long way to go before South Dakota is successful in this,” he says. “There’s a lot of judges between today and them being successful in this. If there is some degree of success by South Dakota, there will likely be other states that do this.”Favorite