A Minor Musing About The Possible Special Legislative Session To Collect Online Sales Tax

Bob Mercer and Cory Heidelberger both have posts  up this morning about the potential special legislative session, Mercer provided a link to the briefing legislators received.

There are a few interesting tidbits. First is the reminder that South Dakota still can't collect sales tax from online purchases despite the Wayfair decision.

Although the United States Supreme Court’s ruling was favorable to the state, the case was remanded back to the South Dakota court system for further legal proceedings. The case and the status of our law are not yet settled. Further, the trial court’s March 2017 order granting summary judgment in favor of Wayfair put in place an injunction that remains in effect today. The injunction prohibits the state from enforcing SB 106. Once the injunction is lifted, the state can begin to enforce SB 106, which will trigger SDCL 10-64-9.

My Amazon shopping cart tells me that I pay sales tax on every purchase. According to my PayPal receipts, two recent purchases from boutique retailers do not show sales tax collection. I'm not sure either retailer will meet the current legal criteria that will demand that they begin collecting South Dakota sales taxes.

Second, it seems odd that key provisions of of amendment to lower the sales tax one tenth of a percent for every $20 million raised from online sales tax collections did not include details for for how the net revenue would be calculated.

There are two ideas as to how “additional net revenue” could be calculated:

(1) additional net revenue is only that revenue that is collected from new licensees that obtain a sales tax license and begin collecting and remitting sales tax after the state can enforce the law, or

(2) additional net revenue is calculated based on the amount of additional money the state collects after the state can enforce its law regardless of whether the licensee had been licensed before or after the state could enforce the law.

Even more confusing is the fact that the law isn't clear about what to do if an extra $22 million or an extra $38 million is raised.

The law provides that sales tax “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” remote sellers. It is not clear whether the $20M in additional net revenue calculation should be done by calendar year or on a rolling basis.  

This is best explained through an example. If, in a given year, the state collects $30M in additional net revenue, $20M of that total would trigger a reduction in the tax rate of 0.1%. How the remaining $10M should be treated is unclear.  

Under one interpretation, that $10M, being less than $20M, would not trigger a further tax rate reduction, but it would go into the base for sales tax collections upon which additional net revenue would be calculated for the following year.  

Under the other interpretation, that $10M “rolls over” into the following year, meaning that only another $10M in additional net revenue would trigger an additional 0.1% tax rate reduction.

These problems along with the question of whether any reduction in the sales tax rate is self-enforcing should have been foreseen and addressed when the legislation was being crafted so that no one would have to consider a special session.