South Dakota Drops Transaction Count for Economic Nexus

South Dakota, the state that ushered in the economic nexus era for sales tax with the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., has enacted legislation to drop the transaction count from its remote seller collection threshold. The new law goes into effect on July 1, 2023 and remote sellers will no longer be required to collect and remit the state’s sales tax if they only exceed “200 or more separate transactions” in South Dakota. Remote sellers with $100,000 in gross revenue from sales into South Dakota remain liable for collection of the state’s sales tax.

South Dakota joins a handful of other states in dropping the transaction count threshold which tends to disproportionately impact high-volume, low dollar sellers. For example, a clothing company can easily sell 200 shirts at $20 each into a state thereby triggering economic nexus and its corresponding sales tax obligations. The sales tax obligations create a significant burden on a small business as the $4,000 in receipts (200 shirts x $20) results in a requirement to register for sales tax and file returns in the subject state. Achieving sales tax compliance is rarely as simple as flipping a switch. In the preceding example, the clothing retailer may need to add sales tax software to properly calculate the state and local sales tax based effective rates at the shipping destination. If the state is one of the several that exempt clothing, additional problems arise. Suppose that, in addition to clothing, the company also sells accessories. The retailer may now also need software to properly tax its products in the target state based on category (clothing = exempt, accessories = taxable).

South Dakota’s law change will not likely impact many of our clients, but it does illustrate the sales tax compliance considerations and complexities associated with economic nexus. State tax law changes, such as South Dakota’s, offer a minor respite to smaller business from the onslaught of economic nexus issues facing remote sellers. If your company has questions on economic nexus or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.