Whether or not you live in South Dakota, the recent tax law passed in that state may have an impact on you because of litigation that was filed in response to the law. Read on to find out why terminating affiliates in South Dakota will NOT help merchants.
What Is Going on in South Dakota?
On March 22, 2016, the South Dakota governor signed into law legislation adopting an “economic presence” approach that would impact out-of-state merchants that sell online to South Dakota residents. Unlike states that have passed affiliate nexus laws, this law does not require any physical presence in the state by the merchant, its subsidiaries, or its affiliates. Rather, the merchant is required to collect and remit sales tax if it either delivers over $100,000 in product to the state or 200 separate transactions in a year.
Last week South Dakota filed suit against Newegg, Overstock, Wayfair, and Systemax to force them to comply with the law. One day after that suit was filed, the American Catalog Mailers Association and NetChoice sued the state, alleging that the law was unconstitutional. Retailers are taking action such as Blue Nile suspending shipments into the state.
How Would Merchants Be Affected By Removing South Dakota Affiliates?
To be clear, this law is not tied to affiliate marketers. Therefore, dropping affiliates from programs will not protect online retailers from the reach of this new law. Unlike in most other “nexus” law states, this law is based completely on the amount of sales of the out of state retailer into South Dakota. Whether a merchant has affiliates in South Dakota is not material to the law. (Read the full text of SB106 §1)
What Is the Potential Long-Term Impact?
South Dakota anticipated immediate legal action to be taken once the law was enacted. In fact, the goal of the legislation and subsequent lawsuit was to get the United States Supreme Court to revisit the decision in Quill Corp. v. North Dakota (1992), which is the case cited by states when they explain the need for affiliate nexus laws. The lawsuit claims “The State [South Dakota] acknowledges that a declaration in its favor will require abrogation of the United States Supreme Court’s decision in Quill Corp. v. North Dakota.”
Why would the Supreme Court revisit Quill now after 24 years? Justice Anthony Kennedy created speculation in 2015 when he stated in his concurring opinion in Direct Marketing Ass’n v. Brohl:
“There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet…Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers…Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”
The Supreme Court had the opportunity in that case to address the underlying substantive issue of sales tax and the Internet but instead decided the case on a procedural question, leaving Quill intact.This left open the opportunity for a new case to be heard at some point in the future on the substantive nexus issues.
South Dakota is not the first state attempting to force the Supreme Court to revisit Quill. Among other states, Alabama adopted an economic presence model in 2015. Other states such as Utah proposed nexus laws for similar reasons. Although it did not pass, Utah legislators mentioned during their hearings on a proposed tax law this year that their goal was to force a federal solution.
Where Does the PMA Stand?
The PMA has long been in favor of a federal solution that would alleviate the current state-by-state approach that has left merchants confused and some affiliates out of business. The most likely federal action would be the Marketplace Fairness Act, which has been introduced multiple times but has never passed both houses of Congress. Alternatively, a Supreme Court decision overturning Quill could have the same effect depending upon the exact holding.