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January 08, 2017 10:07 PM

South Dakota Testing Online Sales Tax

A South Dakota law could impact the entire nation.

Legislators have passed a measure allowing the state to collect sales tax from businesses that operate online, with no physical store in South Dakota.

Several online retailers are now suing the state in response.

Dick Murphy has a passion for all things Irish.

"We're South Dakota's one and only Irish gift store," Murphy said.

He opened up Mrs. Murphy's Irish Gifts in downtown Sioux Falls almost 20 years ago. Over that time, his small business has had to increasingly compete with online retailers. Not to mention the fact that some of them don't have to pay sales tax, as Murphy does.

"It all adds up," Murphy said. 

Across town, the owner of Montgomery's says he's lucky he's in an industry that hasn't been hit as hard by online sales. Still, he thinks it's only fair that all businesses pay state sales tax.

"I like to think about it like a sport's game. How would you like to start a basketball game, and you're 6.5 points below before you even start? That's how I feel in that online retailers don't have to pay a 6.5 percent sales tax," Montgomery's Owner Eric Sinclair said.

It's not only state retailers pushing for the law. State officials estimate state coffers are being shortchanged by an estimated $50 million a year by online retailers and their customers who currently aren't paying state sales taxes.

"That's a pretty big hit to our state general fund. That's money that goes directly to teachers, education, and to the Medicaid and social services programs," State Sen. Deb Peters (R-Hartford) said.

Peters sponsored the bill that lawmakers ultimately passed.

"We're going to have to take a look at our budget numbers. We're going to see a dramatic decrease from even when the governor pitched his budget a month ago because the Christmas sales in South Dakota just weren't as strong," Peters said.

Yet those filing the lawsuit against the state say South Dakota is making it difficult for small online retailers to succeed.

"This law imposes sales tax collections on small and medium sized businesses, as well as large businesses. You can do as little as $220 transactions with South Dakota and generate $4,000 in sales and be subject to sales tax collection and reporting in South Dakota," ACMA President Hamilton Davison said.

Those filing the lawsuit against South Dakota say the new law not only goes against a previous Supreme Court decision, but it will also impact South Dakota shoppers in a negative way.

"This will make marketers much less able or interested in selling into South Dakota," Davison said.

Another group suing South Dakota, NetChoice, issued this statement:

"If this law were allowed to stand, South Dakota businesses will suffer when other states impose unreasonable administrative and tax collection burdens on South Dakota-based retailers... Indeed, if every state followed South Dakota's lead, online retailers across the country would be responsible to over 12,000 different tax jurisdictions and face legal jeopardy from 46 state tax auditors."

"When you think about how easy it is to send off a product online, they have the incredible technology to do that. They can also have the technology to collect a sales tax and remit it back to South Dakota here," Murphy said.

Technology and taxes that this small business owner says could help the state in a big way.

"South Dakota needs every bit of the revenue we generate through our sales tax to conduct the business of making South Dakota a better place to live," Murphy said.

South Dakota itself is suing three online retailers to collect sales taxes from them.

The state hopes to have a decision this month.
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