PIERRE, S.D. (KELO) — Deb Peters says the 2018 Wayfair decision, which allowed state governments to tax online purchases made by their residents from out-of-state companies, proved especially fortunate for South Dakota’s state treasury a few years later during the COVID-19 pandemic.
Peters was one of the legislative leaders who joined forces with officials from the Daugaard administration, the state attorney general’s office and South Dakota’s business community to get the issue before the U.S. Supreme Court.
“The timing of that Supreme Court case couldn’t have been any better. It saved our economy,” Peters said in an interview. “It made our recovery and our bounce-back a lot faster than other states.”
South Dakota’s current governor has a similar view. “We have had record surpluses and sales tax revenue over the last several years – and we have been able to use those dollars to give back to the people of our state,” Governor Kristi Noem said Friday in her weekly column.
South Dakota state government operates on a July-June fiscal year. Sales and use tax revenue show what Wayfair helped accomplish. State government’s sales-tax proceeds went from growth of 3.7% in fiscal 2019 and 4.6% in fiscal 2020, to 12.7% in 2021; 12.2% in 2022; and 9.1% for 2023.
One of the results was that the Noem administration could put unprecedented amounts of surplus into state government’s reserves: $85.9 million in July 2021, $115 million in July 2022, and $96.8 million this past July.
Those amounts far exceeded prior years. Noem put $19 million into reserves in July 2020 and $19.4 million in July 2019. The previous governor, Republican Dennis Daugaard, put in $16.9 million in July 2018 and $7.9 million in July 2017, a year when sales tax revenue actually finished below the Legislature’s forecast.
During nearly all of those years, South Dakota’s state sales and use tax rate was 4.5%. This year, the Legislature decided to reduce the rate to 4.2%. Republican Representative Chris Karr led the effort. He sponsored HB1137 that put the reduction into place through June 30, 2027.
Karr already has legislation ready for the 2024 session to make the 4.2% rate permanent. He wants it to be first on the House of Representatives list. Noem likes that idea, too.
“While it’s no secret that this was not the tax cut I wanted to deliver for the people last session, I’m hopeful the Legislature will make this tax cut permanent,” she wrote.
During the 2022 session, a group of House Republicans and Democrats, led by Republican Representative Jon Hansen, attempted to remove the 4.5% sales and use tax from most food and food ingredients. The House passed it, but the Senate wouldn’t agree.
Noem, as part of her 2022 re-election campaign, announced months later a somewhat similar plan to exempt most food items from the tax. But the Legislature didn’t agree, setting her proposal aside last winter, and chose Karr’s general reduction instead.
Karr’s legislation also had a second feature: It repealed what was known as the Partridge amendment. The amendment had been in effect as part of the sales and use tax code since 2016, when the Legislature at Governor Daugaard’s request increased the rate to 4.5% from the previous 4%, with the additional tax revenue earmarked for teacher salaries and property tax relief.
The Partridge amendment called for the 4.5% rate to be rolled back by one-tenth of 1% for every additional $20 million of sales tax revenues collected from remote sellers. The amendment bore the name of its sponsor, then-Representative Jeff Partridge, and was one of three sets of changes that House members made to Governor Daugaard’s proposal.
Looking back, Partridge said his amendment helped get “at least one vote and maybe two” that previously were nays. “So I think it’s fair to say it played an instrumental role in getting the vote over the finish line,” Partridge said.
Republican Senator Lee Schoenbeck, who was serving in the House during that time and favored the tax increase, kept the running tally of ayes and nays on the bill. “Jeff’s amendment got Jeff’s vote. By then we were down to needing only three or four,” Schoenbeck recalled. He added, “The Partridge amendment was just something Jeff needed to vote for the bill. No time was spent thinking about what would or wouldn’t be needed years later to implement it.”
Asked if the Partridge amendment was key to the House passing the tax increase, Peters said, “I think it was one of many factors.” The Senate went on to pass the tax increase without further changes.
Two years later, state Attorney General Marty Jackley presented South Dakota’s arguments to the U.S. Supreme Court regarding whether the state sales and use tax could be collected on transactions between South Dakotans and remote sellers who were doing business outside the state and didn’t have a physical in-state presence, known as nexus. On June 21, 2018, the nation’s highest court ruled 5-4 in South Dakota’s favor.
Tony Venhuizen, who now serves as a Republican member of the House, was chief of staff during Governor Daugaard’s second term. Venhuizen presented a memorandum from the Daugaard administration to the Legislature’s Joint Committee on Appropriations on July 25, 2018, regarding next steps after the Supreme Court decision. A member of the nonpartisan Legislative Research Council whose staff work for the Legislature had prepared two memos, one dated June 21, 2018, and the other dated June 23, 2018, on the same topic.
One of the issues for discussion was whether the Partridge amendment would automatically take effect. “I think it is notable that the LRC memo took the position that the Partridge amendment was not self-executing, but rather that a change in the sales tax rate required additional action by the Legislature. The Daugaard administration memo raised that question also but didn’t definitively answer it,” Venhuizen said.
Governor Daugaard called lawmakers back to the Capitol for a special legislative session on September 12, 2018. One of the bills approved that day defined marketplace providers as subject to the sales tax. They are businesses that provide online platforms where other business offer products for sale.
Among the House co-sponsors of the marketplace-providers legislation was Republican Jean Hunhoff. “This way we had a definition,” Hunhoff said about marketplace providers. What the legislation didn’t do, however, was define marketplace providers as remote sellers. In other words, the Partridge amendment wouldn’t apply to sales tax revenue collected from marketplace providers. such as eBay and Etsy.
Said Venhuizen, “I think it is fair to say that the Partridge amendment was proposed and passed before the idea of a marketplace-provider classification was introduced.”
The Partridge amendment never was triggered. It called for the tax rollback whenever remote-seller revenue increased $20 million during the prior calendar year. But the $20 million increase in a year never was reached, according to state Revenue Department totals.
Numbers from the department show collections from remote sellers totaled $56,387,783 in calendar 2017. For calendar 2018, they totaled $63,655,771, an increase of $7,267,988. For calendar 2019, they totaled $81,167,225, an increase of $17,511,454. For calendar 2020, they totaled $87,378,555, an increase of $6,211,330. For calendar 2021, they totaled $105,842,669, an increase of $18,464,114. For calendar 2022, they totaled $108,088,894, an increase of $2,246,225.
Daugaard mentioned the Partridge amendment about 50 minutes into his speech to lawmakers during the one-day special session, saying there could be a need for changes to it or reinforcement of it. “We just won’t know with any certainty or confidence how much revenue we will get until we start to collect it,” Daugaard said. He added, “This is intended to provide sales-tax relief with newly collected revenue.”
Lance Russell, a Republican state senator at the time, asked then-state revenue secretary Andy Gerlach whether the Revenue Department had the ability to trigger the Partridge amendment for the promised reduction, or whether the Legislature needed to take action. “I do not, but you as the Legislature do,” Gerlach replied. He added, “I think you’re going to have to legally address this as a Legislature and pass that law.”
That’s why repealing the Partridge amendment was part of Karr’s bill this year. He said the tax cut honored the amendment’s goal. “It’s an unenforceable law. It doesn’t make any sense,” he said about the Partridge amendment. “It’s been there for years and it didn’t do anything.”
“Nobody came forward and said we gotta do this,” he added. “Until the legislators have the stomach to cut the tax, nothing was going to happen.”