State searches for new solutions to sales tax collection problem

No state in the Midwest relies more heavily on the sales tax than South Dakota. And in a state where more than half of total tax collections come from this revenue source, it comes as no surprise that lawmakers are trying to address a growing collection problem: the inability to bring in sales and use taxes from purchases made over the Internet.

Stateline Midwest Vol. 20, No. 3: March 2011

No state in the Midwest relies more heavily on the sales tax than South Dakota.

And in a state where more than half of total tax collections come from this revenue source, it comes as no surprise that lawmakers are trying to address a growing collection problem: the inability to bring in sales and use taxes from purchases made over the Internet. According to the Pierre Capital Journal, the state is now losing an estimated $35 million due to remote sales.

How can the state try to capture more of this lost revenue? Two different approaches will be tried under bills that received overwhelming legislative approval. SB 146 requires online retailers to post on their website a reminder to customers that a use tax is due on Internet purchases. SB 147 more broadly defines a “business presence” in South Dakota. Retailers that maintain “a distribution house, sales house, warehouse, or similar place of business” would be included in the new definition — and, as a result, be required to collect the state sales tax.

South Dakota is one of nine Midwestern states (all but Illinois and Ohio) that are full members of the Streamlined Sales and Use Tax Agreement — an attempt by states to simplify sales-tax collection and to encourage remote sellers to collect taxes. Only a change in federal law, however, will require remote sellers to do so.