By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Business Corporation Law Attorney
One of Benjamin Franklin’s most famous quotes is “In this world nothing can be said to be certain, except death and taxes.” And if South Dakota and other states have their way, online shoppers and those who order from a catalog from that state will have the great statesman turning in his grave.
Many states are trying to tax online purchases regardless of federal law. In one state their law provides that a retailer who sells products or provides services in South Dakota need only have an “economic nexus” with the state in order for it to be required to collect and remit sales tax to the state. The merchant need only collect $100,000 in gross revenue from state citizens, or be involved in at least 200 transactions with South Dakota citizens.
The law is unconstitutional on its face. Why? Well, South Dakota seeks to regulate out-of-state merchants who do business within its state. That doesn’t square up with our United States constitution, which gives the power to Congress to regulate interstate commerce, not the state legislatures. If Congress has not authorized it, South Dakota can’t do it. This principle was reinforced by the US Supreme Court in Quill Corp. v. North Dakota. The Court held that states could only impose sales tax obligations on merchants physically present in the state.
But that didn’t stop South Dakota. In fact, the legislators that wrote this bill knew South Dakota was in the wrong, which is why they put in procedural rules to have this reviewed and, they hope, rubber-stamped by the South Dakota Supreme Court. First, the bill declared that the law would not be enforced until the constitutionality has been decided, and if it is decided the bill is constitutional, the tax would go into effect the date that decision is made. Second, if a taxpayer meets the bill’s threshold, it authorizes the Department of Revenue to seek a declaratory judgment on the bill’s constitutionality and urges the courts to decide this case as quickly as possible with the highest of priority.
The law went into effect on May 1st, and on May 2nd, it was challenged by American Catalog Mailers and NetChoice on the grounds I mentioned earlier. While sales tax will not be collected until there is a declaration by a state or federal court that this is constitutional, it is troublesome because other states, like Alabama and New York, are trying to have the sales tax standard changed so they can go after out-of-state retailers for sales tax. In West Virginia, a judge ruled that independent contractors who performed property maintenance and landscaping services for a company with no physical presence in the state created substantial nexus such that the contractors were required to collect sales tax on their work.
We will certainly be keeping an eye on this and letting you know what happens. For as Thomas Paine once wrote, “Eternal vigilance is the price of liberty.”
To discuss your NJ business and corporate matters, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.