Safeguards are Not as Safe as They Appear

The South Dakota law provides for safeguards to limit the undue burden of the tax collection of out of state vendors. The current safeguards only require those with sales of over US$100,000 or with more than 200 different transactions to residents in the state to collect taxes.

In their brief to the US Supreme Court in support of the legislation the Multistate Tax Commission argues “[a] sales threshold standard, like the one enacted by South Dakota, represents a fairer, more workable alternative to the physical presence standard, and, to the extent the Court deems it necessary, it can provide further guidance to the states for adopting and applying such standards.”

On the surface, this does indeed seem like a reasonable safeguard or standard. However, in practice the safeguards raise an interesting dilemma that puts the out of state vendors at a disadvantage.  

  1. The safeguards are in place to protect out of state vendors. These out of state vendors do not have representation with the legislative body of the state enacting the safeguard.
  2. If revenues within states continues to decline, or if there is a need for additional revenue, this safeguard will be one of the first to be examined as a way to raise state revenues without harming its own residents.

Of course, a safeguard is better than no safeguard. But, a safeguard that benefits the local states to the disadvantage of out of state vendors is sure to be a slippery slope that eventually results in legislative bodies quickly eroding the safeguards because it doesn’t impact their constituency.

The safeguards proposed are red herring designed to make the law more palatable to out of state vendors and limit opposition. In reality, it offers little to no permanent or long term protection and results in safeguarding out of state vendors with sales thresholds the state has no incentive to maintain.

John Schultz