In a recent ruling by the South Dakota Supreme Court, an infrastructure management company was found liable for over $75,000 in unpaid use taxes and interest. Ellingson Drainage Inc., based in Minnesota, was required to pay a use tax on equipment it brought into South Dakota for use in 30 drainage projects.
The situation arose because the company didn’t pay sales tax when purchasing the equipment out of state. As a result, South Dakota imposed a use tax on the property when it entered the state. This use tax is essentially a substitute for sales tax, ensuring that the state doesn’t lose revenue due to purchases made elsewhere.
The South Dakota Department of Revenue assessed a 4.5% use tax on the equipment’s value, totaling approximately $60,000, along with about $15,000 in interest, covering the period from March 2017 to January 2020. The company argued that South Dakota’s use tax statute was unfair, violating constitutional clauses related to due process and commerce. The company claimed that the tax imposed an unequal burden compared to its activity in the state, especially considering that some equipment was used for only one day. However, the court disagreed, stating that the company benefited from operating in South Dakota, just like any other business. The ruling emphasized that the company was free to bring its equipment back for future projects in South Dakota without facing additional use tax. The South Dakota Supreme Court applied a four-part standard that was described in a previous United State Supreme Court’s decision to support their position that the imposition of the use tax was not a burden on interstate commerce. The four parts in determining that a tax is not an unconstitutional burden on interstate commerce if the taxed activity [1] is sufficiently connected to the state, [2] the tax is related to benefits provided to the taxpayer, [3] the tax does not discriminate against interstate commerce, and [4] the tax is fairly apportioned. The South Dakota Supreme Court determined that all four parts were met in this case.
Furthermore, the court dismissed Ellingson Drainage Inc.’s argument that only property permanently remaining in the state should be subject to use tax, calling it legally unsustainable. When operating a business that performs activities in other states, it is pertinent to not only know your home state’s sales tax laws but to also understand the laws of the other states you are doing business in. (Ellingson Drainage, Inc. v. Dep’t of Revenue, South Dakota, No. 30280, February 7, 2024)