Consumers in the Black Hills who purchase retail goods online without paying sales or use tax in South Dakota may be costing local and state governments as much as $13.8 million a year, according to a recent analysis of FY 2016 taxable sales data by the Black Hills Knowledge Network. These lost revenues could pay the salaries of 282 teachers, 286 police officers or 341 fire fighters, or cover the cost of snow removal in Rapid City for nine years.
Although the State of South Dakota requires consumers to pay sales tax on goods and services purchased on the internet and delivered within the state, most online retailers do not collect and pay this tax and many consumers do not report these purchases to the state or pay the required use tax. In 2016, the South Dakota Legislature passed Senate Bill 106, which requires major remote sellers with no physical location in South Dakota to remit sales tax as if they had a physical location in the state. Enforcement of the law, however, is on hold pending resolution of legal challenges to the law pending in state and federal courts.
NOTE: Actual numbers for internet sales in South Dakota are not available. The estimation is based on South Dakota Department of Revenue reports on taxable sales for retail trade in FY 2016 for the seven counties in the Black Hills and the US Department of Commerce third quarter report on retail sales, which concludes that internet sales account for approximately 8.5 percent of retail sales across the country. The BHKN estimate does not include potential tax revenues lost in wholesale trade. The estimate also assumes that all transactions (except in Oglala Lakota County) would be subject to the current 4.5 percent state sales tax rate and a municipal sales tax rate of 2.0 percent. This assumption may slightly exaggerate the estimated tax loss. This estimate also does not account for current payments made by some online retailers (the state estimates that approximately 2,200 sellers are already collecting and remitting these sales taxes) or by consumers who comply with current state law requiring the payment of use tax for goods and services purchased online and delivered to South Dakota residents. In addition, economic theory suggests that if all internet retail sales were taxed, meaning there was no tax advantage to shopping online, relatively fewer purchases would be made online and relatively more would be made from brick-and-mortar retailers. This potential effect has not been included in the estimate.