South Dakota Department of Revenue fights definition from Wayfair Case
We continue to share insider knowledge of how regulatory departments over regulate without caring for the industry that sustains them or respecting residents' desire for choice.
The 2018 South Dakota v. Wayfair Supreme Court case revolutionized how states collect sales tax from online retailers. This landmark case, originating from South Dakota itself, established economic nexus standards that streamlined tax collection and reduced administrative burden for both states and sellers. In simple terms, these standards mean that if an online business sells more than a certain amount in a state (typically $100,000 or 200 transactions), they must collect sales tax there, regardless of having a physical presence, creating a clear, straightforward rule everyone can follow.
Following this case, nearly all states adopted these economic nexus rules, giving birth to the concept of the 'marketplace facilitator.' Under this model, if a platform meets certain criteria, it stands in place of the seller, taking responsibility for collecting and remitting all sales tax processed through that platform. A piece of genius really, as it helps sellers who use these platforms, and it helps the state cut down on paperwork and increase its collection of sales tax and in particular from out of state sellers.
Ironically, seven years later, the very state that championed these changes is now contradicting its own legal framework. South Dakota's Department of Revenue, specifically its alcohol division, is now asserting that alcoholic beverages should be exempt from marketplace facilitator rules. This position stands in direct opposition to the state's own legislation, which clearly states
10-65-5. Certain marketplace providers required to collect and remit sales tax--Criteria. Notwithstanding any other provision of law, a marketplace provider is subject to chapters 10-45 and 10-52 and shall collect and remit sales tax on all sales of tangible personal property, products transferred electronically, or services for delivery into this state, that the marketplace provider makes or facilitates for a marketplace seller if the marketplace provider:
(1) Is a seller subject to § 10-64-2;
(2) Facilitates the sales of at least one marketplace seller that is subject to § 10-64-2; or
(3) Facilitates the sales of two or more marketplace sellers that, when the sales are combined, are subject to § 10-64-2, even if the marketplace sellers are not separately or individually subject to § 10-64-2.
The law clearly provides no exclusions for alcohol products, making the DOR's interpretation particularly problematic. So, you either have an illiterate department or a department that believes it is above the law and so does not have to follow its own regulations and can make up its own interpretations. This overregulation without benefit is the nemesis of our industry.
The DOR's interpretation undermines multiple benefits established by the marketplace facilitator framework. States previously struggling with fragmented tax collection now receive consolidated payments from marketplace providers, significantly reducing administrative overhead. This streamlined approach allows businesses to operate with simplified compliance procedures while ensuring more efficient tax collection, especially from out-of-state sellers who might otherwise be difficult to track and manage.
Our company recognized early on the importance of meeting state requirements efficiently, leading to our adoption of the A.L.T.A. framework. This comprehensive approach incorporates:
Age verification
Licensing & Compliance
Taxes
Audit trail
Through this framework, we've demonstrated how businesses can effectively meet regulatory requirements while maintaining operational efficiency and ensuring compliance across multiple jurisdictions.
South Dakota's situation reflects a concerning pattern emerging across multiple states. In Virginia, for example, regulatory authorities are implementing similar barriers to efficient marketplace operations, apparently influenced by traditional wholesale channels resistant to modern distribution methods. This trend threatens to undermine the progress made in streamlining tax collection and regulatory compliance.
The federal "Protect Small Businesses from Excessive Paperwork Act of 2025" presents a valuable model for state-level regulatory reform. States need to modernize their regulatory frameworks to align with current business models while reducing unnecessary administrative burdens. This modernization should focus on supporting family-owned craft businesses and enhancing consumer choice, all while maintaining efficient tax collection systems that benefit both state revenues and business operations.
Looking ahead, the South Dakota DOR's current position on alcohol sales marks a concerning regression from the efficiency gains achieved through the Wayfair decision. Their interpretation not only contradicts their own legislation but also threatens to reintroduce unnecessary complexity into tax collection and compliance procedures. This situation calls for immediate attention from policymakers and stakeholders to prevent the erosion of progress made in streamlining state tax collection and regulatory compliance.
We have to hope the federal “Protect Small Businesses from Excessive Paperwork Act of 2025” concepts trickle down to states. There needs to be some severe rethinking at the state level of what departments should be doing to help businesses and not hinder them. When it comes to alcohol, so many of these departments are highly influenced by the old-fashioned wholesale channel. These departments even admit that the influence comes from the wholesale channel as to what they should be doing.
The South Dakota Department of Revenue's approach to alcoholic beverages exemplifies a troubling trend among regulatory departments nationwide. Their interpretation contradicts both common sense and the efficiency principles that drove the original legislation. This regulatory inconsistency creates unnecessary barriers for businesses while potentially wasting taxpayer resources on inefficient collection methods, an approach that Governor Kristi Noem would likely find inconsistent with her administration's commitment to efficient governance and fiscal responsibility.
Even as businesses demonstrate their ability to meet state regulatory needs, regulators are increasingly influenced by the wholesale lobbyists to complicate compliance. This same pattern is evident in Virginia, Tennessee, Michigan and others, where regulators have abandoned logical pathways to improve consumer choice and focus on creating barriers under wholesale channel influence. It's time to overhaul regulatory rules nationwide, a change that would improve consumer choice, help family craft businesses grow, and generate more tax revenue for states while reducing the outsized influence of entrenched wholesale interests. It is the American thing to do, help our family craft businesses.