February 5, 2019

The Future of the Half Penny

Will the half penny sales tax have a half-life?     

In order to find money for increasing teacher pay, then Governor Daugaard asked for, and the state legislature agreed to, an increase to the state sales tax from 4% to 4.5%.  During the debate by the House of Representatives, an amendment was offered by Representative Partridge (R-Rapid City) that said if South Dakota was ever allowed to collect sales taxes on remote sales, (i.e., internet) that the money collected from those remote sales would be used to reduce the half-penny increase in sales tax.

In fact, the amendment was very specific in stating that the tax rate would be reduced by 0.1% for every $20 million dollars collected in remote sales.  At the time, the legislature was working on SB 106, which was to be used as a test case to challenge the US Supreme Court decision known as the “Quill decision” that prohibited states from collecting sales taxes from any company that didn’t have a physical presence (or nexus) in that state.

While taxing remote sales seemed like an exciting possibility, it was more commonly thought to be a rather remote possibility - meaning the Partridge amendment was seen by many as the legislative equivalent of the kids promising to “do all of the work and take care of it” if their parents would just buy them a new puppy (or far worse yet, a pony).

What took place next is best summarized by the lyrics from the Drifters’ classic hit This Magic Moment.

“And then it happened . . . it took [us] by surprise”

“South Dakota vs. Wayfair” overturned “North Dakota vs. Quill”.  In other words, the much desired cute little puppy just presented the first real issue on the living room carpet.  Now what?

With work to get a full grasp of the impact of the Wayfair decision underway, several things have prompted a level of reevaluation about the straight line reference of the original amendment.

• Internet sales are taxable much sooner than was expected
• Identifying and secluding the tax is going to be harder than was expected
• The time frame for fully understanding the amount of revenue being collected is unknown but a full measure will certainly not be ready for the rest of this year.
• A key part of implementing the Wayfair decision is the establishment of “marketplaces” or systems that will calculate and collect the sales taxes for businesses and then distribute those funds to various states.  These marketplace systems are just not being established.
• There is significant revenue being collected from internet sales that occurred before the Wayfair decision and should not be part of any calculations of funds available for tax reduction.  These early tax remittances include sales from Walmart, Target and certain sales from Amazon.
• The original Partridge Amendment was never subject to a public hearing.  It was a House Amendment to a Senate bill that was returned to the Senate for a vote to concur with the amendment and then sent directly to the Governor.  The public’s reaction to the amendment remains unknown at this point.

To address these issues, now Senator Partridge (R-Rapid City) has offered SB 86 to bring specific process to the implementation of his original amendment. 

SB 86 Partridge (R-Rapid City) - provide for calculations of sales tax revenues from sellers located outside of the state.

SB 86 is an attempt to bring specific definition to the “Partridge Amendment” adopted during the debate on the half-penny tax increase that funded the increase in teacher pay.  The amendment mentioned the possibility of applying sales taxes to internet sales and using those funds to reduce the half-penny added tax using a formula that called for a 0.1% reduction in the tax for each $20 million in internet sales tax.

SB 86 is sponsored by the original sponsor of the Partridge Amendment – Jeff Partridge. 

The Chamber’s Board of Directors has discussed whether the state should retain the internet tax revenues but has not formed a conclusion because there are too many details that remain unknown.   The Chamber has endorsed SB 86 because it works to answer the questions above before deciding a course of action.

Here is the text of SB 86:

The Department of Revenue shall prepare and submit to the Joint Committee on Appropriations, no later than the twenty-first legislative day, calculations of actual revenue generated during the immediately preceding calendar year under §§ 10-64-2 and 10-65-5. The calculation of revenue generated under §§ 10-64-2 may not include any revenue generated prior to November 1, 2018. If the revenue generated in a calendar year exceeds the revenue generated in the immediately preceding calendar year by at least twenty million dollars, the committee may introduce legislation to reduce the rate of tax under §§ 10-45-2, 10-45-5, 10-45-5.3, 10-45-6, 10-45-6.1. 10-45-6.2, 10-45-8, 10-45-71, 10-46-2.1, 10-46-2.2, 10-46-58, 10-46-69, 10-46-69.1, 10-46.69.2, 10-46E-1, and 10-58-1 by one-tenth percent for each increment of twenty million dollars. The rate of tax reduced under this section may not be less than four percent.

HB 1102 – Malicious Mandate to Manufacturers

HB 1102 – Pischke (R-Dell Rapids) - establish certain provisions regarding fairness in repairs of equipment sold or used in this state.

HB 1102 would mandate that original equipment manufacturers make software and equipment available to independent repair shops at no expense.  For reasons not explained, the bill excludes a car manufacturer which makes sense given a very detailed and extensively regulated relationship that prohibits the very actions the rest of the bill requires. 

Here are key provisions of HB 1106:

First, the definition of an “independent repair provider”: 

(6) "Independent repair provider," a person operating in this state which is not affiliated with an original equipment manufacturer or an original equipment manufacturer's authorized repair provider, which is engaged in the diagnosis, service, maintenance,

or repair of equipment, except that an original equipment manufacturer is an independent repair provider for purposes of those instances when such original equipment manufacturer engages in the diagnosis, service, maintenance, or repair of equipment that is not affiliated with the original equipment manufacturer;

Followed by a new section of law that would control the relationship between manufacturers and independent repair providers:

 Section 2. That the code be amended by adding a NEW SECTION to read:

    For equipment sold and used in this state, the original equipment manufacturer of the equipment shall:

            (1)    Make available to any independent repair provider or owner of equipment manufactured by such original equipment manufacturer, the same diagnostic and repair documentation, including schematic diagrams, repair technical updates and updates and corrections to embedded software, for no charge or in the same manner and in the same time frame as the original equipment manufacturer makes the diagnostic and repair documentation, including repair technical updates and updates and corrections to embedded software, available to its authorized repair providers and subcontract repair or refurbishment facilities; and

            (2)    Make available for purchase by the owner, the owner's authorized agent, or any independent repair provider, equipment or service parts, inclusive of any updates to the embedded software of the equipment, upon fair and reasonable terms.

    Nothing in this section requires the original equipment manufacturer to sell equipment or service parts if the parts are no longer available to the original equipment manufacturer or the authorized repair provider of the original equipment manufacturer.

This idea was proposed several years ago and was strenuously opposed by the South Dakota Chamber of Commerce and Industry.  The Chamber will be working to defeat HB 1102 which will include testimony before the House Commerce and Energy Committee.

Here are the members of that committee:

Representatives:

•  Beal, Arch (R); 
•  Gosch, Spencer (R); 
•  Johnson, Chris (R); 
•  Lake, John  (R); 
•  McCleerey, Steven (D); 
•  Milstead, Rhonda (R); 
•  Miskimins, Paul (R); 
•  Perry, Carl (R); 
•  Rounds, Tim (R); - Chairman
•  Sullivan, Kelly (D); 
•  Weis, Kaleb (R); 
•  Willadsen, Mark (R); 
•  Zikmund, Larry (R)

A complete list of bills that are being tracked by the South Dakota Chamber of Commerce & Industry appears below the following Business Day message.

Register today for Business Day at the Legislature.

In addition to the recent announcement of Chamber Chairman of the Board Dana Dykhouse (President/CEO of First PREMIER Bank) as our evening program speaker, we are pleased to notify our members that Bill Peterson will again moderate Business Caucus, along with Chamber President David Owen.  Owen’s annual legislative update will be accompanied by Business Caucus questions for the audience.  Attendees will respond via text messages, with the results tallied and presented onscreen in a matter of seconds. 

Business Caucus is an informative and enjoyable session that allows participants to offer their opinions on issues being debated in the legislature.  A cumulative response report is developed and delivered to the legislators. 

As a reminder to our manufacturing members, Business Day will again include a digital showcase to highlight the importance of the industry in South Dakota.  The details are available for download – click here.  If you are planning to participate, please notify maryanneb@sdchamber.biz at your earliest convenience.

Bill List

The following is a list of legislative bills being followed by the South Dakota Chamber.  The full list of bills may be reviewed at sdlegislature.gov.