Nestled in the heart of the United States, South Dakota boasts a distinctive tax landscape marked by its absence of corporate income tax and a strategic approach to sales tax. As one of the few states without a corporate income tax, businesses find an advantageous environment to thrive and invest in the state. The South Dakota sales tax structure, characterized by a state rate of 4.2%, opens a window into a nuanced system where additional local taxes up to 2% can be applied, depending on the nature of the transaction and its location. 

This creates a dynamic and evolving tax framework, exemplified by South Dakota’s influential role in reshaping the taxation landscape for remote sellers with its pivotal involvement in the landmark Wayfair case. In this overview, we delve into the key elements of South Dakota’s tax regime, exploring corporate income tax, sales tax intricacies, nexus considerations, and the taxation landscape for services and digital products. Join us on a journey through the unique contours of South Dakota’s tax policies, where business-friendly initiatives intersect with the demands of the modern digital economy.

What is the South Dakota Corporate Income Tax Rate?

South Dakota does not levy a corporate income tax.

What is the South Dakota Sales Tax Rate?

South Dakota has a state sales and use tax rate of 4.2%, and there are additional taxes up to 2% for local taxes. Tax rates depend on the type of activity and location sold. 

How is Sales Tax Nexus Triggered?

While it may seem like collecting taxes is not a concern in South Dakota from the rates, do not be lulled into a false sense of security. South Dakota went after the large e-commerce marketplace Wayfair in the seminal Supreme Court case that has changed how remote sellers are taxed across the country. 

Remote sellers surpassing $100,000 in gross revenue from sales into South Dakota are obligated to collect sales tax. This encompasses the sale of tangible personal property, electronically transferred products, or services. 

Additionally, marketplace providers meeting specific thresholds must obtain a South Dakota sales tax license and remit applicable sales tax according to SDCL 10-65. This requirement applies to marketplace providers that are remote sellers or those facilitating sales for at least one marketplace seller meeting remote seller criteria, or two or more marketplace sellers whose combined sales meet the remote seller criteria. 

If a business lacks physical presence but exceeds $100,000 in gross sales into South Dakota in the prior or current calendar year, it must obtain a license and remit applicable sales tax.

What Transactions are Included or Excluded from Sales Tax?

In South Dakota, the Sales Tax applies to the sale of tangible personal property, certain electronically transferred products, and specific services. Here is a general overview of transactions that are included or excluded:

Included (Taxable):

• Sale of Tangible Personal Property: Generally, sales tax is levied on tangible items such as electronics, clothing, furniture, and other physical goods.
• Products Transferred Electronically: Tax applies to products transferred electronically, reflecting the modern digital economy.
• Services: Specific services are subject to sales tax.

Excluded (Non-taxable):

• Food Sales: Unprepared food for home consumption is often exempt from sales tax.
• Prescription Drugs: Sales of prescription drugs for human use are typically exempt.
• Sales to Government Entities: Sales to federal, state, and local government entities are often exempt.
• Sales for Resale: Items sold for resale are generally exempt from sales tax.
• Medical Equipment: Some medical equipment and supplies may be exempt.

Are Services Taxed for SD Sales Tax?

South Dakota stands out as one of the states that imposes taxes on a diverse range of personal services, encompassing professional services and training.

Is SaaS Taxable for Sales Tax?

South Dakota imposes taxes on various digital services, including:

• SaaS (Software as a Service): Tax is applicable for the sale of cloud software subscriptions to customers in South Dakota.
• Software Downloads: Tax is owed for the sale of software downloads to customers in South Dakota.
• eBooks: Tax is applicable for the sale of eBooks to customers in South Dakota.
• Digital Downloads: Tax is owed for the sale of digital downloads to customers in South Dakota.

Frequently Asked Questions (FAQs) – South Dakota Business Tax

Is there a corporate income tax in South Dakota?

No, South Dakota does not impose a corporate income tax.

Do remote sellers have to collect sales tax in South Dakota?

Yes, remote sellers with gross revenue from sales into South Dakota exceeding $100,000 must collect sales tax.

What services are subject to sales tax in South Dakota?

South Dakota taxes a wide variety of services, including professional services and training.

Are digital services, such as SaaS and software downloads, taxable in South Dakota?

Yes, SaaS, software downloads, eBooks, and other digital services are subject to sales tax in South Dakota.

How does South Dakota treat marketplace providers in terms of sales tax?

Marketplace providers meeting specific thresholds must obtain a South Dakota sales tax license and pay applicable sales tax on sales they facilitate into the state. This includes remote sellers and marketplace providers facilitating sales for other sellers meeting the remote seller criteria.