Lawmakers spar over potential reduction in state sales tax rate

A debate is raging in Pierre this legislative session over how – and some say even if – taxpayers will see a reduction in the sales tax rate now that South Dakota has begun to collect new money from online retailers.

When it comes to legislative intrigue, the contentious wrangling over the sales tax rate has all the elements of great theater: millions of dollars at stake, intraparty division among the Republican majority, past promises made and fears of future promises broken.

Standing at the center of it all is state Sen. Jeff Partridge, a Rapid City Republican with an imposing physical presence, a deep booming voice and a professional background in finance.

Partridge, who sits on the powerful Joint Appropriations Committee, set the debate in motion in 2016, when he offered a measure now known as “The Partridge Amendment.” The amendment stated that the state sales tax would slowly be reduced if South Dakota won its U.S. Supreme Court case that sought to collect sales taxes from online retailers located outside the state who refused to pay up. For each $20 million in new tax revenues collected from online retailers, the state sales tax – the main funding source of state operations – would be lowered by one-tenth of one percent a year a maximum of five times.

The amendment was put forth as a balm to fiscally conservative Republican lawmakers who at the time were on the fence about whether to raise the sales tax from 4.0 to 4.5 to get money to help boost the pay of teachers, whose average wage was lowest in the nation. The first vote to raise the sales tax to help teachers lost by one vote in the House of Representatives, and Partridge recalls that his amendment helped push a second vote on the sales tax hike through the House and eventually into law.

“I think there were legislators that were wanting to get us out of last place in teacher pay but had heartburn about raising taxes,” Partridge said in a recent interview. “This amendment was one way to say if we receive the money, we’ll lower the rate and so we’re not really growing government.”

Last summer, the state prevailed in the landmark Supreme Court case against Wayfair and other online sellers, and in November, new sales tax revenues started rolling in.

To follow up on his 2016 promise, Partridge said he met with lawyers in the Legislative Research Council, the group that helps draft legislative language and protects the legality of actions taken by state government.

The result was this year’s Senate Bill 86, which strikes all the language in his 2016 amendment and clears up what Partridge describes as “ambiguities” in the process of determining how much new money is being collected from online retailers, what time frame is used to determine if the $20 million threshold is met and how a sales tax reduction would take place. The measure passed through the Senate on Monday by a vote of 28-6.

The bill states that the $20 million must be new money in one calendar year derived as a result of the high court ruling and that the sales tax would be reduced the following year. The bill names the Appropriations Committee as the entity to manage the process in the Legislature.

The sales tax could be reduced by .1 percent a year to no lower than 4.0 percent; sales tax rates charged by municipalities, capped at 2 percent, would not be affected.

In recent committee meetings and in an interview with News Watch, Partridge said his bill simply lays out a legal process for calculating the new revenue and then creating language to reduce the sales tax rate as promised in 2016.

“I am trying to present the very legal and rational approach to enacting my original intent,” Partridge said. “It’s my amendment and I fully intend to reduce the sales tax rate.”

But opponents of Senate Bill 86, including several lawmakers from within Partridge’s own party, note that as in all legal matters, the devil is in the details of the bill.

South Dakota lawmakers are debating whether to reduce the state's sales tax rate as collections from online retailers come in. Last year, the state won a U.S. Supreme Court case requiring online retailers to remit sales tax.

Vocal opposition arises

The opponents say the bill language is problematic in that it removes the “trigger” that would require future legislatures to reduce the sales tax. In fact, the measure states that the Appropriations Committee “may” file a bill to reduce the sales tax rate if online collections top $20 million, rather than it “shall” file such a bill. That verbiage, opponents say, will allow future lawmakers to ignore the promise made in the original Partridge Amendment.

“It leaves it all discretionary into the future,” Sen. Lance Russell, a Hot Springs Republican who serves on the Taxation Committee, said at a recent cracker barrel event. “If you think these people have any intention of reducing the sales tax, think again.”

Furthermore, some lawmakers have argued that the $20 million threshold should not be restricted to collections from a single calendar year, but instead should lead to a sales tax reduction anytime the new revenue exceeds $20 million.

The bill had a bumpy path through three meetings of the Senate Taxation Committee before it passed last week on a 4-2 vote. At one point, the bill was amended to use the new revenues to reduce the sales tax on food, though that amendment was stripped away two days later.

At the last minute, Russell tried to kill the bill but was rebuffed by the committee.

“This is nothing more than a glorified appeal with a lot of language in it that makes everything very unhelpful,” Russell said at one meeting. “So, we would have a bill that is nothing more than what I consider nothing.”

The political action group Americans for Prosperity South Dakota has taken a strong interest in Senate Bill 86, and opposes the measure at this time, said Don Haggar, a former Republican lawmaker from Sioux Falls who is now state director of the national lobbying group.

Haggar, who testified against the bill in the Senate committee, said the language in the bill, particularly the word “may,” provides too much leeway for future legislatures to find justification to not reduce the sales tax as promised in 2016.

“I don’t think that carries enough weight,” Haggar said. “Knowing legislators the way I do, they’re probably more likely not to do it than to honor it.”

Haggar also said the process for determining the new online revenues is vague in Senate Bill 86 and does not address complex situations where an online retailer could open a building in the state, or in which a business with a store in South Dakota sees its online sales become dominant. “How do you measure that growth when it’s a moving target?” he said.

Haggar said he is working with the Legislative Research Council on a separate measure that could use a so-called vehicle bill – one filed early in the session without language that has its intent language added later – to accomplish his group’s goal of upholding the pledge to reduce the sales tax rate. The prosperity group has hinted of bringing the sales tax reduction measure to a statewide referendum if it doesn’t believe actions taken by the 2019 Legislature go far enough to ensuring the rate gets reduced.

In an interview, Partridge said the Appropriations Committee is best equipped to make decisions on sales tax projections and any potential reductions in the rate. He noted that if the new revenues came close to $20 million in one year but technically did not reach the threshold, the committee could still file a bill to reduce the rate.

At one point in the interview, he acknowledged that “current events” could also play a role in the actions future appropriators would take.

“It’s integral for them to reduce the tax rate in conjunction with estimates of the revenues based on what else is going on, based on econometrics and potential current events,” Partridge said. “Even with the sales tax increase, we continue to have a very low burden on the citizens of south Dakota.”

That description doesn’t totally jibe with what Partridge, then a House member, said when introducing his initial amendment on the House floor in 2016.

In those remarks, he assured his colleagues the amendment would “bind” future legislators to reduce the sales tax rate.

“It’s a fiscally conservative movement to reduce the rate and give money back to the people and bind legislators of the future to give additional revenue back,” Partridge said then.

The .5 percent sales tax rate increased implemented in 2016 raised roughly $108 million a year, of which about $68 million went to raise teacher pay and another $40 million for property tax relief for residents.

Since the debate over Senate Bill 86 began, there has been no indication that the sales tax revenue provided to teachers or for property tax relief would be affected.

Sen. Jeff Partridge, R-Rapid City.

A call for flexibility

Sen. Susan Wismer of Britton, the lone Democrat on the Senate Taxation Committee, said in an interview that future legislatures should have some flexibility in determining whether to reduce the sales tax. She said there may come a time when the $20 m illion threshold is met, but that the sales tax should not be reduced if money is needed to solve a social services or health care crisis, similar to what the state is now seeing with the closure of nursing homes.

She said the opposition to Senate Bill 86 is rooted among hardline fiscally conservative Republicans who refuse to raise taxes no matter what the consequences are to the residents of the state. “They don’t want to acknowledge the cost to society and this state of their refusal to adequately fund education and health care,” she said.

Wismer, who voted in favor of Senate Bill 86 in committee, said more moderate Republicans “see the data and understand our terrible rankings in umpteen categories and know that we want to do better, and are willing to take the hard votes to make that happen.”

How a lawmaker votes on Senate Bill 86, and whether the sales tax rate ever gets reduced, could also serve as fodder in future election campaigns, not unlike how the vote to raise the sales tax for teacher pay in 2016 came up as an election issue in some 2018 races.

Wismer said lawmakers should put the needs of South Dakotans above any pledge or commitment they made to never raise taxes.

“It’s important to our communities, because state government isn’t just about a healthy state government, it’s about the health of our citizens and we are ignoring the health of our citizens over bragging rights to have the number one business climate and lowest state tax ranking.”

Estimates of how much new sales tax revenue will be generated by the remote online sellers vary wildly. Prior to the Supreme Court ruling, state officials said South Dakota was losing an estimated $48 million to $58 million a year in uncollected taxes from remote online retailers, though it is unlikely that full amount would ever be collected.

Partridge said he suspects the state will see right around the $20 million mark per year, though the figure could rise as more retail purchases are made online over time. He added that reducing the sales tax by a tenth of a percent would probably cost the state about $24 million in lost revenues based on current collections.

Gov. Kristi Noem, who has said she supports efforts to lower the sales tax rate if new collections are high enough, said in her recent budget address that online sales now make up nearly 10 percent of retail sales in the state and that online sales are growing by about 15 percent a year.

“If the state receives a windfall of new revenue due to our new remote seller law, we should return that windfall to the taxpayers,” Noem said. “I know there is interest in clarifying this language, and I want to be part of that conversation.”

In November, the first month the taxes were collected from remote online sellers who did not voluntarily remit, the state saw only a $300,000 bump in sales tax revenues, from about $1.1 million to $1.4 million. The December figures are due out next week.

However, most lawmakers and officials believe the new revenues will increase significantly starting March 1, when the state activates its Marketplace website that will make it easier for remote sellers to comply with the sales tax laws and enable more online sales activity to take place.

Senate Bill 86 now moves to the House for debate.