South Dakota Court Upholds Use Tax Assessment on Equipment Used for One Day

By:  Tina M. Chunn, SALT Senior Manager 

At a glance

• The main takeaway: The South Dakota Supreme Court ruled that the state’s imposition of use tax on the value of equipment used in the state for one-day was constitutional.    
• Assess the impact: This case serves as an important reminder that businesses can create a use tax obligation for property that was used in a state but was purchased elsewhere.
• Take the next step: Aprio’s State and Local Tax (SALT) team has experience reviewing use tax issues and can help you determine if use tax is due and whether a credit is available for tax paid elsewhere.

Schedule a free consultation today to learn more!

The full story:

On February 7, 2024, the South Dakota Supreme Court issued an opinion in which it upheld a use tax assessment against a Taxpayer that used equipment in the state for one day.^[1] The Taxpayer is a Minnesota business that installs drain tile for farming and government applications throughout the United States. Between 2017 and 2020, the Taxpayer had thirty projects in South Dakota, and it brought into the state several pieces of construction equipment that were purchased in other states. However, some of that equipment was used in the state for only one day.

Unpacking the ruling

The Department of Revenue issued an assessment to the Taxpayer for use tax on this equipment based on the value of the equipment after applying the state’s depreciation rules.^[2] The equipment had not been subject to sales or use tax elsewhere, so no credit was available.

The Taxpayer argued that the application of the use tax on equipment used in the state for one day violated the Commerce Clause of the Constitution. When analyzing whether application of a state tax violates the Commerce Clause (i.e., presents an unconstitutional burden on interstate commerce), courts apply the four-prong test announced by the United States Supreme Court in Complete Auto Transit, Inc. v. Brady.^[3] Under the four-prong test, a tax is not an unconstitutional burden if it:

1. Is applied to an interstate activity that is sufficiently connected to the taxing state to justify the tax (i.e., nexus);
2. Is fairly related to benefits provided to the taxpayer;
3. Does not discriminate against interstate commerce; and
4. Is fairly apportioned.

While the Taxpayer conceded that prongs one and three were satisfied because it had nexus in South Dakota and the statute does not discriminate against interstate businesses, it argued that the second and fourth prongs were not met.

The second prong requires that the tax be fairly related to the benefits provided to the Taxpayer. The Taxpayer argued that the tax for its one-day use in South Dakota is not fairly related to any benefit received from the taxing state.^[4] However, the Court disagreed as the Taxpayer enjoyed the same benefit as other persons or businesses in the state and was free to bring the equipment back to work on jobs in South Dakota where the Taxpayer will continue to enjoy the privilege of conducting its business without being subject to additional use tax.^[5]

The fourth prong requires that the tax be fairly apportioned. To determine whether a tax is fairly apportioned, courts apply both an “internal consistency” test and an “external consistency” test.^[6] For internal consistency, the tax in question is deemed to exist in all states and must not result in double taxation. The Taxpayer and Court agreed that there was no double taxation because the state’s use tax includes a provision for a credit of sales/use taxes paid in another state on the same piece of property.^[7]

The external consistency is met when the tax is applied only to that portion of the “. . . interstate activity which reasonable reflects the in-state component of the activity being taxed.”^[8] The Taxpayer argued that the taxing of the full value of the property, only reduced for depreciation, does not appropriately allocate the tax related to their in-state activity. The Taxpayer further argued that the property was not at rest in the state and was in-transit, and therefore the use tax should not apply.

The Courts rejected these arguments. First, it explained that that tax is applied to in-state use of property, and that the use in this case upon which tax is applied occurred entirely in the state. Second, the Court noted that the property was not in-transit in South Dakota when it became used for the purpose for which it was brought into the state. Accordingly, the Court concluded that the fourth prong was satisfied and that the tax as applied in this case was constitutional.

The bottom line

This case serves as an important reminder that using property in a state that had been purchased elsewhere, even for only a day, can give rise to a use tax obligation. Aprio’s SALT team has experience reviewing these types of issues, and we can help determine if use tax is due and whether a credit is available for tax paid elsewhere so that you do not incur unexpected tax liabilities or penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter. 

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[1] Ellingson Drainage v. Dept. of Revenue, S.D. 8, Case No. 30280, (2/7/24).

[2] South Dakota allows a 10% reduction of the property’s value for each year after the date of purchase. SDCL 10-46-3; ARSD 64:09:01:20.

[3] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

[4] In other words, the argument was that the Taxpayer did not receive commensurate benefits for the tax paid.

[5] The tax imposed was not limited to one day of use.

[6] See e.g., Goldberg v. Sweet, 488 U.S. 252, 261 (1989).

[7] SDCL 10-46-6.1.

[8] Goldberg, 488 U.S. at 262.