Effective on July 1, 2023, South Dakota reduced the state tax rate from 4.5% to 4.2% with HB1137. This change affects Sales tax, Use tax, Excise Tax on Farm Machinery and Farm Attachment Units, Amusement Device Tax, and Motor Vehicle Gross Receipts tax. This change does affect special jurisdiction areas, so includes tax collected in Indian Country.
If you collect 6.5% when you could have collected 6.2%, however, you would need to refund the difference to the customer OR still submit the entire amount collected to the SD Department or Revenue.
How this affects your business is based on whether you report sales tax on a cash or accrual basis to South Dakota.*
- CASH BASIS: The date that you receive the payment determines the sales tax rate that should be used. If a client paid on 6/30/23, they are subject to the 6.5% sales tax even if you don’t cash the check until after 7/1/23. So any sales made on or before 7/1/23 but paid after 7/1/23 would be subject to the 4.2% tax rate.
- ACCRUAL BASIS: The date that you billed the customer determines the sales tax rate that should be used for that invoice, regardless of when the payment is received. Payment received after 7/1 but for invoices/sales or services done prior to 7/1 will still be at the higher 4.5%. Only new work/invoices done after 7/1/23 will be at the lower 6.2%
- For returns and refunds, the tax rate that applied on the original purchase will also apply on the return/refund. To report this on your state tax return, you will need to use the adjusted returned merchandise amount (which can be calculated by dividing the taxable amount refunded by 4.2%). There is a great example on the SD Department of Revenue if you have questions on how to do this.
- City taxes remain unchanged in this bill. For example, a prior city tax of 6.5% will now be 6.2% with the change.
- Additionally, SB30 changes the nexus (or who is required to collect/pay sales tax to SD) for Remote Sellers as of July 1, 2023 also. Prior to this, any remote seller that had EITHER more than $100,000 in gross sales in SD or more than 200 transactions would be required to. As of July 1, 2023, only the $100,00 or more in Sales remains regardless of the number of transactions (and the state has dropped the number of transactions from being considered in the requirement.)
For more information, reach out to your accountant, or check out the FAQs on the SD DOR website: https://dor.sd.gov/businesses/taxes/sales-use-tax/2023-legislative-updates/#:~:text=What%20does%20the%20new%20tax,products%20transferred%20electronically%2C%20and%20services
*The accounting method (cash vs accrual) that you use for your state tax may not be how you typically view reports for management decisions and/or how you report your year end income tax on your Federal tax return. If you are unsure what method you use for state tax you can 1) look on your original sales tax application, 2) call the South Dakota Department of Revenue 1-800-829-9188, or 3) use the Live Chat on the SD DOR website to ask.