On January 9, 2019, the South Dakota Supreme Court upheld the denial of South Dakota’s advertising services use tax exemption to a Sioux Falls-based company (Company) that designs and maintains websites that allow individuals and car dealerships to advertise vehicles for sale. On audit, the Company was assessed use tax for purchases it made for cloud services, anti-virus software, contract labor, and similar tangible personal property and services, as well as purchases of Internet domain names. The Company argued that the assessed purchases were exempt as advertising services and, if not otherwise exempt thereunder, the domain name purchases were exempt sales for resale.

In construing the advertising exemption in regard to the state’s use tax, the court found that the exemption “requires the advertising agency to both prepare the advertisement and place it in the advertising media.” Here, the exemption did not apply because (i) none of the assessed transactions, other than the domain name purchases, were used by the Company to complete advertising services for a customer; and (ii) the car dealers, and not the Company, prepared the advertisements displayed on the Company’s website themselves after the Company provided login credentials to the dealers. Therefore the court found that the assessed services did not qualify for South Dakota’s advertising services exemption. And because the Company retained ownership of the domain names and did not otherwise sell them to customers in the form purchased, the purchases of Internet domain names did not qualify as sales for resale. Carsforsale.com, Inc. v. South Dakota Dep’t of Rev., 2019 S.D. 4 (S.D. 2019)