On February 7, 2024, the South Dakota Supreme Court held that South Dakota’s use tax, as applied to the taxpayer, did not violate the Commerce or Due Process Clauses of the Fourteenth Amendment, despite some of the taxed equipment being used in South Dakota for only one day.

The taxpayer, a Minnesota-based company that specializes in installing drain tile for farming and government applications throughout the United States, completed drain tile projects in South Dakota using equipment that had been purchased in other states and on which the taxpayer had not paid sales tax in those states. The South Dakota Department of Revenue imposed a use tax on this equipment, including equipment used in South Dakota for as little as one day.

The taxpayer argued that the application of use tax was unconstitutional because the tax imposed was not fairly related to benefits the taxpayer received and was disproportionate to taxpayer’s activity in South Dakota. Specifically, the taxpayer contended that its use of equipment in South Dakota was “limited,” therefore the taxpayer did not receive benefits commensurate with the tax it paid. Additionally, the taxpayer argued that the tax was disproportionate in light of the fact that 90% of the taxpayer’s activities occurred outside of South Dakota.

Applying the four-part standard described in Complete Auto Transit, Inc. v. Brady, the South Dakota Supreme Court held the Department’s application of use tax to the taxpayer satisfied the Commerce Clause. The court held that the tax was fairly related to the benefits provided to the taxpayer because it enjoyed the same benefits as any other business present in the state and was free to use the equipment in state as often as it wanted. Moreover, the court found that the use tax statute was externally consistent and did not require that the equipment be “at rest” to be subject to the tax. Rather, the taxed activity was “simply an in-state use of equipment that was purchased outside the state without ever having paid sales taxes on the property.”

Ellingson Drainage, Inc. v. S.D. Dep’t of Revenue, 3 N.W.3d 417 (S.D. 2024).