A case on appeal to the U.S. Supreme Court from the South Dakota Supreme Court should be on your watch list. It involves Ellingson Drainage, Inc., a general contractor headquartered in Minnesota that specializes in installing drain tile for farming and government applications. During the audit period the company handled projects in more than 20 states, including several relatively small projects in South Dakota that involved moving equipment purchased in other states into South Dakota for these projects.

The South Dakota Department of Revenue (DOR) assessed a use tax on the full value of the company’s equipment used on the project -- regardless of the length of time the equipment was actually used in that state. There were examples of equipment present in the state for only a few days, yet the DOR assessed a use tax on 100% of the value of every item of equipment. This case, if the Supreme Court does not choose to accept the appeal and give us guidance, will have an adverse impact on the construction industry.  

If other states adopt the South Dakota method, a contractor would be entitled to take a credit for the sales tax it paid on the initial purchase of the equipment it brings into the state, but the contractor must retain each and every invoice and proof of payment in order to prove up the credit -- even on equipment purchased a decade or more ago. And if the original sales tax paid was less than the state’s use tax, the contractor will owe the difference. 

The taxpayer’s able co-counsel, our friends Jeff Friedman of Eversheds Sutherland and UConn and NYU Law professor and SALT scholar Rick Pomp, argued forcefully that the Fair Apportionment prong of the Commerce Clause of the U.S. Constitution requires apportionment to cure the constitutional overreach. 

The case citation is Ellingson Drainage, Inc. v. South Dakota Department of Revenue, Petition for Writ of Certiorari, U.S. S. Ct. Dkt. No. 23-1202 (May 9, 2024).