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How Transactions in Tribal Country Affect South Dakota Sales and Use Tax Obligations

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Transactions in South Dakota’s tribal country can add a layer of complexity to your or your client’s sales and use tax compliance. Your obligations could vary depending on the special jurisdiction of the tribe where you conduct business and that tribe’s participation in a comprehensive or limited tax collection agreement. The South Dakota Department of Revenue provided recent guidance for businesses in its July 2023 Tribal Tax Fact Sheet. Below, we explain the rules within this guidance and discuss potential challenges that could create a future risk of audit for retailers working within an Indian tribe.

Are You Selling to a Tribal Government or to a Customer Located in Tribal Country?

The first issue to address for South Dakota businesses that have transactions in tribal country is to determine who their customer is. Tribal governments are generally exempt from South Dakota sales and use tax under SDLC 10-45-10. Retailers can accept a completed exemption certificate to document the transaction’s exempt status.

If you are not selling to a tribal government, then your sales to others located in tribal country are likely subject to South Dakota sales and use tax. However, the amount of sales tax and method of reporting may depend on whether you are selling or delivering goods in tribal country that is a special jurisdiction subject to a tax collection agreement.

How South Dakota Sales Tax Works for Transactions in Tribal Country Subject to a Tax Collection Agreement?

A majority of the Indian tribes within South Dakota participate in a Tax Collection Agreement with the Department of Revenue, establishing a special jurisdiction. These agreements impose the same sales and excise tax obligations on retail transactions as if they had taken place in South Dakota. In exchange, the participating Indian tribes receive a share of the collected tax revenue. There are two types of tax collection agreements, which are either comprehensive or limited.

Comprehensive Tax Collection Agreements

A comprehensive tax collection agreement subjects retail transactions to sales tax, use tax, contractor excise tax, and tourism tax. Additional municipal sales and use taxes could also apply to transactions in a special jurisdiction, which could increase the tax rate by one to two percent. For example, sales in the Cheyenne River Special Jurisdiction’s Eagle Butte City have a two percent municipal tax.

Tribal members and non-tribal members alike have an obligation to collect and report taxes on their transactions. The following tribes participate in a comprehensive tax collection agreement:

  • Cheyenne River Special Jurisdiction
  • Crow Creek Special Jurisdiction
  • Oglala Special Jurisdiction
  • Rosebud Special Jurisdiction
  • Standing Rock Special Jurisdiction

Limited Tax Collection Agreements

In comparison, Sisseton Wahpeton Oyate and Yankton Sioux Tribe are the two tribes that have a limited tax collection agreement with the state. These agreements are unique to specific locations within each tribe and apply to a smaller set of South Dakota’s taxes. For example, Sisseton Wahpeton Oyate collects use tax while Yankton Sioux Tribe collects use tax and the contractor’s excise tax. Neither tribe participates in the tribal tourism tax.

Contractor’s Excise Tax Exemption for a Qualifying Indian Country Project

South Dakota has a two percent contractor’s excise tax that applies to the gross receipts from a construction or realty improvement project. This excise tax applies in addition to the use tax owed on the materials a contractor uses to complete a project.

Some Indian country projects may qualify for an exemption from the contractor’s excise tax and sales tax. These are projects that occur within tribal country not subject to a tax collection agreement and must be for qualifying purposes, such as hospitals, housing, schooling, or tribal administrative buildings. Before starting a project, contractors can submit an exemption request form to the Department of Revenue to determine if the project qualifies.

Reporting South Dakota Sales and Use Tax for Transactions in a Tribal Country Special Jurisdiction

Businesses that operate with tribal governments or their members, including online or delivered sales, need to register for a tax license and report their transactions to the South Dakota Department of Revenue. You will generally report the taxable sales for each special jurisdiction and use the appropriate code for the location and type of tax using the chart on page 8 of the Tribal Tax Fact Sheet. For example, the sales tax code for the Crow Creek Special Jurisdiction is 417-4 while the contractor excise tax code is 417-2.

Key Issues That Could Lead to a Sales and Use Tax Audit from the South Dakota Department of Revenue

The different relationships between South Dakota and its neighboring tribal country can make it difficult for businesses to maintain their state and local tax compliance. The following issues could create a sales tax audit risk for companies that operate in these jurisdictions:

  • Not reporting the taxable sales using each special jurisdiction’s unique tax code
  • Overlooking the municipal sales and use taxes within tribal special jurisdictions
  • Not obtaining a prime contractor exemption certificate for work performed as a subcontract
  • Not documenting sales to tribal governments with a completed exemption certificate
  • Not reporting and paying taxes on internet sales into tribal country

If you or your client are facing a South Dakota audit or assessment because of transactions in tribal country, our sales tax professionals may be able to help. We provide audit defense and administrative appeal services to businesses and their CPAs who may lack the experience and skillset to handle sales tax-specific challenges.

Contact us to schedule a free consultation.

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