What prompted the recent change in South Dakota’s use tax rules?

The change stems from a South Dakota Supreme Court decision in the Ellingson Drainage case, where the Court clarified that use tax applies not only when materials are used in a project but also when they are merely stored in the state.

How does the Ellingson decision differ from the earlier PPM Technical Services interpretation?

Under the older interpretation, contractors did not owe use tax until materials were actually used in a South Dakota project. The Ellingson decision overturns that approach and requires tax to be paid as soon as materials are brought into the state and placed in storage.

Why did Ellingson challenge the use tax assessment?

Ellingson argued that some equipment was used in South Dakota for only one day and claimed the assessment was disproportionate. The company also raised constitutional concerns under the Due Process Clause and Interstate Commerce Clause, but both lower courts and the Supreme Court upheld the assessment.

What constitutional issues were reviewed in the Supreme Court appeal?

The Court examined whether the application of the use tax violated the Interstate Commerce Clause or the Due Process Clause. It ultimately determined that Ellingson had sufficient connection to the state and that the tax did not create an unconstitutional burden.

How does the ruling affect contractors who store materials in South Dakota?

Contractors must now pay use tax immediately when untaxed materials or equipment are brought into the state and stored, even briefly. This increases both tax liability and the risk of audit exposure.

What should businesses do to comply with the updated tax requirements?

Businesses should review and adjust their procurement and storage practices to ensure they account for use tax as soon as materials enter South Dakota, helping them avoid unexpected assessments or penalties.

Ellingson Ruling Alters South Dakota Use Tax Rules

In a recently published Fall 2025 Newsletter, the South Dakota Department of Revenue (DOR) highlighted a 2024 South Dakota Supreme Court decision in Ellingson Drainage, Inc. v. DOR, which changes how use tax applies to materials brought into the state and stored there.

Moreover, in its decision, the Supreme Court addressed the previously established practice following the Circuit Court ruling in the PPM Technical Services, which allowed contractors to delay paying use tax until materials were actually used in a South Dakota project, meaning that merely storing them in a yard or warehouse did not create a tax obligation.

Background of the Dispute and the Supreme Court's Decision

Ellingson, a Minnesota-based company specializing in drain tile installation for agricultural and government projects, carried out roughly 30 projects in South Dakota between 2017 and 2020. To complete these projects, the company brought multiple pieces of equipment purchased in other states, along with one rented machine. After the tax audit, the DOR issued a use tax assessment of 4.5% on the value of the equipment used in the state, calculated at USD 1.23 million, totaling USD 60,665.44 in use tax and USD 14,862.88 in interest.

The company challenged the assessment, stating that, among other things, some equipment was used in South Dakota for only a single day. Additionally, the company pursued a constitutional challenge through the administrative process and then in Circuit Court, but both upheld the DOR's assessment.

The Circuit Court determined that the application of the use tax statute was constitutional under both the Interstate Commerce Clause (ICC) and the Due Process Clause (DPC). Moreover, the Circuit Court stated that applying a four-part test from prior case law to determine that the tax did not burden ICC. It concluded that Ellingson had adequate connections to South Dakota to satisfy due process.

In its appeal to the Supreme Court, Ellingson raised two central questions: whether the application of the use tax statute violated the DPC because the tax was disproportionate to Ellingson’s activities in the state, and whether it violated the ICC for the same reason.

After reviewing all the evidence, holding a hearing, and carefully examining the related provisions, the Supreme Court clarified that the use tax applies not only when untaxed materials are used in a project, but also when those materials are stored in South Dakota. Consequently, contractors and businesses purchasing materials out of state must pay use tax as soon as those materials are brought into South Dakota and placed in storage.

Conclusion

The shift in taxability rules not only increases the tax liability but also increases potential audit exposure for those who relied on the former interpretation, and aligns the tax treatment of in-state and out-of-state purchases. Therefore, businesses that store materials and equipment in South Dakota, even for a brief period, should reassess their procurement and storage procedures to ensure they comply with the updated tax requirements.

Source: South Dakota Supreme Court - Ellingson Drainage, Inc. v South Dakota Department of Revenue, South Dakota Department of Revenue - Fall 2025 Newsletter