South Dakota’s Tax Base is Changing

South Dakota doesn’t have a personal or corporate income tax. Instead, the foundation of South Dakota’s public finance system rests heavily on sales and property taxes. This article delves into the intricacies of the sales tax base and examining the available data. It also emphasizes the importance of understanding South Dakota’s tax system and its broader relevance to economic considerations.

The South Dakota Department of Revenue provides a variety of reports on the state’s taxes. One particularly important report is the monthly Sales and Use Tax Report, which provides a detailed breakdown at the industry level of gross sales, use taxable, and taxable sales subject to the state’s 4.2% sales and use tax. This data is essential for analyzing trends, understanding economic activity, and assessing how policies and decisions can impact individuals’ lives and the state’s revenue stream. For instance, changes in tax revenue can reflect shifts in income levels, consumption patterns, and business activity. Additionally, changes in economic activity affect tax revenues and government spending.

Economists refer to the government’s various revenue sources as the tax base. More technically, the tax base is the set of all purchases, transactions, income, assets, and property that the relevant taxing authority can tax. There are many different tax authorities, but for South Dakota, this generally includes local, county, and state governments. Each level of government has a different tax base. For example, county governments generally rely on property taxes. The tax base for local governments is mostly consumption-based and comes in the form of sales and use taxes. The same is true for the state government, where 64% of the state’s general fund revenue comes from sales and use taxes. [1]

 South Dakota imposes a 4.2% sales and use tax on “the gross receipts of all retail sales, including the sale, lease, or rental of tangible personal property or any product transferred electronically, and the sale of services,” according to the SD Department of Revenue. [2] South Dakota has one of the broadest sales and use tax bases in the US. The broad tax base allows the state to keep the sales tax rate lower than in many other states. It also allows the state to exclude individual and corporate incomes from the tax base.

The state government’s sales and use tax base includes many industry groups or sectors.

• Retail Trade: Includes grocery stores, gasoline service stations, etc.
• Services: Includes beauty shops, employment agencies, etc.
• Transportation, Communications, Electric, Gas, and Sanitary Services: Involves taxicabs, television broadcasting stations, etc.
• Wholesale Trade: Involves the trade in large quantities of durable and non-durable goods such as hardware, livestock, etc.
• Manufacturing: Includes meat-packing plants, millwork, etc.
• Finance, Insurance, and Real Estate: Includes insurance carriers, depository institutions, etc.
• Agriculture, Forestry, and Fishing: Includes dairy farms, lawn and garden services, etc.
• Mining: Includes natural gas liquids, gold ores, etc.
• Construction: Includes floor laying and floor work, etc.
• Public Administration: Includes national security and international affairs, executive officers, etc.

The figure below shows a breakdown of the state’s sales and use tax base in 2010 and 2023. Each bar shows the total amount of revenue collected from each sector and the share of total revenue coming from that industry. One fact is readily apparent from the figure: the retail sector was, and still is, the state’s largest source of revenue.

In 2010, retail trade dominated the landscape, comprising 47.9% of the total, and by 2023, it had grown to 51.4%. This substantial increase underscores the retail sector’s pivotal role, accounting for most of the overall sales and tax revenue. Retail trade includes a variety of establishments such as department stores, bakeries, bookstores, etc.

Services, transportation, and wholesale trade also witnessed changes in their contributions. Services increased from 16.6% in 2010 to 18.1% in 2023, encompassing diverse businesses such as hotels, launderers, etc. Conversely, transportation decreased from 18.6% to 10.1%, involving activities like trucking or courier services, etc. On the other hand, wholesale trade experienced a noticeable increase from 7.0% to 9.3%. These changes highlight the dynamic nature of the sales tax base and the economic scenario.

Understanding the tax base is necessary for many reasons. For instance, policymakers need to understand where government revenues come from. It’s also important because changes in the tax base reflect changes in the underlying economic activity that drives taxable sales and tax revenue. To provide a comprehensive understanding, it is necessary to delve deeper into the reasons behind these changes and why they hold significance for the decision-making process and the community. By analyzing how changes in the tax rate influence consumer behavior and spending, we gain valuable insights into the broader economic dynamics. This data not only helps us understand the current state of the economy but also aids in forecasting future activities. The ability to anticipate trends and foresee economic shifts contributes to a comprehensive understanding of the state’s economic health, guiding effective policymaking and decision processes to the community’s benefit.

 [1] SD Bureau of Finance and Management FY2024 Revised Revenue Estimates. https://bfm.sd.gov/budget/FY2024/RevisedRevenuePresentation20230214.pdf

[2] SD Department of Revenue. https://dor.sd.gov/businesses/taxes/sales-use-tax