Taxation In South Dakota
South Dakota is one of the largest but sparsely populated states in America. Located in the mid-western part of the nation, it is bounded by Minnesota and Iowa to the east. Additionally, SD is bounded by Nebraska to the south, Wyoming, and Montana to the west, and North Dakota to the north.
The economy of South Dakota is primarily anchored on agricultural production, and the primary sources of state government revenue are taxes, license fees, and income from state-owned entities. The US federal and state governments levy three basic categories of taxes on what residents earn, own or use.
Taxes charged on earnings are known as income taxes and are further categorized as individual income taxes, corporate income taxes, payroll taxes, and capital gains taxes.
Different states implement different income tax policies, which may include levying all, a few, or none of these income taxes. Therefore, corporate income tax is one of the most controversial taxes associated with double taxation and is the subject of this article.
Which US states levy corporate income taxes and which ones do not? Which states implement favorable corporate income tax rates? And finally, what is the corporate income tax policy in South Dakota? This article answers these questions and also highlights the tax benefits of being a South Dakota Resident.
Corporate Income Tax
We talk of corporate income tax in the context of C Corporations because the other forms of incorporations are taxed differently. C corporations are considered entirely separate entities from their shareholders. Therefore, when the shareholders receive profits, they are taxed at the individual level, and the C corporation is also taxed separately as a business entity.
Corporate income tax is generally viewed as double taxation making corporate income tax one of the most controversial taxes in the United States. In reality, though, many corporate shareholders are exempt from income tax, and not all corporate income is taxed at the entity level. So, what is corporate income tax, and is it justified?
What is corporate income tax?
Since C corporations are for-profit entities, they must pay taxes on their profits to stay compliant with federal and state tax laws. The amount of tax levied on a corporation’s gross profits is called corporate income tax. The federal and state governments impose corporate income tax on US resident corporations at different rates.
Corporate income tax ranks as the third-largest source of federal revenue after individual income and payroll taxes. The same corporate income tax rules apply to foreign-owned US-based corporations and US-owned corporations.
How does corporate income tax work?
Corporate income tax is only levied on C corporations which, by their nature, are for-profit entities. Other forms of for-profit entities such as sole proprietorship, partnership, or S corporations are considered pass-through entities and are not subject to corporate income tax.
Unlike individual income taxes, where tax is levied on gross income, corporate taxes are imposed on net income or gross profits. During a current year, the taxman takes a portion of the corporation's profit and not a portion of all the money brought in during that year.
The amount of tax corporations pay is calculated based on taxable corporate profits, also known as gross receipts. Taxable profits are equal to the corporation’s receipts less the following allowable deductions:
- Cost of goods sold
- Wages and other employee compensation
- Interest expenses paid on debts used to finance business investments
- Other taxes
US-based corporations owned by a multilateral pay the corporate income tax only on profits made in the US. Corporate profits can also be subject to taxation at the individual shareholder level on dividends earned and capital gains from the sale of shares.
Who levies corporate income tax?
The state usually levies corporate income taxes on the profits accumulated by companies. As such, if you are considering setting up business in South Dakota, you can enjoy the advantage in that the state doesn’t levy a broad-based corporate income tax.
However, the state does levy taxes on specific financial institutions. Moreover, you should note that the levy taxes charged on these financial institutions are still low when compared to what other states charge.
Who bears the burden of corporate income tax?
Opinions on who bears the economic effect of corporate income tax vary. Corporate income tax is a share of profits and not a cost of production like, say, wages. Thus, the price and output that yield maximum earnings before the tax will still yield maximum profits even after the tax is imposed. Because of this, people may argue that corporate income tax should therefore not be reflected in prices.
This may mean that consumers should or do not bear the economic effects of corporate income tax. However, is this really the case? There is no empirical research to help resolve this debate. Nonetheless, whether in the short run or long run, the economic effect of corporate income tax is borne by the following:
- Shareholders through reduced profits as corporate income tax is a share of profits
- Consumers as businesses pass the tax burden to them through higher prices
- Workers as employers reduce paychecks, bonuses, and benefits
- Trade unions through lower wage settlements
Is corporate income tax justified?
Businesses are trying to avoid their income tax burdens through tax inversion, pass-through entities, acquisitions, and mergers. Because of the many cat-and-mouse games happening, many people observe that businesses are not paying corporate income tax and feel the government should abolish it altogether.
Some people say corporate income tax should be abolished so that businesses can focus on innovation rather than spend more time trying to lower their tax burdens. Being the third-largest source of federal revenue after individual income tax and payroll taxes, one would argue that corporate income tax is justified.
The suggestion that a company should be allowed to operate tax-free while hard working citizens pay their fair share does not go well with some people. Corporations are justified to pay taxes on their income because of their privileges for doing business in corporate form. Also, these entities pay for public services that benefit businesses by paying corporate income tax. Further, corporate income tax is justified because it prevents shareholders from evading taxation on undistributed profits as well as deterring them from converting their shares into capital gains, which are basically taxed at lower rates.
South Dakota Tax Policy
State governments provide various services that require funding and therefore levy taxes to help fund these services. In addition to federal taxes, Americans pay state governments the following taxes:
- Personal income tax
- General sales tax
- An excise or special sales tax
- Corporate income tax
In South Dakota, taxes are collected by the South Dakota Department of Revenue.
South Dakota Income Tax
Income tax policy varies across states. The South Dakota state government does not collect income taxes, and therefore, residents only need to file federal income tax returns.
The bulk of South Dakota tax revenue comes from the following taxes:
- Sales tax
- Use tax
- Gas tax
- Cigarette tax
- Alcohol tax
- Property tax
South Dakota Sales Tax
Sales tax is basically a consumption tax levied on retail consumer goods. South Dakota is one of the US states that rely on retail sales taxes as a significant source of revenue.
Sales tax in South Dakota applies to gross receipts of all:
- Retail sales
- Leasing or renting of tangible individual property and products transferred electronically
- Sale of services
Products and services sold in South Dakota are subject to sales tax except when they are:
- Not specifically intended for resale
- Sold to government
- Sales tax exempt
All foods in South Dakota are subject to sales tax except those with food stamps. South Dakota imposes a sales tax rate of 4% on products or services. When these products or services are delivered within cities that impose taxes, they may sometimes levy extra local sales taxes of up to 3%.
However, most of them only collect extra municipal sales tax of up to 2% and a municipal gross receipts tax of 1%. Additional sales tax may be imposed as tourism tax on gross receipts of establishments involved in tourism, visitor accommodation, or promotion activities.
South Dakota Use Tax
A use tax is a form of sales tax. Unlike sales tax, use tax is not applied when a product or service is sold. The tax is levied when a service or commodity that had not been subjected to sales tax at the time of purchase is converted for use, enjoyment, or for other consumption purposes.
South Dakota’s government imposes use tax at the same rate as the sales tax on all goods, products, and services for which South Dakota sales tax was not paid and are used, stored, or consumed within the state. Usually, it is your responsibility as a purchaser or consumer of these goods or services to report and remit a use tax of 4%.
This is done with the applicable municipal use tax in the filing period in which you received them. Additional municipal sales or use tax may be due if the use, storage, or consumption of a product or service is transferred to a different city that imposes a higher tax rate than was previously paid.
Besides the sales and use tax, the South Dakota government also imposes an excise tax on:
South Dakota Gas Tax
Gasoline is a primary fuel product in South Dakota and is subject to excise tax. A gallon of regular gasoline or diesel is taxed 28 cents.
South Dakota Cigarette Tax
The South Dakota state government collects excise tax on cigarettes and other tobacco-related products. All retailers selling cigarettes, cigars, pipe tobacco, and smokeless tobacco are required to register with the department of revenue to pay cigarette and tobacco tax.
These retailers are required to purchase tobacco products only from licensed wholesalers or distributors. Distributors must apply South Dakota tax stamps to cigarette packs before distributing them to retailers.
South Dakota Alcohol Tax
Alcoholic beverages sold in South Dakota are subject to excise tax, and the tax rate varies by beverage type.
The alcoholic beverages subject to excise tax in South Dakota include:
- Wine – Wine vendors pay a state excise tax of $0.93 per gallon
- Beer – Beer vendors pay a state excise tax of $0.27 per gallon
- Liquor – Liquor vendors pay a state excise tax of $.93per gallon
Unlike sales tax, excise tax on alcoholic beverages is collected from the seller and not the consumer. Nonetheless, consumers bear the burden of excise tax in the form of raised alcohol prices.
South Dakota Property Tax
Property taxes are essential sources of revenue for South Dakota and are levied on real estate, land, and automobiles. The property tax system in South Dakota is relatively simple, and the following authorities can levy these taxes:
- School districts
- Water districts
- Special districts for specific purposes
South Dakota property tax rates vary greatly from one local administration to another, but the state government oversees property valuation to enforce fairness and compliance with state law.
South Dakota Inheritance and Estate Tax
Inheritance tax is borne by heirs of an estate, while the estate tax is taken from a person’s estate upon their death. In 2000, South Dakotans repealed inheritance tax and estate tax. Therefore South Dakota no longer has an inheritance tax and estate tax.
When Should You File Taxes In South Dakota?
With the knowledge you have uncovered regarding the products and services that require you to pay taxes and those with tax benefits, you need to understand when to file for your taxes. That being said, after you have registered for the sales tax, you will get assigned a specific filing frequency.
As such, you will be requested to pay the sales tax either annually, monthly, or quarter yearly. In most instances, the overall frequency decided varies on the amount of sales tax you get from buyers in the state. If your business gets more revenue, you should be paying more frequently than a low revenue business.
That said, when it comes time to pay your taxes, you must do these three things. First, you should calculate the total amount you owe, then file a sales tax return, and finally pay your taxes. Be sure that you keep all your receipts and other important documents showcasing your tax payments.
This is a necessary requirement because they can come in handy if there is a problem. Additionally, the documents can also act as a type of proof if you want to enjoy a few tax benefits for being up to date and compliant.
It is the responsibility of every tax permit holder to file a return for each reporting period. Depending on your filing frequency and the mode of filing, returns are due on different dates.
For example, returns are due on the following dates:
- On the 20th of the following month, if you file returns every month
- The final day of the month following the reporting period, if you file your returns every other month, semi-annually, or on a seasonal basis
- No later than the 23rd day of the month if you file returns electronically
Tax Exemptions In South Dakota
Certain entities, products, or services are exempt from taxes in South Dakota. Depending on the prevailing circumstances, the law may require you to provide a fully completed tax exemption certificate to enjoy certain tax exemptions in the State of South Dakota.
Tax Exemption Certificate
Tax exemption certificates can be for single or recurring use and are issued by the South Dakota Department of Revenue.
Even though the law does not require you to produce documentation to support all exemptions, you may provide a certificate of exemption to the seller in case of any doubt on the intended use of the product or service.
Sales and Use Tax Exemptions
South Dakota state law exempts the following entities, products, or services from sales or uses tax:
- Prescription drugs
- Lottery tickets
- Purchases made with food stamps
- Water bought in bulk or through a water supply system
- Travel agencies
- Governments, including SD public schools
- Non-profit hospitals
- Relief agencies
- SD Religious and private schools
- Banking services performed by registered institutions
- Social services
- Agricultural services
- Educational services and medical services
Corporate Income Tax In Other US States
Besides the federal corporate income tax levied on C corporations, most states in America impose their own corporate income tax on corporations within their borders.
Which states levy corporate income tax?
Other than the following six states, the remaining 44 levy corporate income taxes on profits of corporations within their borders:
- South Dakota
Instead of imposing corporate income tax, Wyoming, Nevada, Ohio, Texas, and Washington impose gross receipt tax.
Which states do not levy corporate income tax?
In addition to South Dakota, Wyoming is the only other state that does not levy a corporate income tax.
Corporate Income Tax Rates
A number of factors determine corporate income tax rates, and they include:
- Federal or state legislations
- Size of shareholders
- Class of stock
In 2017 the Tax Cuts and Jobs Act lowered the corporate income tax rate from 35 percent to 21 percent. Other notable state-level tax reform packages in 2021 are meant to reduce corporate income tax rates, phase out some tax brackets, and increase exemptions.
State corporate income tax rates range from the lowest rate of 2.5 percent in North Carolina to the highest rate of 11.5 percent in New Jersey.
Tax Benefits Of Being A South Dakotan
South Dakota is tax-friendly and ranked second for its conducive business tax climate. Residents and businesses enjoy the following tax incentives:
- No corporate income tax
- No personal income tax
- No inventory taxes
- No inheritance taxes
- No personal property taxes
- Low sales tax
- Taxpayers do not need to file a state tax return
Maximize Your Tax Returns In South Dakota
In The United States, every state features its own set of unique tax laws. South Dakota has restricted individual and business tax obligations at the state level.
For example, individuals and businesses in South Dakota benefit from:
- No personal income tax
- No corporate income tax
- No business inventory tax
- No personal property tax
- No inheritance or estate taxes
As such, there is no limit on interest rates that credit card companies can impose on customers in South Dakota. Therefore, you must first discover what credit score your top lender uses before choosing them to issue you with a credit card. Nevertheless, suppose you have a property in South Dakota.
In that case, you can still increase your tax return by utilizing the available federal tax credits and income tax deductions available when filing your federal return. Moreover, concerning investors and businesses operating in South Dakota, below are the federal and state tax incentives to increase your tax return:
- Partners in education tax credit program
- Housing tax credits
- Work opportunity tax credit (WOTC)
- Research and development (R&D)
Other than the above-mentioned standard tax credit and income tax reduction strategies, there are other ways to maximize and increase your return. You can do so by:
- Using a free tax software
- Hiring tax professionals
South Dakota Is A Tax-Friendly State
Taxes are the primary sources of revenue for any government. In the US, tax revenue is used to fund most federal, state, and local government expenditures. Different types of taxes are imposed at different rates by federal, state, or local governments. South Dakota is one of the states with friendly tax policies in the US as the state government does not collect income tax in addition to other tax incentives.
South Dakota is, therefore, the ideal state to relocate to if you want to avoid paying income taxes. Your wages, salary, capital gains, and dividends will not be taxed at the state level. Additionally, should you be in the process of starting a business or relocating, you can reach out to a reliable mail forwarding company.
These mail forwarding companies offer fast and reliable mail forwarding services to keep you and your clients in the loop no matter where you are. Moreover, these companies also offer tax services to guarantee your return is done right and arrives on time.