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The congressional repeal of South Dakota's internet service tax will take effect next June.

The congressional repeal of South Dakota's tax on internet service is projected to result in a $700,000 loss in state funding next year and $1.4 million the following year for Rapid City.

With the tax due to be officially phased out next June, the South Dakota Municipal League is warning that other towns and cities will be similarly affected. By 2021, the first full year in which South Dakota will not collect the tax, the organization estimates that the state's municipalities will see a combined revenue shortfall of $7 to $10 million.

"There's no way for anybody to make that up," said Yvonne Taylor, the group's executive director.

According to the municipal league, the state government stands to lose between $10 million to $15 million in internet service tax revenue the first full year the repeal takes effect.

Taylor said Thursday her group was among those that objected to the 2016 congressional act that mandated South Dakota and a handful of other states cease the taxation of internet services by mid-2020. Called the Permanent Internet Tax Freedom Act, the measure also barred other states from enacting the tax.

Only six other states have the tax: North Dakota, Hawaii, New Mexico, Ohio, Texas and Wisconsin.

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Because the repeal will take effect partway through fiscal year 2020, Rapid City will receive approximately half the normal amount of revenue from the tax. But the following year, when the tax will not be collected at all, Rapid City is forecast to lose out on approximately $1.4 million, according to city Finance Director Pauline Sumption.

In the immediate future, Sumption said that sales tax revenue growth should be able to sufficiently offset the loss. According to budget projections for next year, Rapid City will collect $29,427,111 in sales tax revenue, up 0.65 percent from 2019. Rapid City's total budget for 2020 is projected to be 5.7 percent larger than 2019's.

Sumption said the abolition of the tax, funds from which are reallocated to municipalities based on their number of internet service users, had a minimal effect on the city's budget proposal for next year. It won't result in any cuts to city services or programs, she said, but could inhibit their expansion.

Proponents of the repeal, according to Taylor, claim that it will be offset by the state's internet sales tax. South Dakota began to collect sales tax from some out-of-state internet retailers and from sales platforms such as eBay in November 2018. The tax applies to retailers that conduct more than $100,000 worth of business in South Dakota annually or more than 200 transactions a year.

The state Department of Revenue could not immediately say how much money the internet sales tax will bring in each year, although the Associated Press previously reported that South Dakota loses an estimated $50 million annually to e-commerce.

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— Contact Matthew Guerry at matthew.guerry@rapidcityjournal.com

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