With no state income tax and a low sales tax, South Dakota is known as one of the most taxpayer-friendly states in the nation. Due to these generous tax regulations, it’s common for investors and business owners looking to hide their assets from high tax rates to turn to South Dakota as a safe haven for their assets. By the end of 2020, it’s expected that trust companies will hold over $355.2 billion in South Dakota.
If you’re a South Dakota resident, you may not have to worry about tax rates on billions of dollars in assets. However, learning about the sales, property, and estate tax laws in South Dakota is important before you attempt to file a tax return. Review this guide to learn more about how South Dakota residents and business owners are taxed.
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South Dakota Income Tax
When you earn income, you’re responsible for paying federal income taxes on what you earned throughout the year. However, South Dakota is one of several states that doesn’t impose a personal state income tax. You’re not responsible for paying taxes to the state government on the income you earned.
South Dakota Sales Tax
While the sales tax in South Dakota is relatively low, the state government relies on this revenue to fund public transportation, education, health care, and other public services available to residents.
The current sales tax rate is 4.5%. In some locations, a municipal tax may apply, which is between 1% to 2% in addition to the state sales tax rate. If you make a purchase in a municipality that imposes the highest municipal tax available, you’re responsible for paying 6.5% in sales tax on your transaction.
When you purchase a taxable good or service in the state, the seller is responsible for adding the proper sales tax to the transaction. If you make a purchase from an out-of-state seller, such as through an online or catalog order, you’re charged use tax instead of sales tax. However, the use tax rate is the same as the sales tax rate.
South Dakota Property Tax
Local governments within the state use property taxes to fund county and municipal governments and schools. As a property owner, the property taxes you’re responsible for depending on the location of the property and its assessed value. Each county sets its own property tax rate based on its current financial need.
First, all property within a county is assessed based on its market value. Next, the property is equalized to 85% of its value. Then, the local government assesses its financial needs and the value of all property within the county. It determines the tax rate based on these figures and sets the tax levy for property owners.
Property tax bills are sent out to property owners in the county based on their individual home value assessments and the current tax rate. The average property tax rate in South Dakota is 1.18% and the average property taxes paid is about $1,394.
South Dakota Estate Tax
An estate tax is the tax that an executor must pay when a property transfers ownership after the death of the current owner. A federal estate tax applies to estates valued higher than $11.58 million at the time of the ownership transfer. The South Dakota estate tax was tied to the federal death tax credit. When this credit was phased out, the state also stopped imposing an estate tax. In South Dakota, residents who died in 2005 or later aren’t responsible for estate taxes.
Other Taxes in South Dakota
Intangible personal property is not taxed in South Dakota. However, there are excise taxes on specific goods and services in the state. Some of these excise taxes are as follows:
- Cigarettes and tobacco: Retailers that sell cigarettes or tobacco products can only buy products from wholesalers and distributors registered with the state.
- Alcohol: Alcohol carriers must purchase licenses in the state for $100 and buy alcohol directly from wholesalers. To ship wine, shippers must pay the state sales tax.
- Coin-operated laundromats: The owners of coin-operated machines for public use must be licensed with the state and renew this license every year they remain in operation. The rate to operate each machine is $16 annually.
- Bingo and raffles: Distributors are responsible for paying a 5% tax on all sales of bingo or lottery equipment or the use of pull-tabs in the state.
- Contractors: Any construction worker or contractor must have a South Dakota contractor’s license and is responsible for paying a 2% excise tax for all projects that are completed.
- Motor fuel: Any business that buys, sells, transports, or stores motor fuel must have a valid motor fuel license with the state. A fuel excise tax of 30 cents per gallon applies to motor vehicle gasoline sales.
In some cases, businesses may qualify for exemptions to these tax regulations. Businesses that file for nonprofit status or that meet other exemption guidelines may not be responsible for all or some of these taxes. For example, businesses that sell fuel to the federal government are exempt from the fuel excise tax.
Filing Taxes in South Dakota
Business owners in South Dakota that engage in sales are required to submit a sales and use tax return to the Department of Revenue (DOR). If they fail to complete and submit this return, even if they have no sales recorded, they may face penalty fees and interest charges. When a business files for a license, the DOR provides a schedule that determines the due date for sales tax return filing. In most cases, these returns are due each month, on or before the 25th.
While you aren’t responsible for filing state income taxes, you must submit federal income taxes to the Internal Revenue Service (IRS) if you earned income throughout the year. This federal tax return is due on or before April 15 each year.
South Dakota imposes some of the lowest taxes in the country. However, it’s important to understand how important tax regulations, such as property and sales taxes, are calculated if you live in the state. By reviewing these tax guidelines, how tax dollars help fund public services, and when taxes are due, you’ll better understand your tax liability and the importance of paying these taxes.
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