Starting a business in South Dakota: tax on your own hours

Most state tax guidance spends its length on a question South Dakota does not ask. Elsewhere the law says goods are taxable, services are not, and here is the enumerated list of services we tax anyway — so the work is finding out whether your particular trade is on it. Iowa taxes about a hundred named services. Nebraska taxes a handful. Illinois taxes none.

South Dakota taxes the sale of services generally. Consulting, bookkeeping, design, repair, personal services: there is no list to check yourself against because the general rule already includes you, and the exceptions are the exceptions. Whatever else that is, it is quick to learn.

It also makes the absence of a general business licence something of a technicality. There isn't one — but since services are taxable, nearly every business here holds a sales tax licence from the Department of Revenue anyway, which does much the same job. You apply online, and the state publishes no licence fee.

Construction is the one trade that escapes sales tax here, and it does not escape far. It carries the contractor's excise tax instead — 2% on gross receipts — and every contractor in the state is told to bid at 2.041%.

The extra four-hundredths exist because the excise tax applies to the tax. Add a flat 2% to a job and that addition becomes part of your gross receipts, and the increment is itself taxable, so 2% of the bid does not cover 2% of what you actually receive. Grossing up gives 2 ÷ 98, or 2.0408%, which the state rounds to 2.041% and calls the bid factor.

Forty dollars on a hundred-thousand-dollar job is nothing. Forty dollars on every job for a year is a systematic leak, and it only surfaces when the return is filed and the figure is larger than the money you set aside for it. Bid at the factor, not at the rate.

Municipalities add 1% to 2% on top of the 4.2% state rate, bringing most towns to about 6.2%. Some also levy a separate 1% municipal gross receipts tax — a different tax reaching a narrow list: alcoholic beverages, eating establishments, lodging and admissions to entertainment. If you run a restaurant, a bar, a hotel or a venue, find out whether your town charges it, because it sits on top of everything else.

South Dakota is one of very few states that does not require most private employers to carry workers' compensation. Read as a saving, that is a misreading, and the reason is what the insurance actually buys.

The bargain is this: the worker gives up the right to sue you over a workplace injury, and in exchange gets prompt benefits regardless of fault. An uninsured employer has not avoided the cost — it has given up the immunity. An injured worker can sue the business directly, and what that costs is whatever a court decides rather than what a schedule of benefits says. Which is why nearly every South Dakota employer carries cover it is under no obligation to carry.

Unemployment insurance is not optional, and it has a rule people miss. Every newly established business registers with the Reemployment Assistance Tax Unit at the Department of Labor and Regulation — but so does a business that succeeds an existing one or changes its ownership structure, and that registration is due within 30 days of the change. A sole trader incorporating is precisely that kind of change, so the day you form an LLC over a business you were already running is the day a 30-day clock starts.

There is no income tax here of any kind: none on individuals, none on corporations, and no city or county levies one. For most businesses the sales tax return is the only recurring state filing there is.

The recurring costs are small and fixed. $150 to form online ($165 on paper), then $55 a year for the annual report in your anniversary month ($70 on paper). The Secretary of State publishes no guaranteed turnaround for online filings, and expedited service is offered though the current fee could not be confirmed from a state source at this check. What forming a company costs in each of the fifty states is on the hub page.

So South Dakota is a swap, and it is worth being precise about which side you land on. You collect tax on work that most states leave alone, and you pay nothing on what you keep. A high-margin practice with few costs comes out well ahead. A business whose customers are consumers rather than tax-reclaiming companies feels the collection side much harder, because for them the tax is a real price rise. The tax-inclusive number is the one a consumer hears, so decide it before you publish a rate card, not after the first invoice comes back queried.