Kansas, in a striking departure from other states, won’t exempt out-of-state small businesses from a requirement to collect and remit taxes on internet and other remote sales.
In guidance (Notice 19-04) issued Aug. 1, the state said its law requires online and other remote sellers with no physical presence in the state to collect and remit taxes on sales delivered into the state. Remote sellers must register to begin collecting and remitting the state’s 6.5% sales tax Oct. 1, the notice said.
But the requirement doesn’t come with minimum business activity thresholds like those in the U.S. Supreme Court’s groundbreaking ruling in Wayfair v. South Dakota. In that June 2018 ruling, the court tossed out its physical presence standard for when states can compel remote vendors to collect and remit sales tax, while suggesting strongly that South Dakota’s law would pass constitutional muster.
The court said South Dakota’s tax system has three features that appear to prevent discrimination against or undue burdens on interstate commerce, one of them being a “safe harbor” for those who transact only a limited business there. South Dakota’s law set thresholds of $100,000 in in-state sales or 200 transactions. That means remote sellers below those thresholds don’t have to collect and remit taxes. Many other states have copied those thresholds in enacting remote sales requirements.
‘Don’t Need Thresholds’
Kathleen Smith, director of research and analysis for the state Department of Revenue, told Bloomberg Tax Aug. 1 that the department “does not believe it needs a de minimis threshold” based on its law (K.S.A. 79-3702) defining retailers doing business in a state.
“If the legislature wants to, they can go ahead and put it in there, but based on the law we have, we believe we have the ability to collect taxes on all transactions,” Smith said. For example, if a retailer had a single transaction for $10 to a buyer in the state, that retailer would have to get licensed and remit sales taxes on that singular sale, she said.
Zachary Fletcher, a Department of Revenue spokesman, said that his department doesn’t have independent authority to create the kind of thresholds discussed in the Wayfair ruling. Setting a minimum threshold “is viewed as the equivalent of an exemption from tax and under the Kansas Constitution, only the Legislature can grant an exemption,” he said.
During its 2019 session, the Kansas Legislature passed a remote sales tax bill with a $100,000 sales threshold, but Gov. Laura Kelly (D) vetoed it.
‘On Thin Ice’
Matthew P. Schaefer of Brann & Isaacson in Lewiston, Maine, the firm that represented Wayfair in the South Dakota case, told Bloomberg Tax that the Kansas Department of Revenue is “plainly on thin ice if it plans to enforce the collection obligation against remote retailers without applying a sales threshold equivalent to South Dakota.”
“By omitting reference to a sales threshold, Kansas has potentially run afoul of the Supreme Court’s favorable view of a ‘safe harbor’ for limited activity in the state, as discussed in Wayfair,” he said, adding that the department may be hoping the legislature will provide guidance in its next session, which begins in January.
Eric Stafford, vice president of government affairs for the Kansas Chamber of Commerce, also said he wouldn’t be surprised if Kansas faces a legal challenge.
“We support efforts to tax Internet sales and remote sales, but attempting to do so without having thresholds in place doesn’t seem like a slam dunk,” he said. “This makes it even more important for the Legislature and the governor to get together on a remote sales tax bill in the coming session.”
Schaefer added that the department’s guidance on requirements governing marketplace facilitators is also on shaky ground. The guidance said marketplace facilitators—such as Amazon Marketplace, Etsy and eBay—can voluntarily comply with requirements to collect and remit sales tax.
The term isn’t defined in Kansas law, Schaefer said.
“Writing a definition for purposes of notice, without any rulemaking or statutory authority of which I am aware, and suggesting that a ‘marketplace facilitator should contact the Department concerning entering into a voluntary compliance agreement’ seems to be venturing beyond the bounds of DOR’s authority,” he said.
Smith declined to comment on whether Kansas law puts it at risk of a lawsuit.
—With assistance from Christopher Brown in St. Louis.
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(With additional information from the Kansas Department of Revenue and potential legal challenges.)