Kansas: Old law imposes new sales tax requirement on remote sellers

Update 9.30.19: The Kansas Attorney General has determined Department of Revenue Notice 19-04 is "of no legal force or effect"; failure to include safe harbor for small sellers is "inconsistent with Wayfair." See Attorney General Opinion 2019-8 for more details.

Update 10.1.19: The department disagrees. See Kansas cannot require remote sellers to collect sales tax. Or can it?

As promised, the Kansas Department of Revenue has published new sales tax requirements for remote retailers. As of October 1, 2019, all out-of-state sellers making sales for delivery into Kansas are required to register with the Department of Revenue and collect and remit Kansas sales or use tax.

According to Department of Revenue Notice 19-04, “Kansas imposes its sales and use tax collection requirements to the fullest extent permitted by law.” Until the middle of last year, it could only require businesses with a physical presence in the state to collect and remit sales tax. The same was true for all states.

However, the Supreme Court of the United States found the physical presence rule to be “unsound and incorrect” on June 21, 2018. Its decision in South Dakota v. Wayfair, Inc. enables South Dakota — and by extension other states — to base a remote sales tax collection obligation solely on a seller’s sales or transaction volume in the state (economic nexus).

In the last year, most states with a general sales tax have enacted an economic nexus law. Not Kansas. Instead, the Department of Revenue is applying Wayfair to an existing statute: K.S.A. 79-3702(h)(1)(F), which defines a “retailer doing business in Kansas” as “any retailer who has any other contact with this state that would allow this state to require the retailer to collect and remit tax under the provisions of the constitution and laws of the United States.”

This is significant.

Most states have closely followed South Dakota’s lead to minimize the risk of a legal challenge. Thus, most are enforcing economic nexus on a prospective basis only, and most allow an exception for small sellers. In South Dakota, the economic nexus threshold is more than $100,000 in sales or at least 200 separate transactions in the state annually. You can find details about each state’s economic nexus law here.

Kansas will tax remote sellers prospectively, starting October 1, 2019. However, it isn’t providing a small-seller exception.

The Kansas Department of Revenue has decided Wayfair gives it the authority to enforce K.S.A. 79-3702(h)(1)(F), but not to establish an exception for small sellers. For that to happen, the Kansas Legislature would have to get involved; it reconvenes in January 2020.

Though it’s uncommon, Kansas isn’t the only state to base a remote sales tax collection obligation on a new interpretation of an old statute: California, New York, and Wisconsin did the same. However, the tax departments in these three states interpreted the law to allow them to establish a small-seller exception.

California originally adopted the same $100,000 sales/200 transactions threshold as South Dakota. Like the Kansas Department of Revenue, the California Department of Tax and Fee Administration (CDTFA) believed it lacked the authority to change the threshold accepted by the Supreme Court in Wayfair. The rule took effect April 1, 2019; the California Assembly intervened a few weeks later, increasing the sales threshold to $500,000 and eliminating the transaction threshold retroactively. More details.

In January 2019, the New York Department of Taxation and Finance announced that the Wayfair ruling allows the state to enforcing an existing law defining a sales tax vendor as “a person who regularly or systematically solicits business in New York State by any means and by reason thereof makes taxable sales of tangible personal property to persons in the state.” The department interpreted regular or systematic solicitation to mean a remote vendor with more than $300,000 in sales and at least 100 transactions in the state in the preceding four quarterly sales tax quarters. More details.

Finally, a law predating Wayfair authorized Wisconsin to tax remote sales to the full extent of federal law. Shortly after the Wayfair ruling, the Wisconsin Department of Revenue adopted an emergency rule to codify the small-seller exception “consistent with the Court’s decision in Wayfair.” More details.

For now, the Kansas Department of Revenue maintains it lacks the authority to establish a small-seller exception. Unless that stance changes, or the Kansas Legislature intervenes, all remote sellers that make any amount of sales into Kansas will have to register with the department and start collecting and remitting sales tax as of October 1, 2019.

Similarly, the department doesn’t believe existing law enables it to force marketplace facilitators to collect on behalf of third-party sellers. Thus, marketplace facilitators are invited to consider entering into a voluntary compliance agreement with the department. Additional information is available in Notice 19-04.

Kansas is a Streamlined Sales Tax (SST) state, so remote retailers can register through the Streamlined Sales Tax Registration System and use a Certified Service Provider (CSP) to fulfill most sales and use tax obligations. Businesses that qualify as a “voluntary seller” in Kansas may be eligible to receive those services at a significantly reduced cost. Learn more about the SST and why you should care about it.

Avalara is an SST CSP and can help you register and apply for free sales tax services in Kansas. Learn more.