Kansas remote seller law may come under fire

Update 9.30.2019: 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 retailers face mounting obligations to register for a sales tax permit then collect and remit sales tax in multiple states, the nation’s smallest sellers may be sighing in relief: Most states’ remote sales tax laws provide safe harbor for small sellers. In fact, all states do, with the exception of Kansas — and the Sunflower State is now being scrutinized for failing to do so.

Kansas Attorney General Derek Schmidt has been asked to opine* on the following:

1. Was [Kansas Department of Revenue Notice 19-04] lawfully promulgated and does the Secretary have the legal authority under Kansas law to require such collection and remittance of taxes?

2. Does the Notice violate the United States Constitutional requirements for states to require collection and remittance of sales and compensating use tax for out-of-state sellers?

Remote sales tax recap

Until the Supreme Court of the United States issued its groundbreaking sales tax decision South Dakota v. Wayfair, Inc. (June 21, 2018), states couldn’t require out-of-state businesses that had no physical presence in the state to collect or remit sales tax.

The Wayfair opinion overruled the physical presence rule, effectively granting South Dakota and other states the right to tax remote sales based on a seller’s economic contacts with the state, or economic nexus. Since the decision, 43 states and the District of Columbia have adopted economic nexus. Kansas was the last to do so.

Aside from Kansas, all states follow South Dakota’s example and allow an exception for small sellers. Thus, economic nexus rules and laws typically contain an economic nexus threshold, such as $100,000 in sales or 200 transactions in the state in the current or previous calendar year (South Dakota’s threshold). Businesses whose sales or transactions into the state meet or exceed the threshold are required to collect and remit sales tax; those making fewer sales or transactions in the allotted time aren’t required to register or collect.

Economic nexus in Kansas

The Kansas Legislature tried to tax remote sales à la South Dakota, complete with a small seller exception. It approved an economic nexus measure in March 2019 and another in May, but both were vetoed by Governor Laura Kelly.

After the Kansas Legislature went on recess without establishing an economic nexus law, the Kansas Department of Revenue stepped up to the plate.

Department Notice 19-04 (August 1, 2019) explains that the Wayfair decision gives the Department of Revenue the authority to enforce an existing provision of the law — K.S.A. 79-3702(h)(1)(F) — that 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.” It will enforce remote sales tax collection as of October 1, 2019.

Significantly, this provision does not include a small seller exception. The department determined it lacks the authority to establish an exception for small sellers, even when viewing K.S.A. 79-3702(h)(1)(F) through a Wayfair lens. Only the Kansas Legislature can establish a small seller exception, and it isn’t scheduled to reconvene until January 2020.

Using Wayfair as a guiding principle — or not

The stance Kansas has taken is somewhat surprising. The Wayfair opinion highlighted three aspects of South Dakota law that “appear designed to prevent discrimination against or under burdens upon interstate commerce.” First among these: “The Act applies a safe harbor to those who transact only limited business in South Dakota.”

That said, the Kansas Department of Revenue isn’t the only state tax authority to somewhat controversially apply the Wayfair ruling to existing law.

The California Department of Tax and Fee Administration (CDTFA) initially adopted the same $100,000 sales/200 transactions small seller exception as South Dakota, claiming it lacked the authority to change the threshold that had been accepted by the Supreme Court of the United States. The California Assembly later increased the economic nexus sales threshold to $500,000 and eliminated the transaction threshold.

The Kansas Legislature could follow California’s example and amend the department’s new enforcement of K.S.A. 79-3702(h)(1)(F). However, unless a special session is called, that won’t happen until next year at the earliest. In the meantime, starting October 1, 2019, remote retailers that do as little as one transaction or $1 in sales in Kansas could be compelled to collect and remit Kansas sales tax under Department of Revenue Notice 19-04.

Kansas Attorney General consulted

Representative Ron Ryckman, Speaker of the Kansas House, has asked the Kansas Attorney General to weigh in on the matter.

Ryckman purports K.S.A. 79-3702(h)(1)(F) “is Constitutionally deficient as neither the Kansas statute nor any other provision of law contain the safe harbor provisions that the Supreme Court identified in the South Dakota v. Wayfair, Inc. decision.” He notes that the Kansas Legislature approved two bills that “did include a safe harbor provision that would have allowed the State to require retailers to collect and remit the taxes in a clear and lawful manner,” though both were vetoed.

It’s the duty of the Legislature to impose a sales or use tax collection duty, not the Kansas Department of Revenue, according to Ryckman. “The Department’s delegated authority is limited to the administration and enforcement of the laws.”

Furthermore, Ryckman points out that Notice 19-04 “causes great confusion and concern” with respect to marketplace facilitators. The department notice invites marketplace facilitators to “contact the Department concerning entering into a voluntary compliance agreement with the Department” [emphasis mine]. According to Ryckman, this had led many entities to assume marketplace facilitators are required to collect tax on behalf of third-party sellers, as is the case in a growing number of states — but not Kansas. 

What’s a remote retailer to do?

Kansas Department of Revenue Notice 19-02 requires retailers with “any other contact with this state that would allow this state to require the retailer to collect and remit” sales and use tax to do so. Unless something changes, remote retailers should consider it the real deal. The team at Avalara Professional Services can help you determine if you have an obligation to collect and remit sales tax in Kansas or other states.

*Hat tip to Bloomberg Tax for procuring a copy for Rep. Ryckman’s letter to the Attorney General.