Kansas cannot require remote sellers to collect sales tax. Or can it?

Update 10.10.2019: Kansas Governor Laura Kelly stands with the Kansas Department of Revenue: “This is about protecting our friends and neighbors doing business on Main Street and throughout our local communities across Kansas. They are working hard, playing by the rules and deserve to be on a level playing field with out-of-state retailers. The Department of Revenue’s notice simply reaffirms this tax fairness.”

The Kansas Department of Revenue announced in August that it would use the United States Supreme Court’s decision in South Dakota v. Wayfair, Inc., to tax remote sales “to the fullest extent possible permitted by law.” Remote sales tax enforcement was set to begin today, October 1, 2019, but yesterday, the Kansas Attorney General announced the department’s policy was invalid. The Department of Revenue is fighting back.

But let’s start at the beginning. 

South Dakota v. Wayfair, Inc. centered on a challenge to a long-standing physical presence rule. The Supreme Court had twice decided, in 1967 and 1992, that a state could not require a business to collect sales tax unless the business had a physical presence in the state. In other words, states could not tax remote sales.

South Dakota challenged that precedent. In 2016, it passed a law requiring remote sellers with no physical presence in the state to collect and remit sales tax based solely on their sales in the state (economic nexus). The Supreme Court took the case and, to the surprise of many, overruled the physical presence rule in June 2018. States can now use economic nexus to require remote sellers to collect sales tax.

In its ruling, the Supreme Court didn’t create another bright-line test akin to the physical presence rule. However, it did highlight three aspects of South Dakota law that seemed designed to lessen the burden on remote sellers:

• South Dakota is a member of the Streamlined Sales and Use Tax Agreement, or SST
• South Dakota would not enforce economic nexus retroactively
• South Dakota provides safe harbor for small sellers (economic nexus applies only to remote retailers with more than $100,000 in sales or at least 200 separate transactions in the state in the current or prior calendar year)

Since the Wayfair decision, 43 states and the District of Columbia have adopted economic nexus laws or rules requiring out-of-state sellers with no physical presence in the state to collect and remit sales tax. They conform to the three above points to varying degrees:

• 24 states are members of SST
• 42 states (plus D.C.) prohibit retroactive enforcement of economic nexus (New York is the outlier)
• 42 states (plus D.C.) provide safe harbor for small sellers (Kansas is the outlier)

Kansas is a member of SST.

Like all 24 SST-member states, Kansas has taken steps to substantially reduce the burden of sales tax compliance for businesses by providing:

• A central, electronic registration system
• Consumer privacy protection
• Simplified administration of exemptions
• Simplified state and local tax rates
• Simplified tax remittances and returns
• State administration of sales and use tax collections (no self-collecting local jurisdictions)
• Uniform state and local tax bases
• Uniform sourcing rules for all taxable transactions
• Uniform tax base definitions and rules

Kansas would tax remote sales prospectively.

The Department of Revenue published Notice 19-04, Sales Tax Requirements for Retailers Doing Business in Kansas, on August 1, 2019. It states that the department will not enforce remote sales tax collection prior to October 1, 2019.

Kansas does not provide safe harbor for small sellers.

Where Kansas is not in line with South Dakota’s economic nexus law or the Wayfair decision: It doesn’t expressly provide an exception for small sellers.

Notice 19-04 claims Wayfair allows the department to impose sales and use tax collection requirements “to the fullest extent permitted by law.” K.S.A. 79-3702(h)(1)(F), adopted in 2003, defines a “retailer doing business in this state” 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.”

The department believes it lacks the authority to establish safe harbor for small businesses. In theory, therefore, as little as one sale into Kansas could establish nexus for a remote seller. Notice 19-04 states, “Kansas can, and does, require on-line and other remote sellers with no physical presence in Kansas to collect and remit the applicable sales or use tax on sales delivered into Kansas.” 

Kansas Attorney General Opinion 2019-8 holds that Notice 19-04 is “inconsistent with Wayfair” and therefore invalid.

According to the opinion, the Supreme Court “provided a categorical standard” the Department could have adopted to enforce K.S.A. 79-3702(h)(1)(F) — the $100,000 in sales or 200 transactions economic nexus threshold. Indeed, the attorney general notes that the department supported legislative attempts to create economic nexus with such a safe harbor. Only after efforts to enact a South Dakota-style economic nexus law failed did the department assert its right to enforce K.S.A. 79-3702(h)(1)(F) on all remote sellers.

Opinion 2019-8 agrees the Department “may determine case-by-case that a particular out-of-state retailer has ‘substantial nexus’ with Kansas and may be required to collect and remit without imposing an ‘undue burden.’” However, the Attorney General takes issue with the fact that the department would use Wayfair and K.S.A. 79-3702(h)(1)(F) to “determine categorically that all out-of-state retailers are not required to collect and remit.” [Emphasis theirs.]

Attorney General Derek Schmidt also criticized the department’s process. As its name implies, Notice 19-04 is a tax notice, not an administrative ruling or policy directive. Opinion 2019-8 points out that revenue notices are traditionally used “to inform the public about actions taken by others that affect the rights and duties of taxpayers, not as an instrument by which the Department itself takes such substantive action.”

The Department of Revenue insists that K.S.A. 79-3702(h)(1)(F) allows the state to “take advantage of any favorable United States Supreme Court decision that would overturn the physical presence requirement,” which Wayfair did.

It points out that Wayfair didn’t establish a bright-line test — the court merely praised South Dakota for not imposing an undue burden on the remote sellers. Furthermore, it argues that its policy does not create an undue burden because:

• Kansas is a member of SST
• Remote retailers can contract with an SST Certified Service Provider (CSP) to register and manage sales tax collection and remittance in Kansas
• Kansas will compensate the CSP for businesses that are volunteer sellers

In summary, “Because Kansas’ membership in Streamline simplifies the compliance process of all sellers, including small sellers, and Kansas is paying the cost of compliance for all remote sellers, including small sellers of less than $100,000 into Kansas, it is difficult to see what burden is being borne by any seller, large or small.” The department also notes that a remote retailer may rebut the presumption that it has sufficient nexus with Kansas to establish a sales tax collection obligation.

Responding to the criticism on its process, the department explained that it “did not change any agency policy by virtue of Notice 19-04.” It was merely, “providing information to the public describing a statutory requirement that became the law after Wayfair.”

We’ll have to wait and see.

The Kansas Attorney General believes the state cannot enforce a blanket collection requirement on every remote seller but may be able to do so on some sellers on a case-by-case basis.

The Kansas Department of Revenue believes it has the authority to require remote sellers to collect and remit sales tax under K.S.A. 79-3702(h)(1)(F) and the Wayfair ruling. Indeed, Revenue Secretary Mark Burghart says the department “cannot select which laws it enforces.” In his response to Attorney General Schmidt's opinion, he explained that “Kansas statutes are presumed to be constitutional, and unless deemed otherwise by a court of competent jurisdiction, the Department is obligated to enforce the statutes enacted by the Legislature.”

According to Secretary Burghart, more than 3,200 out-of-state retailers have registered to collect and remit Kansas sales and use tax since the June 2018 Wayfair decision. Close to 600 of those did so after the department published Notice 19-04.

No matter what happens in Kansas, other states will continue to require remote sellers to collect and remit sales tax under their own economic nexus laws and rules. Learn more in Avalara’s state-by-state guide to economic nexus laws.