Kansas’ Attorney General and the Department of Revenue are at odds, and remote sellers are caught in the middle. Just prior to an October 1 effective date, the Attorney General’s Office issued a nonbinding legal opinion concluding that the Department of Revenue’s decision to require remote sellers to collect and remit sales taxes to the state absent specific statutory authority and without implementing a safe harbor for small sellers was unconstitutional and invalid. The Department has responded that it considers itself on firm legal footing and that the new remittance requirements remain in effect.
The Kansas approach to online (and other remote) seller requirements is far beyond the mainstream, testing legal limits both in the tenuous authority for the new requirements under state law and their dubious validity under the U.S. Constitution. Legal challenges are undoubtedly forthcoming and have a good chance of prevailing. (When that happens, the Attorney General’s office, which views the Department’s policy as unconstitutional, will then be in the difficult position of defending the Department.)
The lack of a safe harbor, meaning that even the smallest sellers—for instance, an out-of-state resident selling a single craft item to a Kansan—incur obligations to collect and remit Kansas sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , is particularly legally doubtful and transparently bad policy. The state’s Attorney General termed it unconstitutional, and that view is very much in the legal mainstream. (We wrote about this two months ago, when the notice first came out.)
If you’re a remote seller, now what?
Following the Supreme Court’s landmark decision in South Dakota v. Wayfair, which eliminated the physical presence requirement for a state to establish “substantial nexus” for purposes of imposing sales tax collection and remittance obligations, states have rushed to adopt online sales tax regimes.
Legally, what has changed isn’t the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden itself—in-state purchasers always owed sales tax (technically, “use tax”) on their untaxed out-of-state purchases, though compliance was incredibly low—but the ability to require merchants to collect at the point of sale. Some states, therefore, concluded that their existing sales tax codes already authorized them to expand to remote sellers without physical presence in the state, once that requirement was lifted by the Supreme Court. However, states also recognized their ability to establish so-called “economic nexus” did not mean that the courts had eliminated all constraints on their taxation of out-of-state sellers.
In Wayfair the Court specifically noted that, in removing the physical presence requirement, it was not concluding that a remote sales tax regime might not offend other constitutional provisions, like the requirements of the Commerce Clause and the Due Process Clause—particularly the requirement that states not impose an undue burden on interstate commerce. In other words, states were now free to require remote sellers to collect sales tax from their residents, but the details still mattered.
In particular, the Court highlighted a number of salient features of the challenged South Dakota law, strongly suggesting that these features would allow that law to survive a Commerce Clause challenge. Key among them: a safe harbor for small sellers.
Kansas tried to go that route, with the legislature passing two bills that authorized remote sales tax collections and contained safe harbor provisions. However, both bills also included broader tax conformity provisions opposed by the governor, who vetoed them.
The legislative route foreclosed (for now), the Department of Revenue charted a different course: simply announcing, in a notice, that the law already on the books imposed collection and remittance requirements on all sellers, in and out of state, and post-Wayfair, state law therefore requires all such sellers to comply. Significantly, this was not spelled out in regulations but in a notice, a document reserved for explaining and clarifying points of law and regulation, not establishing new rules. From the Department’s perspective, it’s simply applying the law as written—as it has existed since 2003.
But that’s a hard sell.
Like many states, Kansas law has long anticipated the possibility of taxing remote sales. In a 14-page letter to the Attorney General as his office was preparing its legal opinion, the Revenue Secretary sketched some of this history, noting that the state amended its definition of retailers in 1990 to align it with what it hoped would be a court-created opportunity at that time, and then made further statutory revisions in 2003 which were “designed to posture Kansas such that it could take advantage of any favorable United States Supreme Court decision that would overturn the physical presence requirement established in National Bellas Hess [and affirmed in Quill].”
For the Secretary, this is an argument for proceeding: the state has made multiple revisions to its sales tax code over the years so that it would be ready to tax remote sales when the federal government gave a green light. Arguably, however, the logic runs the other way: on two occasions the state, anticipating a favorable ruling, revised its code to bring it into compliance with what it expected to be the new guidelines. Now, with the opportunity actually at hand under different circumstances, and a set of guidelines that diverges from what the state anticipated 16 years ago, the state is moving forward without amending its code for compliance.
According to the Revenue Secretary, the current law is “plain, unambiguous, and self-executing.” It reads, in relevant part, that the definition of a retailer doing business in the state extends to “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 is neither plain nor unambiguous that this requires the state to impose tax obligations on remote sellers without regard to potential constitutional impediments. In fact, the law clearly stipulates that the inclusion ends where any federal constitutional constraints begin. Interpreting this statute to require all remote sellers, regardless of size, to collect on behalf of the state requires a second, significant step: a determination that proceeding without a safe harbor for small sellers does not offend the U.S. Constitution as applied by the federal courts.
In the past, the Department of Revenue has complained that its hands are tied and it lacks the legal authority to create a safe harbor provision on its own. This is doubtless correct. The Department’s inability to overcome this impediment, however, does not entitle it to simply ignore it. There’s a clear solution here, and it’s for Kansas to do what other states have done: adopt legislation that establishes a de minimis threshold for the taxation of remote sellers, rather than trying to accomplish it by notice, even when the state’s laws haven’t been conformed to current requirements.
Revenue officials argue that the Supreme Court has not enshrined any specific threshold. This is true so far as it goes. But the Court also makes clear that not all systems states could adopt would pass constitutional muster, and draws attention to the importance of avoiding undue burdens on interstate commerce. The Kansas Attorney General’s opinion views this as a “categorical standard,” observing:
“It is reasonable to conclude that post-Wayfair, out-of-state retailers whose contacts with a taxing state exceed those approved safe harbor limits may be subject categorically to a duty to collect and remit without offending the Commerce Clause. Similarly, it is reasonable to conclude that the likelihood a state offends the Commerce Clause by imposing a duty to collect and remit on an out-of-state retailer increases the further the retailer’s contacts with the taxing state depart below the ‘clearly’ sufficient safe harbor thresholds.”
For now, Kansas is going forward with its requirements, even though the Attorney General believes the notice to be of no legal effect. This puts small businesses in a bind, generates uncertainty for taxpayers and the government alike, and imposes burdens that need not exist. Instead of defending a dubious administrative effort to tax remote sales, Kansas officials should take a step back and do this the right way—by law, with appropriate safeguards.
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