Kansas Invites Legal Challenge with Aggressive Remote Sales Tax Regime

August 2, 2019

Kansas just unveiled the most aggressive remote sales tax collections regime in the country, and it did so without adopting any new, post-Wayfair legislation. The new requirements, set out in a Department of Revenue notice, obligate all remote sellers with any transactions in Kansas to begin collecting and remitting sales taxes by October, no matter how small the company or how few Kansas sales they have. The new guidance challenges the emerging consensus on remote sales tax collections and raises legal issues most states have been eager to avoid.

By statute, Kansas has long considered itself empowered to impose sales tax obligations on anyone selling into Kansas, regardless of whether they were physically present in the state. Until recently, however, the state was unable to enforce the law against most remote sellers due to the physical presence standard established by the U.S. Supreme Court in Quill Corp. v. North Dakota (1992). When the Court overturned Quill’s physical presence standard in South Dakota v. Wayfair, Inc. (2018), it ushered in an era of sales taxation, with states rushing to amend their statutes or adjust their regulatory guidance to require remote sellers to collect and remit sales tax.

Most, however, took the Supreme Court’s cautions to heart. The Wayfair decision repudiated physical presence as a nexus standard, replacing it with economic nexus. What this means, in layman’s terms, is that a company can have sufficient economic connections with a state for that state to be able to tax it even if it lacks any physical presence (people or property) in the state. What the Court didn’t do, however, was establish exactly what was sufficient to establish economic nexus, or what standards might be necessary to stave off other legal challenges. Simply concluding that physical presence is unnecessary doesn’t resolve every question; states must still act in a way that does not discriminate against or unduly burden interstate commerce.

In Wayfair, the Court was not asked to determine exactly what these standards would be. Anticipating the question, however, Justice Kennedy, in his majority opinion, spelled out what we and others have termed the “Wayfair Checklist”—a list of provisions in the South Dakota law at issue in that case which, in the Justice’s opinion, would likely insulate it from other constitutional challenges. A lack of physical presence in the state was no longer a bar to South Dakota’s imposition of sales tax collections requirement. Justice Kennedy also signaled that, while these matters weren’t presently before the Court, the design of South Dakota’s law was such that it would probably be upheld against other constitutional challenges as well.

Most states have, therefore, looked to South Dakota as a model, perhaps tweaking here and there, but largely hewing to the design of the South Dakota law since it appears to have the Court’s blessing. The provisions specifically praised in Wayfair have been replicated in state after state to give their laws a strong presumption of constitutionality. And it’s worth noting here that South Dakota’s law coming before the Court was no accident; proponents of remote sales tax collection authority from around the country had input into how that law was structured and designed it as the model legislation for a test case before the Court.

One of the most important of these provisions is a safe harbor for businesses with few sales into a given state. South Dakota, with a population less than one-third that of Kansas, chose a threshold of $100,000 in sales or 200 discrete transactions. Any remote seller below the threshold is not obligated to collect and remit. The purpose of this safe harbor is to avoid unduly burdening interstate commerce. To cite an extreme example, imagine someone with a home side business who sells the occasional craft item on commission. They sell maybe 20 products a year, just as a hobby, and now someone from Kansas wants to pay them $50 to make something for them.

If they take that commission, should they—for a single $50 sale—be required to obtain a sales tax permit from the state of Kansas (you have to register three to four weeks before your first sale), fill out the sales tax forms, and collect and remit both state and local sales tax (meaning you have to figure out the applicable local rate as well) of a few dollars?

Kansas says yes.

A court might well be skeptical, as this is a rather significant burden on interstate commerce. A company making even a single sale into Kansas needs to be fully compliant with Kansas’s sales tax laws. This is what the safe harbor was meant to prevent, and Kansas is now the first state to go without one.

The state is doing so, moreover, without any post-Wayfair legal authorization. After Gov. Laura Kelly (D) vetoed broader tax bills which included the establishment of remote sales tax collections regimes (which included safe harbor provisions, among other items on the Wayfair Checklist), the Department of Revenue has chosen to proceed on its own, relying on existing authority to tax remote sales—and doing so with very little regard to the emerging consensus on states’ constitutional authority in this area. The state is out on a limb from a legal standpoint, and it’s preparing to impose very significant compliance burdens on small sellers.

Interestingly, the notice also establishes obligations for marketplace facilitators, which is the term of art for platforms that facilitate sales by third parties (think eBay, Amazon Marketplace, Etsy, or even Uber Eats). Many states are doing this, but thus far, all have done so by adopting specific legislation. Nothing in Kansas’s existing statute says anything about facilitators collecting and remitting tax, yet the Department of Revenue is moving forward with such a requirement.

Kansas’s aggressive approach represents a radical departure from the post-Wayfair consensus. Legal challenges seem likely, but litigation takes time. By taking this approach, Kansas is putting small sellers in a bind, forcing taxpayers to foot the bill for a difficult legal battle, and potentially imperiling the state’s remote sales tax regime altogether, a possible outcome that a more reasonable approach would have avoided.

Was this page helpful to you?

No

Thank You!

The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?

Contribute to the Tax Foundation

Related Articles