Outlier No More: Kansas Adopts Tax Reform with Wayfair Safe Harbor, GILTI Exclusion

Legislators in Kansas have had enough of their state being a 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. policy outlier.

After three years of deliberations, more than two-thirds of members in both the Senate and the House enacted tax reform and relief legislation Monday over the veto of Gov. Laura Kelly (D). Senate Bill 50 puts the state on firm legal standing by adopting a safe harbor for small remote sellers under the state’s 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. and by excluding Global Intangible Low-Taxed Income (GILTI) from the state’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. base. And it better aligns the state tax code with net income and provides individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. relief to individuals and families.

Similar legislation was vetoed by the governor in 2019 but did not receive enough votes for an override. And while related proposals were considered again in 2020, Kansas’ legislative session, like most states’, was severely disrupted by the onset of the coronavirus pandemic.

But with the state’s budget in a healthy condition—tax receipts for fiscal year (FY) 2021 are expected to come in 16.3 percent above final FY 2020 collections—legislators took this opportunity to make a series of structural tax changes, several long overdue.

Most notably, with the establishment of a $100,000 de minimis exemption for remote sellers, Kansas’ sales tax code is now in compliance with the U.S. Supreme Court’s majority opinion in the South Dakota v. WayfairSouth Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions. decision. For nearly two years, the Kansas Department of Revenue has made the legally dubious assertion that it has the authority to require all out-of-state sellers to collect and remit the state’s sales and use taxes regardless of the amount of money they made from sales into Kansas or the number of transactions they made into the state, and in the absence of any express law on remote seller requirements. Had this policy been allowed to continue, the courts would have had very good reason to strike it down for violating the U.S. Constitution’s Dormant Commerce Clause, which prohibits states from imposing undue burdens on interstate commerce.

Moving forward, SB 50 protects small remote sellers that make only incidental sales into Kansas by requiring such sellers to collect and remit only if their gross receipts from sales into Kansas exceed $100,000. Importantly, this legislation makes clear that sellers exceeding such threshold will not be required to remit sales taxes from sales occurring prior to July 1, 2021.

SB 50 also excludes GILTI from taxation for tax years 2021 and beyond by adopting a modification that allows 100 percent of GILTI to be subtracted from federal adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” (AGI) when determining Kansas taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . This will end the legally questionable policy of imposing higher taxes on certain multinational businesses operating in Kansas for reasons having nothing to do with their operations in Kansas, or even in the U.S. The timing of this change is auspicious, moreover, because had policymakers not acted, proposed changes to GILTI at the federal level could have increased businesses’ burdens in Kansas.

Additional pro-growth changes contained in SB 50 include the extension of Kansas’ net operating loss (NOL) carryforward period to align with the one put in place under the Tax Cuts and Jobs Act (TCJA), as well as the decision to decouple from the federal limitation on net business interest expense deductibility under IRC § 163(j). These changes will better align Kansas’ income tax code with actual business net income.

SB 50 also extends tax relief to individuals and families across the income spectrum by increasing the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. by $500 for all filers and by giving Kansans the option to claim state itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s even if they elect to claim the federal standard deduction, which was made significantly more generous under the TCJA.

Taken together, these pro-growth structural reforms will make Kansas’ tax code substantially more competitive and—all else being equal—these reforms are expected to improve Kansas’ ranking on our State Business Tax Climate Index from 35th to 24th overall (contingent upon changes made in other states).

There is more work to be done in Kansas if the state wants to truly stand out among its regional and national competitors as being pro-growth and taxpayer-friendly, but these structural changes will reverse several of the least competitive aspects of the state’s tax code and significantly improve the state’s competitive standing moving forward.

For more information about these and other structural tax policy solutions that would improve Kansas’ economic competitiveness, see our 2019 publication, Kansas Tax Modernization: A Framework for Stable, Fair, Pro-Growth Reform.

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