Kansas Department of Revenue issues notice requiring any seller providing goods or certain services in Kansas to register, collect and remit state sales tax beginning October 1, 2019
On August 1, 2019, Kansas issued Notice 19-04 that requires any remote seller, regardless of physical presence, to register, collect and remit sales taxes on any sales of tangible personal property and/or certain services in Kansas. This notice interpreted K.S.A. 79-3702(h)(1)(F) “to the fullest extent permitted by the law.” As provided in the Notice, “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. Accordingly, a remote seller must register with Kansas and obtain a sales and/or use tax account number.” Kansas is giving remote sellers until October 1, 2019, to register and begin collecting and remitting Kansas sales and/or use tax (the state sales tax rate is 6.5 percent).
Furthermore, the state will not enforce the statutory requirement for failures to do so before October 1, 2019. As explained in the notice, registration can either be through the Streamlined Sales and Use Tax Governing Board or directly with the Kansas Department of Revenue. See, e.g., www.sstregsiter.org and www.ksrevenue.org. This bill also includes requirements for marketplace facilitators (i.e., platforms that facilitate sales by third parties such as Amazon marketplace) and urges any such person to enter into a voluntary compliance agreement with the Department of Revenue.
In interpreting Kansas’ existing statute to the “fullest extent permitted by law,” the state is opening itself up to a legal challenge to the open question that was left unresolved in South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018). In Wayfair, the Supreme Court overruled the physical presence rule of Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), and National Bellas Hess, Inc. v. Department of Rev. of Ill., 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967). The Supreme Court, however, left in place the four-part test for determining whether a state tax on interstate commerce violates the Commerce Clause. As explained in Wayfair, “[t]he Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3 does not discriminate against interstate commerce, and (4) is fairly related to the service the State provides.” Wayfair, 138 S.Ct. at 2091 (citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977)).
In Wayfair, remote sellers without a physical presence challenged a South Dakota law that required sellers that delivered more than $100,00 of goods or services into the State or engaged in 200 or more separate transactions for the delivery of goods or services into the State. Here Kansas is correct that no physical presence is required. See Wayfair, 138 S.Ct. at 2092 (“[e]ach year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States”). Even without a physical presence, the retailers challenging the South Dakota law arguably had a substantial nexus through their business. However, the Kansas Department of Revenue expands the reach of its law to apply to any remote seller who provides goods or services into the state. This Notice fails to explain how such a transaction would constitute a “substantial nexus” to Kansas and represents an exception to the actions of other states in the post-Wayfair era. As such, the Kansas Department of Revenue’s interpretation of K.S.A. 79-3702(h)(1)(F) will presumably be subject to challenge as an undue burden on interstate commerce under existing Supreme Court precedent.
In responses provided to Bloomberg Tax that were published on August 1, the Kansas Department of Revenue asserted it does not have the authority to create a de minimis exception and that it would be up to the Legislature to grant an exemption. See Tripp Baltz, Kansas Only State Making Small Businesses Pay Remote Sales Tax, Bloomberg Tax (Aug. 1., 2019) (subscription required). As a result, in response to a question reported in the Bloomberg Tax article, an online retailer who sells one $10 purchase in a year would still be required to register, collect and remit Kansas sales tax. While the Kansas Legislature passed a remote sales tax bill with a $100,000 sales tax threshold that was included in a broader tax bill, the Governor vetoed it. Given existing Supreme Court precedent and the reach of the Kansas Department of Revenue’s interpretation in spite of Supreme Court pronouncements requiring “a substantial nexus,” litigation may soon follow.
Kennyhertz Perry will continue to cover this issue and will provide updates as they become available. In the meantime, potentially impacted individuals and businesses should consult their tax professionals concerning their sales tax collection, remittance, and registration requirements.
Kennyhertz Perry advises clients on a wide range of tax counseling and tax litigation matters. Kennyhertz Perry has a nationwide tax litigation practice that is built upon the unique depth and breadth of experience gained by working on behalf of and against the government. Recognizing that one tax matter can involve both civil and criminal considerations, Kennyhertz Perry relies on its attorney’s comprehensive experience leading criminal and civil tax prosecutions and investigations for the U.S. Department of Justice to provide clients with valuable insights and practical strategies to effectively navigate and resolve their tax problems. Kennyhertz Perry’s tax litigation and compliance practice is led by Ben Tompkins, an attorney who worked both as a U.S. Department of Justice Tax Division Trial Attorney and an Assistant United States attorney prosecuting civil and criminal tax cases. Ben previously provided analysis concerning the Supreme Court’s Wayfair decision to the Kansas City Business Journal (subscription required) and stands ready to counsel clients concerning their sales tax registration, collection, and remittance obligations.
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