Kansas law addresses Wayfair, TCJA provisions

On May 3, 2021, the Kansas legislature voted to override Gov. Laura Kelly’s veto of omnibus legislation imposing a sales tax collection and remittance requirement for remote sellers and marketplace facilitators exceeding a $100,000 sales threshold effective July 1, 2021.¹ The legislation also decouples Kansas from significant portions of the Tax Cuts and Jobs Act of 2017 (TCJA)² and changes the corporate income tax filing deadline to one month after the federal due date, beginning with the 2020 tax year. With respect to personal income tax, the legislation increases the Kansas standard deduction and allows individual taxpayers to utilize the benefits of itemized deductions when filing Kansas tax returns regardless of the method used on the corresponding federal tax return.

Economic nexus and marketplace provisions

Economic nexus threshold for remote sellers

Prior to the enactment of S.B. 50, remote sellers making any sales into Kansas were subject to sales and use tax collection and remittance requirements according to a Kansas Department of Revenue policy established in August 2019 via departmental notice.³ This policy made Kansas the first and only state to impose a collection obligation on remote sellers without any safe-harbor sales thresholds. In September 2019, the Kansas Attorney General issued an opinion concluding that the Department was not authorized to enforce the notice because the position was inconsistent with the U.S. Supreme Court’s decision in South Dakota v. Wayfair.⁴ However, the Department responded with a statement explaining that it would continue to enforce the notice because it was following established statutory provisions that were also supported by the Kansas Governor.⁵ The Governor subsequently released a statement in defense of the policy, explaining that it served to reaffirm fairness between Kansas businesses and out-of-state retailers from a sales tax perspective.⁶ The resulting clash between the Department and the attorney general over the enforceability of the policy created unclear collection requirements for remote sellers with Kansas customers for nearly two years.

The legislation resolves the conflicting policy positions by establishing an economic nexus sales threshold of $100,000 for remote sellers.⁷ Specifically, the bill modifies the definition of a “retailer doing business in this state” to include a retailer that does not satisfy any of the other statutory definitions, but has over $100,000 of cumulative gross receipts from sales to Kansas customers, either during the period of Jan. 1, 2021 through June 30, 2021, or the current or immediately preceding calendar year.⁸ Remote sellers meeting the economic nexus threshold will not be required to collect and remit tax from sales occurring before July 1, 2021.⁹ Prospectively, any retailer exceeding the sales threshold in the current calendar year for the first time will be required to collect and remit tax on any sales over $100,000 of cumulative gross receipts from Kansas sales during that year.¹⁰

Marketplace facilitator requirements

For sales occurring on or after July 1, 2021, marketplace facilitators are generally subject to sales tax collection and remittance requirements if they: (i) make over $100,000 in sales of taxable property or services in Kansas during the current or immediately preceding calendar year; or (ii) make or facilitate over $100,000 in taxable sales of property or services on their own behalf or on behalf of marketplace sellers for delivery into the state.¹¹ Marketplace facilitators meeting the sales threshold for the first time in the current calendar year must collect and remit tax only on cumulative gross receipts from sales of over $100,000 into Kansas during that year.¹² For purposes of this requirement, a “marketplace facilitator” is defined as a person that (i) contracts or agrees with marketplace sellers to facilitate the sale of the seller’s products or rooms, lodgings or accommodations through the person’s physical or electronic marketplace for a fee; and (ii) collects the payment from the purchaser and remits all or part of the payment to the seller.¹³

Marketplace facilitators are exempt from collection and remittance requirements under certain circumstances. The Department may waive the requirements if the marketplace facilitator demonstrates to the Department’s satisfaction that substantially all of its marketplace sellers are already collecting and remitting taxes.¹⁴ If a waiver is granted, the tax collection obligation falls on the marketplace seller.¹⁵ Additionally, marketplace facilitators and marketplace sellers may contractually agree to have the marketplace seller collect and remit all applicable taxes if the marketplace seller: (i) has gross U.S. sales exceeding $1 billion (including gross sales of related entities); (ii) provides evidence to the marketplace facilitator that it has properly registered with the Department; and (iii) notifies the Department that the seller will collect and remit all applicable taxes and fees on sales made through the marketplace.¹⁶ Effective April 1, 2022, marketplace facilitators will also be responsible for collecting and remitting applicable prepaid wireless E911 fees for taxable retail sales made through the marketplace.¹⁷

The legislation contains specific exclusions from the definition of marketplace facilitator. With respect to lodging and accommodations services provided through a marketplace, an exclusion is provided if services are provided by a hotel under a brand belonging to the taxpayer or the taxpayer facilitates sales or charges on behalf of the hotel.¹⁸ The following businesses are also excluded from the definition of a “marketplace facilitator”:

• Platforms or forums that exclusively provide advertising services;¹⁹
• A business providing payment processing services for purposes of marketplace sales;²⁰ or
• Certain derivatives clearing organizations, designated contract markets, foreign boards of trade or swap execution facilities.²¹

Income tax changes

The legislation includes significant changes to Kansas law for corporate and individual income tax purposes. These provisions were enacted primarily in response to additional Kansas tax resulting from federal tax changes adopted in the TCJA.

Global Intangible Low Tax Income (GILTI)

As Kansas conforms to the Internal Revenue Code (IRC) on a rolling basis, GILTI under IRC Sec. 951A is included in the Kansas taxable income starting point. As a result, many Kansas taxpayers were paying significant tax on foreign income that in many cases was not taxed previously due to the changes implemented by the TCJA. As a partial offset, Kansas allowed the corresponding 50% deduction under IRC Sec. 250(a) in addition to a 100% subtraction modification for any Sec. 78 dividend income attributable to GILTI. ²²

Effective for tax years beginning after Dec. 31, 2020, a 100% subtraction of GILTI is allowed for both individual and corporate taxpayers.²³ The corresponding 50% subtraction for any GILTI included in federal taxable income of a domestic corporation and 50% of any IRC Sec. 78 dividend income attributable to GILTI on the federal return will be a required addition to federal taxable income.²⁴

Provisions impacting both individual and corporate taxpayers

• Business Interest Expense Limitation: Effective for tax years beginning after Dec. 31, 2020, a subtraction modification to adjusted gross income (AGI) and federal taxable income is required for any disallowed interest pursuant to IRC Sec. 163(j), as in effect on Jan. 1, 2018.²⁵ However, taxpayers are required to add back to federal AGI or federal taxable income any excess interest expense carryover.²⁶
• Business Meal Expenditures: Effective for tax years beginning after Dec. 31, 2020, a subtraction modification to AGI and federal taxable income for disallowed deductions of business meal expenditures under IRC Sec. 274 will be allowed to the extent deductible under the version of the IRC in effect on Dec. 31, 2017.²⁷
• Kansas Expensing Deduction:
  • Previously, the expensing deduction for certain assets place in service was only allowed for corporate income taxpayers and was calculated without regard to deductions claimed under IRC Sec. 179. For the 2021 tax year and thereafter, the expensing deduction is also available to individual taxpayers and national banking associations, state banks, savings banks, trust companies or savings and loan associations subject to privilege tax. The deduction may only be used to determine the taxpayer’s income or privilege tax liability.²⁸
  • The legislation also changes the calculation of the expensing deduction for eligible assets so that the difference between the depreciable cost of the applicable property for federal income tax purposes is reduced by the sum of the amount of bonus depreciation being claimed for such property and the amount of expensing deduction claimed for such property pursuant to IRC Sec. 179.²⁹ Previously, only bonus depreciation was subtracted when determining the allowed expensing deduction for applicable property.

Provisions impacting corporate taxpayers

• IRC Section 965: The legislation clarifies that for purposes of the 80% deduction for dividends received from foreign corporations, “dividends” includes amounts included in federal taxable income under Sec. 965(a), net of the Sec. 965(c) deduction. This amendment is not limited to tax years beginning after Dec. 31, 2020. The dividends received deduction does not apply to excluded GILTI and the corresponding addbacks effective after Dec. 31, 2020. ³⁰
• FDIC Premiums Paid by Certain Large Financial Institutions: Effective for tax years beginning after Dec. 31, 2020, a subtraction modification is allowed for disallowed deductions under IRC Sec. 162(r), as in effect on Jan. 1, 2018.³¹
• Capital Contributions: Effective for tax years beginning after Dec. 31, 2020, Kansas corporations will follow the exemption from federal taxable income for capital contributions as it existed in IRC Sec. 118 on Dec. 21, 2017. Therefore, the changes to Sec. 118 included in the TCJA will not be applied when determining federal taxable income for Kansas purposes.³²
• Net Operating Losses (NOL): The legislation changes the Kansas treatment of net operating losses (NOLs) such that NOLs incurred in tax years prior to Jan. 1, 2018, follow the federal treatment under IRC Sec. 172, except that the carryforward period is limited to 10 years.³³ For NOLs incurred after Dec. 31, 2017, Kansas NOL deductions will follow the federal treatment, but may only be carried forward.³⁴ Therefore, while Kansas NOLs incurred after Dec. 31, 2017 may now be carried forward indefinitely, the federal 80% limitation added by the TCJA, and the CARES Act temporary suspension of such limitation for NOLs carried forward to 2019 and 2020, will apply for Kansas income tax purposes.
• Corporate Income Tax Return Filing Deadline: For tax years beginning after Dec. 31, 2019, Kansas corporate income tax returns are due one month after the due date of the federal return, including any applicable extensions granted by the IRS.³⁵

Personal income tax changes

Several provisions of the legislation apply specifically to individual income taxpayers, notably the changes to the Kansas treatment of federal itemized deductions. The TCJA limited many commonly used itemized deductions while increasing the standard deductions available to taxpayers on their federal returns. The federal limitation on itemized deductions is significant for Kansas taxpayers because Kansas law provides that taxpayers may itemize deductions on their state tax return only if they itemized on the federal return for that year.³⁶ Starting with the 2021 tax year, Kansas taxpayers are permitted to itemize deductions regardless of which option is utilized on the federal return.³⁷ The legislation likewise increases the Kansas standard deductions available to individual taxpayers.³⁸

Commentary

The legislature’s override of the governor’s veto marks the culmination of efforts by Kansas lawmakers to enact omnibus tax legislation that implements a sales tax marketplace provision, establishes a safe harbor sales threshold for remote sellers and decouples from several provisions of the TCJA. Although supportive of the marketplace provisions contained in S.B. 50, the governor ultimately vetoed the bill over concerns that the income tax changes would be harmful to the state’s fiscal health.³⁹ The governor had vetoed two similar bills during the 2019 legislative session, but lawmakers reintroduced TCJA decoupling provisions in an effort to make the Kansas income tax code more competitive with other states. Unlike in previous years, the legislature prevailed in overriding the governor’s veto of S.B. 50 with the requisite two-thirds vote thresholds required in both the House and Senate, due in part to a better understanding of the increased sales tax collections.

With the enactment of S.B. 50, Kansas became one of the final two states with a sales tax to enact a marketplace facilitator provision, now requiring online marketplaces to collect and remit sales tax on behalf of retailers making sales through their marketplaces.⁴⁰ Significantly, the $100,000 safe harbor sales threshold is also applicable to remote sellers, which were previously required to collect and remit tax if they made any sales into the state according to Department policy. Under the Department’s interpretation of existing Kansas law, all remote sellers were statutorily required to collect and remit sales and use taxes on any Kansas sales, regardless of sales or transaction volume. The legislation resolves the conflicting policy positions taken by the Department and the attorney general, setting clear statutory collection and remittance guidelines for both remote sellers and marketplace facilitators in line with other states.

The legislation’s corporate income tax provisions are the result of over three years of legislative efforts to respond to the increases in Kansas taxes due to federal tax changes resulting from the TCJA. Many of these changes provide welcome relief for taxpayers impacted by the federal changes, ranging from multinational corporations to individual taxpayers. Similar to other states, the legislation makes favorable changes to Kansas law by decoupling from the federal treatment of GILTI and the disallowed business interest expense deduction under IRC Sec. 163(j), and allowing for the unlimited carryforward of NOLs incurred in 2018. However, the required addback of Sec. 78 income attributable to GILTI may create a mismatch with the 100% subtraction treatment of Sec. 78 gross up income. Without further clarification, Kansas taxpayers having Sec. 78 gross up income resulting from GILTI would be allowed a 100% subtraction but would then have an addition modification for 50% of Sec. 78 gross up income.⁴¹

Given that most of the income tax provisions enacted in S.B. 50 apply beginning with the 2021 tax year, taxpayers should consider the impact of such changes for purposes of calculating estimated payments. However, taxpayers with Sec. 965 income may evaluate the merits of filing refund claims to the extent that they may receive an additional dividends received deduction benefit for tax years preceding 2021. In any event, the legislation raises several questions that will require clarification in the form of regulations and other guidance that is expected from the Department. In addition to the income tax provisions, the marketplace provisions and pending guidance related to waivers is likely of primary concern to impacted taxpayers, given that collection and remittance requirements begin on July 1, 2021.

1 Kan. S.B. 50, Laws 2021.

2 P.L. 115-97 (2017).

3 The notice confirmed that remote sellers without a physical presence in Kansas are required to collect and remit sales tax on sales of tangible personal property and services regardless of the volume of sales or number of transactions. Notice 19-04, Kansas Department of Revenue, Aug. 1, 2019. The notice referred to a statute giving Kansas the authority to require retailers doing business in the state to collect and remit tax under the provisions of the U.S. Constitution. KAN. STAT. ANN. § 79-3702(h)(f)(F).
4 Opinion No. 2019-8, Kansas Attorney General, Sept. 30, 2019.
5 Secretary Burghart’s Statement on Attorney General Derek Schmidt’s Opinion of the Collection of Taxes from Out-of-State Retailers, Kansas Department of Revenue, Sept. 30, 2019.
6 Governor Responds to the Attorney General’s Opinion on Notice 19-04, Office of Kansas Governor, Oct. 1, 2019.
7 S.B. 50, § 14, adding KAN. STAT. ANN. § 79-3702(h)(1)(G).
8 S.B. 50, § 14, adding KAN. STAT. ANN. § 79-3702(h)(1)(G)(i)(a)-(b).
9 S.B. 50, § 14, adding KAN. STAT. ANN. § 79-3702(h)(1)(G)(ii)(a).
10 S.B. 50, § 14, adding KAN. STAT. ANN. § 79-3702(h)(1)(G)(ii)(b).
11 S.B. 50, §§ 2(a)(1), 4.
12 S.B. 50, § 2(a)(2).
13 S.B. 50, § 1(b)(1).
14 S.B. 50, § 2(b).
15 S.B. 50, § 2(b)(1)-(3). The Department is required to adopt rules and regulations establishing the criteria, process and procedures necessary to apply for waivers and for providing notice to affected marketplace facilitators and marketplace sellers.
16 S.B. 50, § 2(c)(1)-(3).
17 S.B. 50, § 2(d).
18 S.B. 50, § 1(b)(2). A taxpayer providing a platform through which unaffiliated third parties offer to exclusively rent to and collect fees from occupants for less than 29 consecutive days are considered marketplace facilitators. Id.
19 S.B. 50, § 1(b)(3)(A). The platform or forum cannot be involved directly or indirectly with collecting payments or have agreements with marketplace sellers to facilitate consideration between third parties.
20 S.B. 50, § 1(b)(3)(B).
21 S.B. 50, § 1(b)(3)(C). Such entities must be registered with the Commodities Futures Trading Commission.
22 KAN. STAT. ANN. § 79-32,138(c)(iv).
23 S.B. 50, § 8, amending KAN. STAT. ANN. § 79-32,117(c)(xxv). This applies to corporate taxpayers as well because KAN. STAT. ANN. § 79-32,138(c)(i) includes all modifications under KAN. STAT. ANN. § 79-32,117(c) and amendments thereto.
24 S.B. 50, § 11, amending KAN. STAT. ANN. § 79-32,138(b)(vii).
25 S.B. 50, § 8, amending KAN. STAT. ANN. § 79-32,117(c)(xxvi). This provision also applies to corporate taxpayers.
26 S.B. 50, § 8, amending KAN. STAT. ANN. § 79-32,117(b)(xxvii).
27 S.B. 50, § 8, amending KAN. STAT. ANN. § 79-32,117(c)(xxvii). This provision also applies to corporate taxpayers.
28 S.B. 50, § 13, amending KAN. STAT. ANN. § 79-32,143a(h)(2)(i).
29 S.B. 50, § 13, amending KAN. STAT. ANN. § 79-32,143a(a).
30 S.B. 50, § 11, amending KAN. STAT. ANN. § 79-32,138(c)(v).
31 S.B. 50, § 11, amending KAN. STAT. ANN. § 79-32,138(c)(vi). This provision impacts certain large financial institutions due to a small institution exception that makes such premiums inapplicable for any taxpayer with less $10 billion in total consolidated assets for the taxable year, per IRC § 162(r)(2).
32 S.B. 50, § 11, amending KAN. STAT. ANN. § 79-32,138(a).
33 S.B. 50, § 12, amending KAN. STAT. ANN. § 79-32,143(a)(1)(A).
34 S.B. 50, § 12, amending KAN. STAT. ANN. § 79-32,143(a)(1)(B).
35 S.B. 50, § 6, amending KAN. STAT. ANN. § 79-3221(c)(2)(A)-(B). Enacted after S.B. 50, S.B. 47 included several provisions that were also included in S.B. 50, including the provision extending the corporate income tax filing deadline. Presumably, S.B. 47 included this provision in the event that the veto of S.B. 50 was not overridden. S.B. 47 further amends Kansas law to provide that all taxpayers other than corporate taxpayers must file a Kansas return by the same due date established under the IRC, including any applicable extensions granted. S.B. 47, § 13, amending KAN. STAT. ANN. § 79-3221(c)(3).
36 KAN. STAT. ANN. § 79-32,120(a)(1).
37 S.B. 50, § 10, amending KAN. STAT. ANN. § 79-32,120(a)(1)(B).
38 S.B. 50, § 9, amending KAN. STAT. ANN. § 79-32,119(a)-(d).
39 Message from the Governor Regarding Veto of Senate Bill 50, Office of the Kansas Governor, Apr. 16, 2021.
40 Missouri was the final state to pass legislation implementing remote seller economic nexus and marketplace provisions. Passed on May 14, 2021, the bill is expected to be signed into law by the Missouri Governor with an effective date of January 1, 2023. Mo. S.B. 153.
41 S.B. 50, § 11, amending KAN. STAT. ANN. § 79-32,138(b)(vii). The addition modification specifically refers to deductions claimed on the federal return under IRC Sec. 250(a)(1)(B), which includes both 50% of GILTI and 50% of Sec. 78 income related to GILTI.

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