Kansas enacts single sales factor, market sourcing

On April 24, 2025, Kansas Gov. Laura Kelly signed legislation, H.B. 2231, which adopts single sales factor apportionment provisions, market-based sourcing rules for sales of services and intangible property, and a reduction in the corporate income tax rate contingent upon certain state revenue thresholds. The legislation includes a provision allowing for a deferred tax impact deduction for publicly traded companies affected by the change to single sales factor apportionment. The Kansas legislature also voted to override Gov. Kelly’s veto of S.B. 269 on April 10, 2025. This legislation allows for a reduction of state income and privilege tax rates contingent upon certain state budget requirements.

Single sales factor apportionment

For tax years beginning on Jan. 1, 2027, and subsequent tax years, H.B. 2231 provides that all business income is apportioned to Kansas for corporate income tax and privilege tax purposes by using a single sales factor.¹ For tax years prior to this change, Kansas applies an evenly weighted three-factor apportionment formula based on sales, property, and payroll.² This change to single sales factor apportionment also includes the apportionment of income for railroads and interstate motor carriers, which currently apportion income based on miles.³ Also, the version of the Multistate Tax Compact adopted by Kansas is amended to provide that for the 2027 tax year and thereafter, taxpayers may no longer apportion or allocate income under Article IV of the Compact.⁴

Two-factor election

There are also changes to the Kansas two-factor apportionment election to use the average of the property factor and sales factor.⁵ Under existing law, the Kansas two-factor election includes a 10-year requirement for continuing to use the two factors, but taxpayers that previously made the two-factor election are now permitted to break the election and apportion income using a single sales factor.⁶

Deferred tax impact deduction

Beginning with the 2035 tax year, publicly traded companies, including affiliated corporations participating in the filing of a publicly traded company’s financial statements prepared in accordance with generally accepted accounting principles (GAAP), are allowed a deferred tax impact deduction if the change to single sales factor apportionment results in any of the following:

• An aggregate increase in the taxpayer’s net deferred tax liability;⁷
• An aggregate decrease in the taxpayer’s net deferred tax assets; or
• An aggregate change from a net deferred tax asset to a net deferred tax liability.⁸

Eligible taxpayers are entitled to a deferred tax impact deduction from net business income before apportionment equal to the amount necessary to offset the increase in the net deferred tax liability or decrease in the net deferred tax assets, or aggregate change from a net deferred tax asset to a net deferred tax liability resulting from the imposition of the single sales factor requirement as of the end of the tax year prior to the 2025 tax year.⁹ The annual deferred deduction amount is calculated as follows:

• Divide the deferred tax impact by the corporate income tax or privilege tax rate in effect for the tax year;
• Further divide the resulting amount by the Kansas apportionment factor that was used to calculate the deferred tax assets and deferred tax liabilities; and
• The result multiplied by 1/10 equals the total net deferred tax deduction available for the first year beginning on or after Jan. 1, 2035, and the next nine successive tax years.¹⁰

If the deduction is greater than the taxpayer’s net business income before apportionment, any excess deduction may be carried forward and applied as a deduction for future tax years until fully utilized.¹¹

Any taxpayer planning to claim this deduction must file a statement with the Kansas Secretary of Revenue by July 1, 2027, that specifies the total amount of the deduction that the taxpayer claims.¹² The statement must be made on the form and in the manner as prescribed by the Secretary and contain the information or calculations specified by the Secretary. No deduction is allowed for any tax year except to the extent claimed as provided by the legislation by July 1, 2027.

Market-based sourcing

For tax years beginning after Dec. 31, 2026, H.B. 2231 adopts market-based sourcing for services, sales of intangible property, interest from loans, and dividends for most taxpayers.¹³ This provision will replace the historic cost of performance method of sourcing sales other than sales of tangible personal property, which sources these sales to the location in which a plurality of a taxpayer’s income-producing activity is performed.¹⁴

The statute clarifies application of market-based sourcing based on the type of sale. For the sale of a service, the taxpayer's market for the sale is in Kansas to the extent the service is delivered to a location in the state.¹⁵ Intangible property that is rented, leased, or licensed is sourced to Kansas to the extent the property is used in the state.¹⁶ If the intangible property is used in marketing a good or service that is used in Kansas, it is sourced to the state, provided the good or service is purchased by a consumer in Kansas. A sale of intangible property is sourced to Kansas to the extent the property is used in the state. For a contract right, government license or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area, the sale is sourced to that geographic area.¹⁷ Net gains from intangible property sales that are contingent on the productivity, use or disposition of the property are treated as receipts from the rental, lease, or licensing of intangible property.¹⁸

Interest from a loan secured by real property is sourced to the location of the property, while interest from a loan not secured by real property is sourced to the location of the borrower.¹⁹ Dividends are sourced to Kansas to the extent the payor’s commercial domicile is in Kansas.²⁰

If the state or states of assignment of receipts under the costs of performance method cannot be determined, the state or states of assignment are required to be reasonably approximated. If they cannot be reasonably approximated, the receipts are excluded from the sales factor.²¹

Contingent income tax rate reductions

There are two separate timelines to consider for potential income tax rate reductions. The contingent rate reductions provided by S.B. 269 that were enacted over Gov. Kelly’s veto apply to different income and privilege taxes. In contrast, the contingent rate reduction contained in H.B. 2231 only applies to corporate income tax.

S.B. 269 allows contingent tax rate decreases based on the state exceeding revenue estimates and retaining a certain amount in the budget stabilization fund.²² Beginning Aug. 15, 2025, and every future Aug. 15, the Director of the Budget will determine if certain state revenue levels are exceeded. Provided the revenue thresholds are satisfied, individual income tax rates would be reduced first, with both tax rates being reduced proportionally until the lower bracket reaches 4%, at which time only upper bracket rates would be reduced until the upper bracket rate reaches 4%.²³ After the individual income tax rate reaches a flat 4% rate, reductions to the corporation surtax rate and the normal tax rates for financial institutions would commence in corresponding amounts.²⁴ These reductions would continue until the combined normal tax and surtax for corporations reaches 4% (in effect, eliminating the surtax), the combined normal tax and surtax for banks reaches 2.6% (in effect, reducing the normal tax rate to 0.475%), and the combined normal tax and surtax for trust companies and savings and loan associations reaches 2.62% (in effect, reducing the normal tax rate to 0.37%).

For tax years beginning after Dec. 31, 2028, H.B. 2231 enacts a contingent corporate income tax rate reduction.²⁵ Specifically, the rate will be reduced based on the extent the actual corporate income tax revenue exceeds the prior fiscal year’s corporate income tax revenue. The Secretary of Revenue must publish by Oct. 1, 2028, the new income tax rates to take effect for tax years beginning after 2028.

Personal exemptions

Any individual filing a federal income tax return as a head of household is allowed an additional Kansas personal exemption of $2,320 beginning with the 2024 tax year.²⁶ Also, the additional personal exemption for disabled veterans is increased from $2,250 to $2,320 beginning with the 2025 tax year.²⁷

Commentary

The legislative changes to the apportionment methodology used by Kansas by adopting single sales factor apportionment and market-based sourcing for sales other than sales of tangible personal property ensure consistency with a majority of states. As explained by Governor Kelly, the change to single sales factor apportionment is intended to level the playing field for Kansas-based businesses, make the state more attractive for capital investment, and encourage job creation.²⁸ Given that the shift to a single sales factor and market-based sourcing will not occur until the 2027 tax year, taxpayers will have an opportunity to react to these changes, and the Kansas Department of Revenue will be afforded an opportunity to develop regulatory guidance. Importantly, and in contrast to many other jurisdictions, railroads and interstate motor carriers will also shift apportionment methods from a mileage-based apportionment methodology to the general apportionment provisions used by most other companies.

As seen in recent years in many jurisdictions that have dramatically changed their income tax systems (either through a significant filing method or apportionment regime change), Kansas is providing some form of relief to certain eligible taxpayers — though such relief is only provided for the financial statement effect of the change to a single sales factor, not the market-based sourcing provisions. As these taxpayers must affirmatively apply and file a statement with the state by July 1, 2027, in order to claim the deduction, care will need to be taken to ensure the proper amount of financial statement effect is captured in the amount that will be eligible for the deferred tax impact deduction. And even though the change to market-based sourcing does not result in the potential for a deferred tax impact deduction, such a change needs to be closely considered by interstate businesses, particularly those engaged in service-based or intangible-laden businesses.