Kansas muddles remote seller tax guidance


John Stowe
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Tim Hartley
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Bob Gershon
Kansas City
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Patrick Skeehan
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Following a notice issued by the Kansas Department of Revenue discussing the sales and use tax collection requirements for out-of-state sellers and a subsequent opinion by the Kansas Attorney General invalidating the notice, the collection requirements for remote sellers remain unclear.1 The notice indicates that remote sellers without a physical presence in Kansas are required to collect and remit sales or use tax on sales delivered into the state regardless of the amount of sales made to in-state consumers. In response to the Attorney General’s opinion rejecting the Department’s authority to issue the notice, the Kansas Secretary of Revenue issued a statement that the Department would continue to enforce the notice.2 The controversy has even garnered the attention of Kansas Gov. Laura Kelly, who recently issued a statement supporting the Department’s notice.3

Background On June 21, 2018, in South Dakota v. Wayfair, Inc., the U.S. Supreme Court upheld a statute that requires remote sellers with no physical presence in the state to collect sales tax if they have a certain level of sales in the state.4 Specifically, remote sellers must collect tax if they meet one of the following thresholds in the previous or current calendar year: (i) the seller’s gross revenue from sales in the state exceeds $100,000; or (ii) the seller has 200 or more separate sales transactions in the state. These economic nexus thresholds generally are described as a “safe harbor.” In upholding this statute, the Court overruled its long-standing requirement that a remote seller must have a physical presence in a state in order for the state to impose a sales tax collection obligation.5 The Court concluded that the South Dakota statute satisfies the substantial nexus standard that is a component of determining whether a state can survive Dormant Commerce Clause scrutiny.

Following Wayfair, most states have enacted or implemented a sales or use tax collection requirement for remote sellers that meet certain sales thresholds in the state. The Kansas legislature passed two bills earlier this year that would have required remote sellers to collect tax if certain sales thresholds were met, but Governor Kelly vetoed this legislation.6

Department notice On Aug. 1, 2019, the Department issued a notice to provide sales tax guidance to remote sellers doing business in Kansas.7 The notice explains that Kansas imposes its sales and use tax collection requirements to the fullest extent permitted by law. The notice points to a Kansas statute, which defines a retailer doing business in Kansas as “any retailer who has any other contact with this state that would allow this state to require the retailer to collect and remit tax under the provisions of the constitution and laws of the United States.”8 Noting that Kansas already requires online and remote sellers without physical presence to register, collect and remit sales and use tax on sales delivered into Kansas, the Department’s notice formally announced its intent to enforce these requirements beginning Oct. 1, 2019. The notice also directs marketplace facilitators to contact the Department about entering into a voluntary disclosure agreement.9

Attorney General opinion Following issuance of the Department’s notice, the two legislative leaders of the Kansas House and Senate took the rare step of asking the Kansas Attorney General to determine whether the notice was lawfully imposed or offended Kansas law or the U.S. Constitution. On Sept. 30, 2019, the Attorney General issued a detailed opinion concluding that the Department’s new interpretation of the sales tax collection statute and the enforcement policy described in the notice were not a valid exercise by the Department of any authority delegated to it by the legislature.10 As a result, the Department cannot begin requiring all remote sellers lacking Kansas physical presence to register, collect and remit sales or use tax. The Attorney General determined that the categorical rule implied in the notice requiring all remote sellers to collect and remit tax is inconsistent with Wayfair. Because the Department’s policy was not lawfully adopted, the Attorney General determined that the policy is invalid and does not have any force or legal effect. In addition, the Attorney General noted that since the Department did not assert any legal obligation with respect to marketplace facilitators, that portion of the notice should be viewed as having no legal force or effect.

In considering Wayfair, the Attorney General explained that the case “does not stand for the proposition that states are free to impose a duty to collect and remit without limitation by the Commerce Clause on any out-of-state retailer who may conduct a retail sale in Kansas.” The Attorney General rejected the Department’s argument that Wayfair “removed any constitutional impediment to the enforcement of the tax collection statute.”11 According to the Attorney General, the U.S. Supreme Court’s case law interpreting the Commerce Clause continues to require that Kansas show a retailer has “substantial nexus” with the state and that the collection and remittance of tax would not impose an “undue burden” on the remote seller. The Wayfair Court did not expressly hold that a statutory “safe harbor” based on a minimum level of sales is required by the Commerce Clause, but the Court relied on the safe harbor in the South Dakota statute as evidence that the statute was clearly sufficient. However, the issue of whether a lesser or different safe harbor than that provided by the South Dakota statute is permissible remains an open question.

The Attorney General determined that the Department had no statutory authority to issue a notice to establish a new standard for applying the Kansas remote seller collection statute following Wayfair. Rather than merely providing guidance and public notice of a change in the state of the law, the notice “declares how the Department itself intends to interpret the U.S. Constitution and [the remote seller collection statute] post-Wayfair to establish a substantive standard that imposes a duty to collect and remit on all out-of-state retailers.” The Attorney General acknowledged that the Department may set a standard for implementing the law, but this should be accomplished through adopting rules or regulations, rather than by issuing a notice that does not comply with formal rulemaking procedures.12

According to the Attorney General, the Department’s new policy to enforce the remote seller collection statute without a safe harbor as announced in the notice is inconsistent with Wayfair. The Kansas statute grants the Department with authority to require out-of-state sellers without physical presence to collect tax to the extent allowed by the Constitution, but some Commerce Clause restrictions remain. The Attorney General explained that the Department could determine on a case-by-case basis whether a particular remote seller has “substantial nexus” and the tax collection requirement does not impose an “undue burden.” However, the Department does not have the authority to determine categorically that all remote sellers are required to collect and remit tax.

Reaction to Attorney General’s opinion Kansas Revenue Secretary Mark Burghart issued a statement regarding the Attorney General’s opinion on Sept. 30, 2019 in support of the notice issued by the Department.13 Secretary Burghart stated that the notice simply restated Kansas statutory authority allowing the state to require collection and remittance of Kansas sales and use tax.14 The statement recited the long history of Kansas’ sales and use tax regime, the nature and basis of the sales and use tax, U.S. Supreme Court precedents, and exhaustive examination of Wayfair, and how nexus questions and the Kansas statute should be examined under Wayfair. In Secretary Burghart’s view, Wayfair “merely removed the constitutional physical presence required for such out-of-state retailers and thus leveled the playing field between in-state and out-of-state retailers.” The Department defended the viability of the notice through diminution, by admitting that the notice is not a regulation with the force of law, because no regulation is needed to explain a law that is “plain, unambiguous and is self-executing.” Secretary Burghart concluded his letter by emphasizing that the Department is required to enforce Kansas statutes enacted by the legislature, as they are presumed to be constitutional unless overturned by a court of competent jurisdiction.

On Oct. 1, 2019, Gov. Kelly also issued a short response to the Attorney General’s opinion, essentially siding with the Department.15 She explained the need for Kansas businesses that are complying with the sales and use tax laws “to be on a level playing field with out-of-state retailers,” and noted that the Department’s notice served to reaffirm fairness from a tax perspective.

Commentary Following Wayfair, most states quickly enacted legislation or implemented policies that require remote sellers to collect sales tax if certain thresholds are met, some of which are consistent with the thresholds at issue in Wayfair. Due to significant political infighting in the state between the state legislature and the Governor, Kansas has been unable to adopt post-Wayfair legislation to date, leaving the door open to the Department’s issuance of the notice. While a few state tax authorities have acted via regulatory or other guidance to impose sales tax rules on remote sellers, the Department’s notice is the first attempt to impose a collection obligation on remote sellers without any safe harbor sales thresholds. With the Attorney General and the Department (along with the governor) on opposite sides of this issue, the Department’s attempts to enforce its remote seller rule is likely to invite swift legal challenge.

The current uncertainty in this area is particularly problematic for remote sellers that have some presence, but do not have substantial economic interaction with Kansas. Remote sellers that do not want to comply with the notice can point to the Attorney General’s opinion invalidating the notice. On the other hand, remote sellers that want to take the more conservative approach and prevent potential tax exposure down the road will comply with the notice. For remote sellers in the cross-hairs of this debate, future developments concerning the remote seller collection requirements in Kansas may provide some clarity, either through a full-blown court battle, legislative action that adopts economic thresholds, or regulatory action, under which the Department could promulgate a regulation or revise its notice to add a safe harbor.

1 Notice 19-04, Kansas Department of Revenue, Aug. 1, 2019; Opinion No. 2019-08, Kansas Attorney General, Sep. 30, 2019.
2 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, Sep. 30, 2019.
3 Governor Responds to the Attorney General’s Opinion on Notice 19-04, Office of Kansas Governor, Oct. 1, 2019.
4 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
5 Quill Corp. v. North Dakota, 504 U.S. 298 (1992); National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967).
6 S.B. 22, vetoed by Kansas Governor Laura Kelly on March 25, 2019; H.B. 2033, vetoed by Kansas Governor Laura Kelly on May 17, 2019.
7 Notice 19-04, Kansas Department of Revenue, Aug. 1, 2019.
8 KAN. STAT. ANN. § 79-3702(h)(1)(F).
9 In doing so, the Department defined the term “marketplace facilitator” to be a person who facilitates sales by retailers pursuant to agreement, through the person’s physical or electronic marketplace, and engages in at least one marketplace-oriented activity as well as at least one activity with respect to the retailer’s products.
10 Opinion No. 2019-08, Kansas Attorney General, Sept. 30, 2019.
11 Quoting a letter that Kansas Secretary of Revenue Mark A. Burghart sent to Kansas Deputy Attorney General Athena E. Andaya on Sept. 4, 2019.
12 Under Kansas law, the adoption of a rule or regulation requires the opportunity for public hearing and comment, analysis by economic impact statement, review by the director of the budget, approval by the secretary of administration and attorney general, and filing with the secretary of state. KAN. STAT. ANN. §§ 77-420; 77-421.
13 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. According to the statement, more than 3,200 out-of-state sellers have registered to collect and remit Kansas sales or use tax since Wayfair was decided. Almost 600 of these retailers have registered since the notice was published on Aug. 1, 2019.
14 Referencing KAN. STAT. ANN. § 79-3702(b)(1)(F).
15 Governor Responds to the Attorney General’s Opinion on Notice 19-04, Office of Kansas Governor, Oct. 1, 2019.

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