04/16/2021 | Press release | Distributed by Public on 04/16/2021 16:22
Updated April 16, 2021; originally published March 31, 2021.
At the end of March, Kansas lawmakers passed legislation establishing a new economic nexus threshold for out-of-state businesses and requiring marketplace facilitators to collect and remit Kansas sales tax on behalf of third-party sellers. It was widely believed Governor Laura Kelly would sign it. Instead, the governor vetoed Senate Bill 50 on April 16, 2021.
New economic nexus threshold for remote sellers
Kansas currently requires all out-of-state sellers to collect and remit Kansas sales tax. Had Gov. Laura Kelly signed SB 50, the state would have provided safe harbor for certain remote businesses.
A bit of background is in order. States won the right to tax remote sales (those by a business with no physical presence in the state) when the Supreme Court of the United States overturned the physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018). After the decision, states quickly adopted economic nexus laws that base a sales tax collection obligation on a remote seller's economic activity in the state.
Many states modeled their laws after the South Dakota economic nexus law that triggered the demise of the physical presence limitation.* Thus, most states provide safe harbor for businesses whose sales in the state are under a certain threshold (e.g., $100,000 in sales or 200 transactions in the state in a calendar year). Kansas was the outlier.
In August 2019, the Kansas Department of Revenue announced it would use the Wayfair decision to tax remote sales 'to the fullest extent possible permitted by law ' starting October 1, 2019. Unlike other states, it did not provide an exception for small sellers. Although the Kansas Attorney General found the policy to be 'inconsistent with Wayfair,' the governor stood by the department.
Jump forward to today. SB 50 sought to establish an economic nexus threshold similar to thresholds in other states - though every state's threshold is different. Under the bill, an out-of-state retailer with no physical presence in Kansas would establish economic nexus and an obligation to register then collect and remit Kansas sales and use tax if the retailer had:
Any remote retailer satisfying either of the above criteria would have collect and remit sales and use tax starting July 1, 2021. The bill specifies that any such retailer 'shall not be required to collect and remit any taxes from sales occurring prior to July 1, 2021.' See the text of SB 50 for additional details.
Had it been adopted, the $100,000 economic nexus threshold would have been a notable policy shift for Kansas.
As of last fall, the Kansas Department of Revenue had reportedly collected approximately $5 million in sales and use taxes from out-of-state sellers with less than $100,000 in annual sales in the state. At the time, Revenue Secretary Mark Burghart said non-collecting remote sellers that hadn't already been contacted by the state would be hearing from the department in the coming months.
SB 50 tried to put an end to that plan, at least with respect to businesses selling beneath the $100,000 threshold. But it also raised questions.
According to the 2019 notice, Sales Tax Requirements for Retailers Doing Business in Kansas, 'Remote sellers who are not already registered with the Kansas Department of Revenue must register and begin collecting and remitting Kansas sales and/or use tax by October 1, 2019.' And under SB 50, the $100,000 economic nexus threshold is effective January 1, 2020, (the immediately preceding calendar year) or later.
So, what tax law would have governed remote sales occurring October 2019 through December 2019? Could Kansas come after a remote seller for uncollected tax for that period? Would it? And what about out-of-state sellers who have been held liable for tax on sales into the state since October 2019? Could they apply for a refund?
According to Scott Peterson, vice president of government relations at Avalara, 'This is the oddest provision' in the bill.
New sales tax collection requirement for marketplace facilitators
Kansas also tried to follow the lead of other states with SB 50's marketplace facilitator provision.
Most states with a general sales tax already mandate the collection and remittance of sales and use tax by most marketplace facilitators, as do Washington, D.C. and some local governments in Alaska. Kansas, Florida, and Missouri are the outliers, and all three have been working to implement a marketplace facilitator law. Kansas was first to get a bill to its governor's desk, though Florida was hot on its tail.
SB 50 would have imposed a sales and use tax collection requirement on marketplace facilitators with more than $100,000 in annual gross receipts from sales of property or taxable services sourced to Kansas in the current or immediately preceding calendar year. Both direct and indirect (i.e., third-party) sales were to be included in the $100,000 threshold.
'Marketplace facilitator' includes entities that contract with sellers to facilitate the sale of products or lodgings through a physical or electronic marketplace (e.g., Airbnb or Amazon). However, the bill specifically excludes entities that provide a platform to facilitate the sale or rental of sleeping accommodations provided by a hotel.
To be considered a marketplace, the entity must directly or indirectly collect payment from a purchaser and transmit all or part of the payment to a seller. Businesses providing advertising services exclusively are not subject to new marketplace facilitator requirements.
The bill allowed a marketplace facilitator to apply for a waiver from these requirements so long as it could demonstrate, to the satisfaction of the Kansas Department of Revenue, that 'substantially all of its marketplace sellers already are collecting and remitting taxes to the department.' Furthermore, a marketplace facilitator and third-party seller could contractually agree to have the marketplace seller collect and remit all applicable taxes and fees if certain conditions are met. For example, the seller must have annual gross sales in the U.S. of over $1 billion.
Had Gov. Kelly signed SB 50, the marketplace facilitator collection requirements described above would have taken effect July 1, 2021; marketplaces would not have been required to collect and remit taxes from sales occurring prior to that date. Additionally, any marketplace facilitator required to collect and remit sales tax under SB 50 would have been required to collect and remit applicable prepaid wireless 911 fees starting April 1, 2022.
The elimination of click-through nexus
Antoher lost opportunity: SB 50 would have repealed the state's affiliate nexus and click-through nexus provisions.
Affiliate nexus creates a sales tax collection obligation for out-of-state businesses with affiliates in the state. Click-through nexus does the same for remote retailers that have an agreement with one or more residents in the state to refer potential customers to the retailer, through an internet link, website, telemarketing, or otherwise.
Since the advent of economic nexus and marketplace facilitators laws, several states have repealed affiliate and/or click-through nexus laws, including Arkansas, California, Ohio, and Washington. Kansas lawmakers are likely to revisit this issue in the future.
Gov. Kelly was expected to sign SB 50 because she's long been a vocal proponent of taxing remote sales and requiring marketplace facilitators to collect and remit tax on behalf of third-party sellers. Her veto message did not mention of taxing remote sales.
*Physical presence in a state still triggers nexus, or a sales tax obligation, but physical presence is no longer the sole requisite.
Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.