Kansas’s apparent decision to issue remote seller rules that don’t specify a minimum sales threshold isn’t likely to be emulated by other states, and could end up being challenged in court.
The state Department of Revenue on August 1 issued guidance requiring any out-of-state sellers that make retail sales into the state to register with the department and begin collecting and remitting sales tax on their Kansas sales starting in October, apparently without regard to how many sales they make into Kansas.
That would make Kansas the only state to require sales tax compliance by remote sellers without specifying a minimum value or number of sales that a seller has to make into the state in a year to have nexus for sales tax purposes.
That could mean a small seller with even a single sale into the state is legally required to register and collect sales tax — a compliance burden that runs counter to the broadly held interpretation by tax experts that the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair Inc. endorsed the idea that states should set a minimum threshold before requiring a seller to comply.
“The position of the department is not supported by the language in Wayfair,” Richard Pomp of the University of Connecticut School of Law told Tax Notes August 2.
The Supreme Court’s Wayfair decision overturned only the long-standing requirement that sellers have a physical presence in the state in order to be required to comply with sales tax rules. But the majority opinion did express support for South Dakota’s simplification of its sales tax rules via its membership in the Streamlined Sales and Use Tax Agreement — of which Kansas is also a member — its law’s lack of retroactive enforcement provisions, and its establishment of a threshold that specified that remote sellers must comply with South Dakota’s sales tax rules only when they have at least $100,000 worth of sales, or 200 or more sales, into South Dakota in a year.
Kansas’s decision to eschew a minimum threshold could mean its rules are at risk of being unconstitutionally burdensome to small sellers, according to Jared Walczak of the Tax Foundation.
Despite Wayfair’s elimination of the physical presence requirement, “states must still act in a way that does not discriminate against or unduly burden interstate commerce,” Walczak wrote in an August 2 review of Kansas’s guidance.
Regarding Kansas’s rules, “a court might well be skeptical, as this is a rather significant burden” on small sellers with minimal sales into the state, Walczak added.
Notably, the SSUTA does not require that a state implement a minimum threshold for remote sellers, Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, told Tax Notes in an email.
Two separate bills to require remote sales tax collection in Kansas — both of which included a threshold of $100,000 in annual sales — were vetoed by Gov. Laura Kelly (D) earlier this year, for reasons unrelated to their remote seller provisions.
In an August 1 statement to Tax Notes, a department spokesman said that without a state law articulating a threshold, the DOR “does not have the statutory authority to put a threshold amount in place” since “[a] de minimis amount is viewed as the equivalent of an exemption from tax and under the Kansas Constitution, only the Legislature can grant an exemption.”
Pomp expressed skepticism about that argument, however, saying he thinks the DOR is taking a very narrow view of the constraints imposed by the state constitution and is “setting the stage for endless litigation.”
Jonathan Maddison of Reed Smith LLP said his hope is that the August 1 guidance is actually a mistake by the department “and they will quickly realize that mistake and at a minimum announce an economic nexus sales threshold.”
He said the DOR is wrong in treating a threshold to establish nexus as being the same as a tax exemption.
“The U.S. Supreme Court did not hold that any state can require any remote seller to collect tax on sales into the state,” Maddison said, adding that the Kansas rules could be litigated by a trade association representing remote sellers.
One such group might be the American Catalog Mailers Association, which along with NetChoice is already working to put together a lawsuit to challenge some states' remote seller requirements on the grounds that their sales tax rules are too complicated.
Hamilton Davison with the association told Tax Notes in an email that “the small seller exception was just one of several simplification provisions contained in the South Dakota statute that the U.S. Supreme Court, in its Wayfair decision, indicated may be necessary to avoid imposing an undue burden on remote sellers in violation of the Constitution’s Commerce Clause.
“The failure of the Kansas Department of Revenue to heed the Supreme Court’s warning is certainly problematic, and it will harm many family-owned and other small businesses. In fact, this bad behavior seems to be a dare to Congress to take action,” Davison said.
Meanwhile, it doesn’t seem likely that other states will follow Kansas’s lead, according to Christopher Lutz of Horwood Marcus & Berk Chtd.
“I think taxpayers would have a good argument that anything below [South Dakota’s minimum sales threshold] would be unconstitutional,” he said.
Despite the potential for litigation, Eric Stafford of the Kansas Chamber of Commerce told Tax Notes he doesn’t believe the state’s DOR is seeking to test the limits of Wayfair.
“South Dakota passed their [remote seller] law knowing it would be challenged, and drafted it in a manner to have it challenged,” he said. “I don’t think that’s the intent of this. But I wouldn’t be surprised . . . if there was a legal challenge.”
However, Stafford noted that the chamber backed the 2019 legislation to create remote seller rules — including the proposed nexus threshold of $100,000 in annual sales into the state — and would likely support similar legislation early next year.
“Our plan is to have the same language for an internet sales tax requirement” introduced as early as January 2020, Stafford said, suggesting the issue might be addressed legislatively before litigation could advance very far.
Sen. Bud Estes (R), chair of the Senate Federal and State Affairs Committee — which backed S.B. 22, one of the vetoed 2019 bills to establish remote seller rules — said he also expects lawmakers will attempt to resurrect the effort to craft remote seller legislation next year.
After the vetoes earlier this year, “I figured next year we’ll get things straightened out,” he said.
Kelly's office was working on a statement as of press time.