Kansas' aggressive online sales tax policy could spur legal battle

Posted at 11:14 AM, Aug 08, 2019
and last updated 2019-08-08 12:14:57-04

TOPEKA, Kan. (AP) — Kansas plans to impose what some tax experts said Wednesday would be the nation's most aggressive policy for collecting state and local taxes on online sales, possibly inviting a legal battle.

The state Department of Revenue issued a notice last week saying any "remote seller" doing business with Kansas residents must register with the department, collect state and local sales taxes and forward the revenues to the state, starting Oct. 1. It cites a U.S. Supreme Court decision last year allowing states to collect sales taxes on Internet sales.

Most states now have policies to collect such taxes, but almost all set minimum annual sales or transaction thresholds to exempt small businesses, according to groups tracking tax laws. Kansas is the first to attempt to collect the taxes without exempting any businesses, they said.

The Republican-controlled Legislature included provisions on taxing Internet sales in two tax-cutting bills this year, but Democratic Gov. Laura Kelly vetoed both measures, saying they would destabilize the state's finances. The Department of Revenue is imposing its new policy under an existing tax law that applied to out-of-state businesses but wasn't being enforced because past court decisions prevented it.

"I think they're insane," said Diane Yetter, founder of the Sales Tax Institute in Chicago. Later, she added, "I just think Kansas is setting itself up for a lawsuit — and embarrassment, truthfully."

Kansas Revenue Secretary Mark Burghart, a veteran tax attorney himself, said during an interview that the department is obligated to enforce existing tax laws consistently. He said it's not fair to Kansas businesses to require them to collect sales taxes from consumers and not require out-of-state businesses to do the same after the U.S. Supreme Court decision last year.

Burghart also said he does not feel the department has the authority to exempt some small, out-of-state businesses from collecting sales taxes. Legislators must set the thresholds, he said.

"We have to move forward with implementation of the law as it is in place," he said.

Kansas Senate President Susan Wagle, a conservative Wichita Republican who is a frequent Kelly critic and is running for the U.S. Senate, termed the department's policy an "abuse of power." Other top Republicans were less harsh but said Wednesday that they worried about the risk of lawsuits — and lawmakers are likely to take up the issue again next year.

Legislators also have felt pressure to collect more taxes from online sales to prevent local businesses from facing a competitive disadvantage. There's also the potential budget upside: The department believes the state will collect between $20 million and $40 million a year in additional tax revenues.

Wagle asked Attorney General Derek Schmidt, also a Republican, to weigh in on the policy's legality. His spokesman Wednesday would say only, "We are aware of the situation."

Yetter and other tax policy experts said the U.S. Supreme Court's decision isn't permission to tax all remote sales from out-of-state businesses.

"They're pushing a lot of envelopes in their approach," said Jared Walczak, director of state tax policy for the conservative Tax Foundation, who deems Kansas' policy the "most aggressive" in the nation.

The high court overturned a previous ruling that states could not collect their sales taxes unless a business had a physical presence within their borders, allowing tax collections if businesses had an economic presence. It upheld a South Dakota law requiring businesses to collect its taxes if they had $100,000 in sales or 200 transactions in the state within a year.

The decision suggests states still must exempt some businesses to avoid putting an undue burden on interstate commerce in violation of the U.S. Constitution, said George Isaacson, a Lewiston, Maine, attorney representing the businesses challenging the South Dakota law. He said Kansas' policy represents a "blatant disregard" of that.

"These are small mom-and-pop type operations that are now going to be subject to this collection obligation and would be least able to mount a legal challenge," Isaacson said.