A new Kansas online sales tax rule is harmful to small businesses and threatens to embroil the state in expensive litigation. It wasn’t passed by the Legislature; it’s being unilaterally implemented by Gov. Laura Kelly’s Department of Revenue.
Since the concept was blessed in the Supreme Court’s South Dakota v. Wayfair decision in 2018, state legislatures across the country have crafted and implemented new internet sales tax laws. Every state thus far has included a “safe harbor” provision that protects small retailers from being subjected to burdensome collection and reporting obligations. Every state, that is, except Kansas.
The Kansas Department of Revenue just announced its intention to require sales tax collection from all remote retailers, no matter how small. That means the smallest of businesses — even the proverbial grandma selling knitwear from her home — would be subject to all of Kansas’ tax collection and audit power if they make even one sale into the state.
Before the Wayfair decision, states’ authority to tax sales was limited to businesses with a physical presence in their borders. The court overruled this precedent, but at the same time made clear it was not open season for states looking to grab extra revenue.
The South Dakota law contained important safeguards that the court signaled were instrumental in its decision to approve their approach. Most importantly, South Dakota’s legislation set a “safe harbor” threshold of 200 sales or $100,000 in sales to South Dakota customers — remote retailers that did not cross either of these thresholds were not required to collect and remit sales taxes on South Dakota sales. In other words, Grandma is safe from South Dakota tax bureaucrats.
Each state that implemented internet sales taxes since the Wayfair decision has included thresholds at least as high as South Dakota’s. Some, like Texas and California, have set their thresholds much higher.
The reason is simple: collecting and remitting sales taxes to the 45 sales tax states and D.C. would be an administrative nightmare for small retailers.
By failing to exempt small retailers, Kansas is declaring its hostility to small business. Those lacking expensive lawyers and accountants could find themselves unwittingly caught up in the state’s tax regime, subjecting itself to audits and penalties. Meanwhile, small businesses that are aware of the new rules might simply avoid selling to Kansas customers altogether rather than try to implement a full-scale sales tax compliance apparatus.
Kansas’ Department of Revenue claims that it failed to allow for a safe harbor because a safe harbor is an “exemption” and only the Legislature is empowered to issue tax exemptions. But, as the saying goes, that dog don’t hunt. An exemption only applies to an established legal authority for imposing the duty to collect this tax, and the Legislature hasn’t done so. The Kelly administration is unilaterally imposing this tax without legislative authority.
This isn’t just bad policy and disrespectful of the legislative process, it also is unlikely to survive a legal challenge. The U.S. Supreme Court gave strong indication that a significant safe harbor provision was necessary for an internet sales tax law to be constitutional, so advancing a rule without one could leave Kansas taxpayers on the hook to pay for a legal fight that the state has almost no hope of winning.
Ironically, two bills that did contain safe harbor provisions were already advanced earlier this year but vetoed by Gov. Kelly over unrelated matters. Gov. Kelly should wait for the Legislature to address the matter, rather than moving forward with this reckless and harmful rule on her own.