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Kansas Gov. Laura Kelly and Secretary of the Kansas Department of Revenue Mark Burghart have rejected the Kansas Attorney General's (KS AG) opinion finding that Notice 19-04 (Notice), which requires all remote sellers to register and begin collecting and remitting sales and use tax without having to meet an economic or transaction threshold, was unlawful.

The KS AG had said in its September 30, 2019 opinion that the Notice, which was issued by the Kansas Department of Revenue (KS DOR), was inconsistent with Wayfair, was not lawfully adopted under state procedures, and thus had no force or effect.

In a press release, Gov. Kelly expressed her support for the action taken by the KS DOR in the Notice, while Secretary Burghart implied that the KS DOR will enforce the Notice unless otherwise directed by a court.

Background

In March 2019, the Kansas legislature passed SB 22, which would have imposed a collection obligation on remote sellers with more than $100,000 in Kansas sales in the current or preceding calendar year. SB 22 was vetoed by Gov. Kelly on March 25, 2019, and the Kansas legislature failed to override the veto. Subsequently, on May 4, 2019, the Kansas legislature passed HB 2033, which was similar to SB 22 and would have established an economic nexus threshold of $100,000 in total gross sales, as well as marketplace facilitator collection requirements, effective October 1, 2019. HB 2033 was vetoed by Gov. Kelly on May 17, 2019, and the legislature failed to override the veto on the last day of the state's 2019 legislative session.

On August 1, 2019, the KS DOR issued the Notice, stating that it would require sales and use tax registration and collection by remote sellers beginning October 1, 2019. It based its authority to do so on the state's anti-Bellas Hess law (Kan. Stat. Section 79-3702(h)(1)(F)), which was adopted in 2003 and defines a "retailer doing business in this state" to include "any retailer [that] has any other contact with [Kansas] that would allow [Kansas] to require the retailer to collect and remit tax under the provisions of the constitution and laws of the United States." Unlike other states that adopted economic nexus provisions for remote retailers, the KS DOR does not include a "small seller threshold;" rather, the obligation to collect and remit tax applies to all remote sellers.

Attorney General opinion

The KS AG determined that the KS DOR's action to require all remote retailers to collect and remit sales and use tax via Notice was not "lawfully adopted." Specifically, the Opinion states that the KS DOR's interpretation of the law was not a "valid exercise by the [KS DOR] of any authority that may have been delegated to it by the [Kansas] Legislature." As such, the KS DOR did not have a legally sufficient basis to require collection and remittance of retail sales or compensating use taxes by out-of-state retailers with no physical presence in Kansas. The Opinion suggests that the Notice "might" have been duly authorized, had the KS DOR promulgated the guidance by "rule or regulation," as required by the state's Administrative Procedures Act, and followed the guidance in the Wayfair decision.

While noting that the Kansas's anti-Bellas Hess law may be applied on a case-by-case basis, the Opinion explains that categorically requiring all out-of-state retailers to collect and remit sales and use tax would likely impose an undue burden on interstate commerce and itself be unconstitutional.

Kansas governor and DOR respond to the Opinion

Following the release of the KS AG's Opinion and calls from members of the Kansas legislature urging the Notice to be rescinded, Gov. Kelly issued a press release on October 1, 2019, stating that: "This is about protecting our friends and neighbors doing business on Main Street and throughout our local communities across Kansas. They are working hard, playing by the rules and deserve to be on a level playing field with out-of-state retailers. The Department of Revenue's notice simply reaffirms this tax fairness."

Further, Secretary Burghart, issued a press release in response to the Opinion on September 30, 2019, stating that:

"For the past 29 years, there has been overwhelming legislative support for re-establishing fairness in the obligation to collect and remit Kansas taxes between out-of-state retailers and Kansas retailers. Notice 19-04 simply informs out-of-state retailers of the law that overwhelmingly passed the Legislature in 2003 that ensures the obligation of out-of-state retailers to collect and remit the taxes that are due and owing. The Notice does not reflect a change in policy, but only restates long-established statutory provisions regarding the duty to collect and remit Kansas taxes.

Prior to the Wayfair decision, Kansas retailers were at a competitive disadvantage with out-of-state retailers. This Notice informs out-of-state retailers of the Wayfair result, which merely removed the constitutional physical presence requirement for such out-of-state retailers and thus leveled the playing field between in-state and out-of-state retailers. …

The Department of Revenue cannot select which laws it enforces. Kansas statutes are presumed to be constitutional, and unless deemed otherwise by a court of competent jurisdiction, the Department is obligated to enforce the statutes enacted by the Legislature."

Implications

The Opinion notes that the KS DOR may adopt economic nexus provisions through the state's established regulation and rulemaking procedures, as authorized under the anti-Bellas Hess law. However, the Opinion also says that the KS DOR could not lawfully "draw a constitutional (and thus statutory) line that allows imposing the duty to collect and remit on all out-of-state retailers" without adopting such policy through the regulation and rulemaking process. Nevertheless, in light of the statements issued by the governor and the revenue secretary, any business with sales into Kansas should evaluate its position in light of this development to determine whether it should register and begin collecting and remitting tax before issuance of any formal administrative regulations or legislative action.

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