After the South Dakota v. Wayfair Supreme Court ruling, nearly every US state passed an “economic nexus” rule or law.
Economic nexus occurs when a business is not based in a state but exceeds a state-mandated threshold of sales volume or sales transactions. Once a business exceeds the state’s threshold, they have economic nexus and are then required to collect sales tax from all buyers from that state.
Each state’s economic nexus rule or law is slightly different, but most states have a “small seller exemption.” This is also sometimes called a “safe harbor” for small sellers.
For example, the economic nexus threshold in most states is some combination of $100,000 in sales or 200 sales transactions to buyers in the state. If an eCommerce business doesn’t exceed these thresholds, then they do not have to worry about collecting sales tax in states with “small seller exemptions” until their business grows larger.
Every state with an economic nexus law has a small seller exemption.
What’s the deal with Kansas sales tax?
Kansas is the one state that, under Kansas Department of Revenue Notice 19-04, requires that all eCommerce sellers – no matter how large or small – who make sales into Kansas register for a sales tax permit and collect sales tax from Kansas buyers.
According to the notice:
Kansas imposes its sales and use tax collection requirements to the fullest extent permitted by law. Specifically, as noted above, K.S.A. 79-3702(h)(1)(F) provides that a retailer doing business in this state means:
(F) any retailer who has any other contact with this state that would allow this state to require the retailer to collect and remit tax under the provisions of the constitution and laws of the United States.
In other words, Kansas requires that any online seller who makes sales in Kansas to register for a Kansas sales tax permit and collect sales tax from all Kansas buyers.
There is no small seller exemption. According to the letter of the law and this notice, even if you only make a handful of sales in your eCommerce store, if one of those sales is to a buyer in Kansas, then you and your eCommerce business are on the hook for Kansas sales tax compliance. Ouch.
Important note: “Economic nexus” refers to out-of-state or “remote” sellers. If your business is located in Kansas or you have other sales tax nexus in Kansas then you’re also likely required to register for a Kansas sales tax permit.
But then the plot thickened…
The Kansas Attorney General Steps In
Two Kansas lawmakers, understandably, had questions about the legality of Kansas going so much farther on the matter of economic nexus than all of the other US states with economic nexus laws. They requested a ruling from Kansas Attorney General Derek Schmidt on the legality of requiring every online seller selling into Kansas to comply with Kansas sales tax law.
In a letter, Attorney General Schmidt looked at the facts and concluded:
“…the Department’s new interpretation of K.S.A. 79-3702(h)(1)(F) and its associated new enforcement policy, as described in Notice 19- 04, were not a valid exercise by the Department.”
And that the Kansas Department of Revenue’s actions:
“are a legally insufficient basis to begin requiring collection and remittance of retail sales or compensating use taxes by out-of-state retailers with no physical presence in the State. …We think the categorical rule as implied in the Notice… that requires all out-of-state retailers collect and remit is inconsistent with Wayfair, has not been lawfully adopted and is invalid.”
While the letter is written in legal language, it also gets its point across. In other words, the Kansas Attorney General flat out disagreed with the Kansas Department of Revenue when it comes to enforcing Kansas sales tax on small sellers.
A Fix-It Bill Dies Before Passage
Both bills stated that only sellers who made $100,000 or more in the previous or current calendar year would be required to register for a Kansas sales tax permit and collect Kansas sales tax.
However, neither bill passed, leaving the question still in limbo.
What should online sellers do about Kansas sales tax?
While Kansas authorities squabble among themselves, the Kansas Department of Revenue’s current guidance appears to stand.
That means that, as of now, Kansas considers any remote seller, no matter how small, to be responsible for collecting sales tax on all sales shipping into Kansas.
You can read Kansas’s exact guidance here.
Should you register for a Kansas sales tax permit?
As with many tricky sales tax decisions, the choice is up to you and what is best for your business.
It all comes down to risk. Are you not yet registered in Kansas? Do you make a small sale or two into Kansas every year? We recommend calculating how much sales tax you would have owed had you been registered to collect sales tax in Kansas. If that is a number you can live with paying out of pocket (adding on some penalties and interest) then you may want to wait and see how this shakes out.
On the other hand, if you make a large number of sales into Kansas and are not yet registered to collect Kansas sales tax, you may find that that the amount of sales tax (plus penalties and interest) you would owe to Kansas if audited to be too large for comfort.
In this case, it might be wise to go ahead and register for a Kansas sales tax permit and begin collecting. As always, we recommend that you speak with a vetted sales tax pro should you have any questions or concerns about registering for a sales tax permit in a state.
Not sure how much Kansas sales tax you should have collected had you been collecting? TaxJar’s Economic Nexus Insights dashboard will show you. Just connect all of the shopping carts and marketplaces on which you sell and TaxJar will show you all states in which you have economic nexus, or where you are approaching the state threshold. This is an easy way to maintain your peace of mind around when and from which customers you are required by law to collect sales tax!
We have word that Kansas might decide this matter once and for all during Fall 2020. Stay tuned here to the TaxJar blog for updates as soon as we hear them!
Ready to automate sales tax? Try TaxJar for free with our 30-day, no risk trial. No credit card required.