Kansas clarifies sales tax responsibilities for remote retailers and marketplaces

From a sales tax compliance perspective, the past few years have been a roller-coaster ride for companies with customers in Kansas but no physical presence in the Sunflower State. Exactly who needed to register for sales tax hasn't always been clear. Fortunately, the bumpy ride may now be at an end because the Kansas Department of Revenue has issued new guidance clarifying the sales and use tax collection obligations of remote sellers.

Before delving into the new guidance, it's helpful to understand how we got to this point.

Remote sales tax recap

It started when the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. (June 21, 2018). The Wayfair decision overturned a long-standing physical presence requirement, thereby authorizing states to base a sales tax obligation solely on an out-of-state company's economic activity in the state, or economic nexus.

States embraced their new taxing authority with gusto, and within a year of the Wayfair decision, most had an economic nexus law on the books. Kansas did not, but it wasn't for lack of trying: In the spring of 2019, Governor Laura Kelly vetoed two measures that would have established economic nexus because she feared other components of the bills would undermine the state's economic recovery.

A few months later, the Kansas Department of Revenue announced, "Kansas can, and does, require online and other remote sellers with no physical presence in Kansas to collect and remit the applicable sales or use tax on sales delivered into Kansas. … Remote sellers who are not already registered with the Kansas Department of Revenue must register and begin collecting and remitting Kansas sales and/or use tax by October 1, 2019."

Unlike every other state with economic nexus, the Kansas rule didn't provide an exception for companies doing little business in the state (e.g., up to $100,000 in annual sales). As a result, its remote seller rule came under fire. When asked to weigh in on the matter, the attorney general of Kansas found the department rule to be "inconsistent with Wayfair" and invalid. Yet Governor Kelly backed the department's right to tax all remote sales.

This put remote retailers in a pickle. Some opted to respect the Department of Revenue requirement, and by October 2020, the state had collected roughly $5 million in sales and use taxes from remote sellers with less than $100,000 in annual sales in the state. But some businesses must have taken the attorney general's opinion to heart, for around the same time, Department of Revenue Secretary Mark Burghart said the department would be contacting noncollecting remote sellers.

So it went until the Kansas Legislature succeeded in enacting economic nexus on May 3, 2021, overriding another gubernatorial veto to do so. The law that took effect July 1, 2021, provides safe harbor for remote businesses with less than $100,000 in gross sales to Kansas consumers in the current or previous calendar year.

This de minimis threshold conflicted with Department of Revenue Notice 19-04. Fortunately, the Department of Revenue has now updated its guidance for remote sellers.

New guidance for remote sellers in Kansas

Notice 21-17 makes several points clear.

De minimis threshold

Effective July 1, 2021, a remote retailer must register only if they "establish a de minimis threshold of $100,000 in gross sales to customers in Kansas."

The $100,000 threshold includes all sales made by a remote seller to Kansas customers, "regardless of whether the item being sold is subject to, or exempt from, tax." Thus, businesses dealing in exempt transactions only may develop an obligation to register, validate exempt sales, and report sales into Kansas.

Interestingly, the threshold for remote marketplace facilitators is slightly different. According to Notice 21-14, marketplace facilitators should count only taxable sales when determining whether the $100,000 de minimis threshold has been met. "Sales of property or services that are exempt from tax are not included." As of this writing, it's unclear why the department would count exempt sales toward a remote seller's threshold but not toward a remote marketplace facilitator's threshold.

Furthermore, a marketplace facilitator should count both direct and facilitated sales when calculating the threshold: sales of its own property and services as well as sales facilitated on behalf of third parties.

Lookback period

Sales made in 2020 don't count toward the threshold, but all sales made during 2021 must be considered when determining whether the threshold has been met.

Remote sellers whose sales exceeded the $100,000 threshold in the period from January 1 through June 30, 2021, are required to register and collect sales tax starting July 1, 2021. Remote retailers who meet or exceed the threshold for the first time after June 30, 2021, are required to collect and remit tax on any sales above the $100,000 threshold.

Registration and collection requirements

Remote sellers are "required to begin collecting and remitting tax on sales in excess of the $100,000 threshold as soon as they cross the threshold. In other words, a 'remote seller' is required to register, collect, and remit tax on the next transaction after meeting or exceeding the threshold." [Emphasis added.]

However, the department allows retailers up to 30 days to register: "A 'remote seller' should register with the Department … not later than thirty (30) days after their sales for the calendar year exceed $100,000."

States generally don't want unregistered businesses collecting sales tax, so it's advisable to register as soon after crossing the threshold as possible.

Trailing nexus

Once economic nexus has been established, remote sellers must collect sales tax through the end of that calendar year and throughout the following calendar year. However, the collection requirement doesn't necessarily extend into the third year.

For example, if you establish economic nexus in October 2021, you must continue to collect Kansas sales tax as applicable through December 31, 2022. If your 2022 sales also exceed the $100,000 de minimis threshold, your collection obligation extends through 2023. However, if you sell beneath the $100,000 threshold during 2022, you may cancel your registration in 2023. If you do, the department would like you to alert customers of their use tax obligation.

Customers owe use tax when retailers don't collect tax

The department reminds, "while you may not be required to register and collect the tax, the tax is still due and must be remitted to the state of Kansas. If you do not collect and remit the tax it will now be the responsibility of the consumer to do so."

Remote sellers lacking economic nexus may voluntarily register with the department and collect sales tax on taxable sales "for the benefit of their Kansas customers." This includes companies that registered under Notice 19-04 - which required all remote sellers doing business in Kansas to register - that may no longer have an obligation to collect. The department notes, "Because of the threshold, some remote sellers that registered and have been collecting tax may no longer be required to collect tax on sales made into Kansas."

For additional information and examples, please see Department of Revenue Notice 21-17. To get an idea of how close you are to meeting the economic nexus threshold in Kansas or any other state, take a free nexus assessment.