February 21, 2024

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Attorney General: Kelly administration risks lawsuits on remote sales tax policy

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Kansas Attorney General Derek Schmidt issued a legal opinion on September 30, stating Governor Laura Kelly’s unilateral expansion of remote sales tax jurisdiction exceeds her authority.  The next day, the Kelly administration went ahead anyway, and now the AG says her action is exposing the state to litigation.

“If the Department of Revenue attempts to enforce its policy against a retailer, who under Wayfair is not subject to a Kansas duty to collect and remit, it is possible that private entity would have a cause of action,” said  C.J. Grover, the public information officer for the Kansas Attorney General’s Office. “We continue to recommend the administration not proceed with implementing the policy reflected in its notice in order to avoid unnecessary risk of litigation for the state.”

More than 3,200 out-of-state retailers have registered to begin collecting and remitting sales taxes to the state of Kansas since the U.S. Supreme Court issued a ruling allowing states to charge sales taxes to businesses without a physical presence in a state, like internet sellers.  But that ruling – called the Wayfair decision – said the obligation to collect and remit should only apply to retailers above minimum sales thresholds that will vary by state.  The Kelly administration is attempting to obligate all retailers regardless of sales level.

According to Zach Fletcher, public information officer for the Kansas Department of Revenue, almost 600 of the new registrants applied to remit remote sales tax to Kansas after Gov. Laura Kelly’s administration issued a directive requiring they do so.

Kelly’s directive to out-of-state retailers created something of a standoff between her administration and the Kansas Attorney General Derek Schmidt’s office. The Republican AG issued a legal opinion warning that Kelly’s sales tax directive exceeds the executive’s authority, noting that the administration issued its directive only after lawmakers and the Governor failed to reach an agreement on internet sales tax legislation.

Last legislative session, state lawmakers twice passed legislation that would have imposed collection and remittance responsibilities on remote sellers. The legislation sought to use the new revenue to offset a reduction in food sales taxes. Kelly vetoed both bills because the legislation also sought to eliminate a state income tax increase created by changes in the federal tax code.

Speaker of the House Ron Ryckman called the Kelly tax memo an unlawful tax mandate, and state Sen. Susan Wagle, both Republicans, warned that Kelly’s executive remote sales tax increase could open the state up to litigation.

Kansas is one of 24 states that belong to a streamlined sales tax compact. The compact allows sellers to register with it rather than applying to those individual different states as retailers. There are more than 10,800 sales tax jurisdictions in the U.S., according to the Tax Foundation. Kansas has 521 sales tax jurisdictions. The compact helps retailers charge and remit appropriate sales taxes. More than 30 states have passed laws or regulations for remote sellers to remit sales taxes, and Fletcher says it’s difficult to know whether new out-of-state applicants registered in order to comply with the Kelly memo, the Wayfair decision or whether they registered as part of registering with the streamline compact. Either way, the administration contends remote sellers with Kansas transactions, no matter the dollar amount or number, should be collecting sales taxes to remit to Kansas as of Oct. 1.

“People need to be registering and collecting and remitting,” Fletcher said.

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