July 19, 2024

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Gov. Kelly orders tax increase on remote sellers

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For the third time in a matter of weeks, Gov. Laura Kelly has attempted to usurp the authority of the Legislature using executive action.

The Tax Foundation today reports the Kelly administration issued a directive requiring all internet sellers with Kansas transactions to begin collecting and remitting sales taxes by October. 

“The new guidance challenges the emerging consensus on remote sales tax collections and raises legal issues most states have been eager to avoid,” writes Jared Walczak, the director of tax policy at the Tax Foundation.

Senate President Susan Wagle warns Kelly’s decision creates a scenario in which the state may face serious litigation.

A recent decision by the U.S. Supreme Court, known as Wayfair, paved the way for states to begin taxing entities that don’t have a physical presence in the state, like internet sellers. 

Walczak explains it this way: “The Wayfair decision repudiated physical presence as a nexus standard, replacing it with economic nexus…A company can have sufficient economic connections with a state for that state to be able to tax it even if it lacks any physical presence (people or property) in the state.” 

The Court didn’t, however, establish standards.

Kansas lawmakers twice passed legislation that would have imposed the duty to collect tax on remote sellers without a Kansas presence and use the proceeds to reduce the tax on food; Kelly vetoed both bills because the legislation would have also offset a state income tax increase caused by changes in the federal tax code.

Wagle called Kelly’s attempt to begin collecting remote sales taxes without legislative authorization “an abuse of power and radical departure for the rule of law.”

“I am asking Attorney General (Derek) Schmidt to once again intervene and tell her to comply with the law,” Wagle said.

Kelly abandoned an executive order earlier this summer after Schmidt threatened to file a lawsuit against her administration. In early July, she issued an executive order that would give food stamps to able-bodied adults, despite a state statute requiring able-bodied adults without dependents to seek job training or work in order to qualify for the food assistance program. 

Less than two weeks later, draft guidelines from the Kelly administration on how foster care agencies should handle LGBTQ children leaked. The guidelines run counter to a 2018 law, the Adoption Protection Act.

Kelly’s latest directive on collecting remote sales taxes may run afoul of the federal courts, according to Walczak.

“A court might well be skeptical, as this is a rather significant burden on interstate commerce,” he writes. “A company making even a single sale into Kansas needs to be fully compliant on Kansas’s sales tax laws.”

Walczak says other states are doing this through a legislative process, and legal challenges are likely.

“By taking this approach, Kansas is putting small sellers in a bind, forcing taxpayers to foot the bill for a difficult legal battle, and potentially imperiling the state’s remote sales tax regime altogether, a possible outcome that a more reasonable approach would have avoided,” he writes.

Wagle says Kelly’s executive order is “unconscionable.”

“It’s absurd we have to continually place a check on Governor Kelly as she attempts to increase taxes through gubernatorial regulation,” Wagle said.

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