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Kansas Governor Brushes Off Objections to Wayfair Notice

Posted on Oct. 2, 2019

Kansas Gov. Laura Kelly (D) on October 1 dismissed the Republican attorney general’s objections to the Department of Revenue’s post-Wayfair enforcement of remote seller collection obligations without the provision of safe harbors.    

“This is about protecting our friends and neighbors doing business on Main Street and throughout our local communities across Kansas,” Kelly said in a prepared statement. “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.”

The DOR separately confirmed the administration’s position that there is no reason to rescind Notice 19-04, the guidance that took effect October 1 requiring remote sellers to collect and remit sales and use tax but containing no sales thresholds or other small-seller exceptions.

Republican legislative leaders late September 30 called on the governor to rescind the notice after Attorney General Derek Schmidt concluded in a nonbinding legal opinion that the DOR did not engage in a valid exercise of its authority.

Kansas is one of nine states where the governor and attorney general currently are from opposing political parties.

In a prepared statement, Kansas Revenue Secretary Mark Burghart maintained September 30 that the notice “does not reflect a change in policy, but only restates long-established statutory provisions regarding the duty to collect and remit Kansas tax.” He said that more than 3,200 remote sellers have registered with the state since the U.S. Supreme Court decided South Dakota v. Wayfair Inc. and that about 600 of those had registered since the notice was published August 1.

“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,” Burghart said.

Burghart had been more explicit in a September 4 letter to the attorney general’s office. 

“This notice did nothing more than publicize the Wayfair decision, the controlling Kansas statute, and the directions for how sellers can begin to comply with the Kansas statute,” Burghart wrote.

Kansas in 2003 revised its definition of a retailer doing business in the state to include sellers with any contacts that would allow Kansas to require the collection and remittance of tax under the U.S. Constitution. That statutory change “was designed to posture Kansas such that it could take advantage of any favorable United States Supreme Court decision that would overturn the physical presence requirement established in National Bellas Hess,” Burghart wrote.

Burghart disputed that any regulation is needed regarding how long-standing but dormant Kansas law applies post-Wayfair. “The law is plain, unambiguous and is self-executing,” he wrote.  

Burghart then laid out a legal argument for why the state could withstand an undue burden challenge by small remote sellers.

Undue Burden

In the 14-page letter, Burghart alluded to the Quill Court’s bifurcation of the concept of nexus and how that has changed with the Wayfair decision.

“Under Wayfair, nexus determinations for sales tax are primarily controlled by the Due Process Clause of the U.S. Constitution, which only requires a definite link or minimal connect between a state and the entity it wants to tax,” Burghart said.  

Later, Burghart wrote that the Wayfair majority “invoked the undue burden standard in a peculiar way" by noting the possibility of small remote sellers bringing an undue burden claim under Pike v. Bruce Church Inc. “The Court, however, has been retreating from the Pike undue burden test for several decades, even in the regulatory context from which that standard derives,” Burghart said. “Moreover, since the time of Quill no case has found that a state tax imposed an undue burden on interstate commerce, apart from consideration of the Complete Auto standards.”

“It should be noted that the Wayfair decision did not establish, as a matter of constitutional jurisprudence, a bright-line test when it mentioned the four elements of South Dakota law ($100,000, 200 transactions, member of Streamlined and prospective only),” Burghart wrote. He said the Court simply noted that these were aspects of the South Dakota law that, taken together, did not create a burden for remote sellers; it "did not hold that those features were necessary or exclusive to avoid an undue burden for sellers.”

“If the elements of the South Dakota law were a constitutionally mandated check list, then membership in Streamlined would be required (no additional states have joined Streamlined since Wayfair was handed down), as would the 200 transactions requirement (most states have not adopted the 200 transactions threshold, and some which initially did, have since struck them from their statutes),” Burghart wrote.  

Also key to Burghart’s argument is the fact that Kansas is a member of the Streamlined Sales and Use Tax Agreement. While many states have established a minimum sales threshold, another way of avoiding harming small sellers — and thus satisfying undue burden claims — is small-seller registration with the Streamlined Sales Tax Project, he said. By contracting with a certified service provider through the project, burdens related to registration, tax calculation, return preparation and filing, and documentation on audits are substantially lifted from small sellers.  

“Essentially, undue burden is measured in dollars: when a seller’s expenses in complying with a state’s tax scheme is too high for the taxes it collects and remits,” Burghart wrote. “Happily, that is not an issue in Kansas. Kansas pays for each and every one of the compliance functions noted above. The seller pays nothing.”

Because of the state's sales tax simplification and because Kansas “is paying the costs of compliance for all remote sellers, including small sellers of less than $100,000 into Kansas, it is difficult to see what burden is being borne by any seller, large or small,”  Burghart said. He added that the Kansas statute contains a rebuttable presumption of nexus for those small remote sellers who do not believe they are subject to collection obligations.

AG’s Counterpositions

In his September 30 legal opinion, Schmidt disputed Burghart’s assertion that under Wayfair, nexus determinations for sales tax are primarily controlled by the due process clause. To the contrary, the Wayfair Court recognized that “some other principle in the Court’s Commerce Clause doctrine might invalidate” state efforts to impose collection requirements on remote sellers. The Court remanded the Wayfair case to the lower court for such a determination, but the case was ultimately settled.

In a footnote, the attorney general’s office added: “We acknowledge the possibility that courts eventually may merge the Due Process and Commerce Clause analyses post-Wayfair, but at this time the courts have not done so, and it is similarly possible the two requirements will remain doctrinally and analytically distinct.”

Schmidt agreed that Kansas law authorizes the DOR to impose collection obligations to the extent the U.S. Constitution permits application of the Kansas statute — but said that the statute itself “establishes no standard for determining which out-of-state retailers those are.” He wrote that the critical question post-Wayfair is, what is the new statutory limit in Kansas? It’s clear post-Wayfair that the Kansas statute applies to more out-of-state retailers, Schmidt said, but “the Wayfair decision itself provides no reasonable basis to conclude it applies without limitation to every out-of-state retailer that ever sells anything into Kansas.”

Schmidt disputed that “the Notice on its face in fact attempts to accomplish more than ‘issue public notice of a change in the existing state law,'” and said that enforcing the Kansas statute without a safe harbor is inconsistent with Wayfair.

Finally, the attorney general’s office said the Wayfair Court "has made at least this much clear”:

  • imposing a duty to collect and remit on out-of-state retailers whose contacts exceed the safe harbor thresholds approved in Wayfair seems categorically permissible under the Commerce Clause; 

  • imposing a duty to collect and remit on out-of-state retailers whose contacts fall below or outside of the approved safe harbor thresholds may or may not be permissible under the Commerce Clause. To determine whether Kansas may enforce that duty against such a retailer requires an analysis of the “substantial nexus” and “undue burden” tests as applied to the facts of each case; and

  • Wayfair cannot fairly be read to have eliminated all Commerce Clause limits on Kansas’ authority to impose a duty to collect and remit on out-of-state retailers. Thus, it is prudent to conclude that Kansas may not enforce that duty on out-of-state retailers that have only de minimis contacts with Kansas. What constitutes de minimis contacts has not been determined at this time.

 

"The Department has chosen to draw a constitutional (and thus statutory) line that allows imposing the duty to collect and remit on all out-of-state retailers. That is the most extreme, and the least legally defensible, manner of proceeding,” Schmidt wrote.

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