If you are selling goods or products online and some of your customers are located in Kansas, you need to be aware of the state’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Kansas. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For guidance on how physical presence is determined specifically under Kansas law, consult Section 92-20-7 of the Kansas Administrative Regulations, covering registration of ostensibly out-of-state retailers, which defines when a retailer is “engaged in business within” Kansas. Note that the definition includes not only the bulleted items mentioned just above, but also those same types of items when maintained “indirectly, or through a subsidiary.”
As you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
A Note on “Nexus”
In its Quill decision, the United States Supreme Court discusses not only physical presence, but also several types of potential “nexus” between a business and a state, including one type based on the Due Process Clause of the Constitution and another type based on the Commerce Clause of the Constitution. The type of “nexus” (or connection) the Supreme Court ultimately found relevant for mail-order businesses was the Commerce Clause version, which, for all practical purposes, is physical presence. In line with Quill, the Kansas Department of Revenue (KDOR) tends to largely equate physical presence and nexus. For a helpful explanation of how the KDOR looks at this issue, check out the section “What is Nexus?” in this KDOR publication on sales and use tax.
Example 1: You are operating solely out of an office in Hanover, New Hampshire and make a sale to a customer in Topeka, Kansas—a state where your business has no physical presence: You are not required to collect sales tax from the Topeka customer.
Example 2: You are operating solely out of a warehouse in Overland Park, Kansas and make a sale to a customer in Lawrence, Kansas: You are required to collect sales tax from the Lawrence customer.
Example 3: After several years of operating solely out of an office in Hanover, New Hampshire, you open a one-room satellite office just outside of Wichita, Kansas—a state where previously you had no physical presence. A day later, you make a sale to a customer in Kansas City, Kansas: You are required to collect sales tax from the Kansas City customer.
Some items sold via the Internet to Kansas customers may be exempt from sales tax under Kansas law. For example, Section 79-3606(t) of the Kansas Statutes (KSA) states that seeds used in the planting of crops are exempt from sales tax. For further information on many exemptions, check generally KSA 79-3606 and the section “ITEMS EXEMPT FROM SALES TAX” in the KDOR publicatio on sales tax exemptions certificates.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” There is an excellent discussion, including multiple illustrative examples, of how use tax works in Kansas in a KDOR publication. As one of the KDOR examples states, “Individual Kansas consumers buying goods in other states or through catalogs, mail-order companies, over the Internet, or from TV, magazine, and newspaper ads must pay Kansas consumers’ use tax on these purchases if the seller does not charge” tax to the consumer.
Kansas’s Failed “Amazon Law”
Earlier this year, the Kansas legislature considered a revision to the sales tax law that would require larger out-of-state Internet retailers with in-state “affiliates” to collect and pay sales tax. Similar laws have been at least considered, and sometimes enacted, in various states around the country. They are commonly known as “Amazon Laws” and address what are known as “click-through” arrangements with in-state residents.
As you might guess, the term “Amazon Law” refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states. “Amazon Law,” however, is not an especially accurate term in Kansas’s case, because Amazon has a physical presence in Kansas and already collects and pays Kansas sales tax.
The proposed Kansas law died in committee in June.
While you might not know it from looking solely at Kansas’s sales tax statute, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states, including Kansas, and at the federal level. The Kansas legislature’s consideration of a new law for larger out-of-state Internet retailers was one part of this larger debate. However, at this time Kansas has not enacted any law that would require out-of-state retailers to collect sales tax from Kansas customers.
In Kansas, the physical-presence rule continues to apply for Internet retailers. However, because the issue is a subject of ongoing debate, you should consider checking in periodically with the Kansas Department of Revenue to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.