(Updated to reflect response from Revenue Department)
Gov. Laura Kelly’s administration did not have a legally sufficient basis to direct out-of-state retailers to collect sales taxes on internet transactions, Attorney General Derek Schmidt said in a new opinion Monday.
Schmidt rejected the Department of Revenue’s argument that it was enforcing an existing state law when it instructed out-of-state retailers to collect Kansas sales taxes starting Oct. 1.
“The notice does not describe a valid exercise by the department of any authority delegated to it by the Legislature,” the opinion said.
The Revenue Department cited last year’s U.S. Supreme Court decision that found states could require businesses to collect sales taxes even if the businesses don’t have a physical presence in the state.
The justices upheld a South Dakota law that set a minimum threshold of business activity before collecting internet sales taxes.
The South Dakota law only covers businesses with more than $100,000 in sales or 200 or more transactions in the state. Kansas has no minimum threshold.
Schmidt wrote that the Supreme Court observed that South Dakota’s law was designed to prevent “undue burdens upon interstate commerce.”
Key in that decision was that South Dakota imposed a minimum level of retail activity before a business was subject to a sales tax, Schmidt wrote.
The court didn’t explicitly find that the minimum level of business activity — or “safe harbor” — was required by the Commerce Clause, he wrote.
However, the court relied on that minimum standard “as persuasive evidence that the statute was ‘clearly sufficient,’” he wrote.
The Revenue Department’s directive was questioned within days of when it was issued, with some experts saying that Kansas was going beyond what the Supreme Court allowed when it upheld internet sales taxes.
House Speaker Ron Ryckman Jr. called on the agency to reverse course Monday.
“As a state that values doing right and playing by the rules, we’re hopeful Gov. Kelly will honor the attorney general’s findings and rescind what appears to be an unlawful tax mandate by her administration,” he said.
“The last thing Kansans want is to be on the hook for more costly lawsuits.”
Senate President Susan Wagle, too, called for the department to withdraw the directive.
“The governor seems to think she can occupy the role of both the legislature and the governor’s office,” Wagle said in a statement.
“The separation of our three branches of government is under attack by this administration and it needs to end.”
Revenue Secretary Mark Burghart late Monday reiterated that the Revenue Department needed to apply the law, adding that the notice did not reflect a change in state policy.
“For the past 29 years, there has been overwhelming legislative support for re-establishing fairness in the obligation to collect and remit Kansas taxes between out-of-state retailers and Kansas retailers,” he said in a statement.
“The Department of Revenue cannot select which laws it enforces,” he said. “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.”
Since the Supreme Court’s decision, more than 3,200 out-of-state businesses have registered with the state to collect and pay taxes to Kansas. Almost 600 of those have registered since Aug. 1 when the notice was published.
While the U.S. Supreme Court broadened the playing field for collecting taxes from out-of-state retailers, it “did not eliminate all limitations imposed by the Commerce Clause,” the opinion said.
Kansas still cannot place “undue burden” on interstate commerce by imposing a sales tax on out-of-state businesses, the opinion stated.
“The Supreme Court in its Commerce Clause analysis found relevant the ‘safe harbor’ that was present in the South Dakota statute but is absent from the Kansas statute and from the enforcement policy announced.”
Schmidt said the agency directive issued last month requiring all out-of-state retailers to collect sales taxes is inconsistent with the U.S. Supreme Court’s decision and “has not been lawfully adopted.”
He explained how the Revenue Department’s policy does not actually follow the state statute it cited in issuing its directive.
“The Legislature has not enacted any statute that on its face necessarily attempts to require imposition of the collection of the sales or use tax on all out-of-state retailers,” the opinion said.
While Schmidt said he would traditionally rely on the courts for interpreting the U.S. Constitution, there are no cases that have been decided since the high court ruled on the South Dakota law.
Schmidt said his office found no instances where a state has been allowed to eliminate any minimum standards of business activity or establish something less than what was adopted in South Dakota.
“We suspect this is because few states other than Kansas have attempted to do so; rather, most other states have adopted a safe harbor modeled generally on what the Supreme Court approved,” he wrote.
His office did find one case in Alabama where an appeals court was faced with a similar issue.
In that case, the court sidestepped the constitutional question and found that state law — similar to the Kansas statute — did not extend to all of out-of-state retailers.
Schmidt also suggested that the agency exceeded its authority because it didn’t follow the legal process of adopting a rule for requiring out-of-state businesses to collect Kansas sales tax by holding hearings and seeking public comment, among other things.
“The department did not attempt to exercise the rule-and-regulation authority the Legislature delegated to it,” Schmidt wrote, “opting instead merely to declare its categorical view that ‘Kansas can, and does, require on-line and other remote sellers with no physical presence in Kansas to collect and remit'” sales taxes.
“Those extra-procedural declarations, upon which the Department’s entire proposed new course for interpreting and implementing the statute rests, seem to us ‘unreasonable, arbitrary or capricious.’”
