On May 3, 2021, Kansas legislators overrode a veto from Governor Laura Kelly to pass Senate Bill 50, which establishes an economic nexus threshold of $100,000 for out-of-state sellers, requires marketplace facilitators that make or facilitate more than $100,000 in gross sales to collect and remit sales and use tax, and repeals the state’s click-through nexus provisions for affiliates. The bill also includes several tax reductions for individuals and businesses. The nexus provisions of the law go into effect July 1, 2021.
Kansas Taxation of Remote Sellers
In 2018, the U.S. Supreme Court held in South Dakota v. Wayfair that states could tax out-of-state sellers with no physical presence in the state as long as the seller had a “substantial nexus” with the taxing state. In August 2019, in response to Wayfair, the Kansas Department of Revenue issued Notice 19-04, which required remote sellers to register with the state and collect and remit sales or use tax on sales into the state. The notice also stated that marketplace facilitators “should contact the Department concerning entering into a voluntary compliance agreement with the Department.”
Kansas, however, was the only state without an economic nexus threshold, raising questions as to whether the state’s tax on remote sellers satisfied the “substantial nexus” test of Wayfair. The new law ends the uncertainty. Governor Kelly supported the economic nexus and marketplace facilitator requirements of the bill, but objected to the tax reductions. Kelly vetoed a similar bill in 2019 for the same reasons.
$100,000 Economic Nexus
The bill requires sellers with more than $100,000 in gross sales sourced in Kansas to collect and remit state and local sales and use taxes beginning July 1, 2021. The requirement applies to sellers that meet the $100,000 threshold during January 1, 2021, through June 30, 2021, or during the current or immediately preceding calendar year.
Marketplace Facilitator Requirements
The bill also requires marketplace facilitators that make or facilitate more than $100,000 in gross sales sourced in Kansas to collect and remit state and local sales and use taxes beginning July 1, 2021. The threshold applies to marketplace facilitators with a physical presence in Kansas as well as remote marketplaces with economic nexus. The nexus calculation includes both direct and third-party sales, and the $100,000 threshold applies to sales during the current or immediately preceding calendar year.
The bill defines a “marketplace facilitator” as a person that contracts or agrees with marketplace sellers to facilitate the sale of products or lodging through a physical or electronic marketplace. The person owns, operate, and otherwise controls the marketplace and either directly or indirectly collects the payment from the purchase and transmits all or part of the payment to the seller. This applies regardless of whether fees are deducted from the transaction. The definition excludes platforms that only provide advertising services, a person whose principal activity is to provide payment processing services, or the types of commodity futures trading organizations listed in the bill. The bill also defines a “marketplace seller” as a seller that makes sales through any physical or electronic marketplace that a marketplace facilitator operates, owns, or controls.
The bill authorizes the Department of Revenue to waive a marketplace facilitator’s obligation to collect and remit taxes upon a showing by the marketplace facilitator that substantially all of its marketplace sellers are already collecting and remitting all applicable taxes. The bill also allows marketplace facilitators to contract with marketplace sellers that have least $1 billion of annual gross sales in the United States to require the marketplace seller to collect and remit all applicable taxes and fees.
In addition to the sales and use taxes, the bill requires marketplace facilitators to collect and remit local transient guest taxes beginning January 1, 2022 and prepaid wireless 911 fees beginning on April 1, 2022. It also repeals the so-called “click-through” nexus provisions for affiliated persons.
Additional Tax Provisions
The bill also includes several tax changes for individuals and businesses. For individuals, the bill clarifies that identify theft victims do not owe Kansas individual income tax on unemployment compensation that was fraudulently obtained by another individual. The bill also increases the standard deduction and allows taxpayers to itemize deductions on their state taxes regardless of whether the taxpayer itemized deductions or took the standard deduction for federal income tax purposes.
For businesses, the bill makes several changes in response to the Tax Cuts and Jobs Act (TCJA). The bill excludes global intangible low tax income (GILTI) from state income tax by allowing a 100 percent deduction of GILTI from federal adjusted gross income used to calculate Kansas taxable income. This applies to tax years beginning in 2021. The law also decouples from the federal tax code’s limit on net business interest expense deductibility by allowing a deduction for the amount disallowed under IRC Section 163(j). Additionally, the law conforms Kansas to the federal tax code by allowing taxpayers to carry forward their net operating losses indefinitely beginning in tax year 2018.
Other changes include an exemption for capital contributions as existed before the TCJA, an exemption for the amount of Federal Deposit Insurance Corporation (FDIC) premiums disallowed under IRC Section 162(r), and an exemption for meal expenditures to the extent the expenditures are disallowed as a deduction under the federal tax code.
Additionally, the bill allows an expensing deduction for the costs of placing certain tangible property and computer software into service in the state beginning in tax year 2021. The bill requires all taxpayers claiming the Kansas expensing deduction to offset the amount of federal expensing deduction claimed pursuant to IRC Section 179.
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