Kansas Enacts Sales Tax Economic Nexus and Marketplace Legislation, Other Income Tax Changes
Kansas Enacts Sales Tax Economic Nexus and Marketplace Legislation, Other Income Tax Changes
The Kansas legislature on May 3, 2021 overrode the governor’s veto of S.B. 50, thereby enacting remote seller and marketplace facilitator rules, as well as other income tax provisions. The new legislation creates a bright-line small-seller exemption for remote retailers, bringing Kansas in line with the rest of the country.
Before enactment of S.B. 50, the Kansas Department of Revenue had issued Notice 19-04, which relied on the general imposition statute to assert nexus on remote retailers to the fullest extent allowed under the U.S. Constitution. As a result, Kansas did not provide a small-seller exemption (such as a $100,000 sales threshold), but instead asserted that all remote sellers with sales into Kansas were subject to sales tax. The Kansas attorney general disagreed with the department’s controversial position and opined that Notice 19-04 has “no force or legal effect.” S.B. 50 now makes that entire discussion moot for sales after July 1 ,2021, by creating a $100,000 economic nexus threshold in Kansas.
Given Florida’s recent enactment of marketplace legislation, Missouri is now the only state imposing sales tax that has not addressed the issue of economic nexus for remote sellers or marketplace facilitator rules.
Sales and Use Tax
Economic Nexus Threshold
Beginning July 1, 2021, retailers that have in excess of $100,000 of cumulative gross receipts from Kansas customers in the current or immediately preceding calendar year are considered a “retailer doing business in this state,” and are subject to a requirement to register in the state and to collect and remit sales tax. The bill specifies that any retailer that meets the requirement of having in excess of $100,000 cumulative gross receipts in the current calendar year for the first time is only required to collect and remit taxes on sales in excess of $100,000; thus, it is not responsible for collecting and remitting tax on sales below the $100,000 threshold.
Marketplace Facilitator Provisions
A marketplace facilitator is required to collect and remit tax if it makes or facilitates the sale of property or services subject to tax in the state, on its own behalf or on behalf of its marketplace sellers, for delivery into Kansas in an amount exceeding $100,000.
While Kansas’s definition of “marketplace facilitator” is typical, the bill specifically includes persons that provide a marketplace for unaffiliated third parties to rent or provide lodgings or accommodations in a home, apartment, cabin or other residential dwelling, but only for short-term rentals (defined as fewer than 29 consecutive days). However, if the accommodations are provided by a hotel that is operating under a person’s brand, then the person is not considered a marketplace facilitator. In Kansas, the definition of “marketplace facilitator” specifically excludes a platform that exclusively provides advertising services, a person whose principal activity with respect to marketplace sales is to provide payment processing services between two parties, and other financial transactions markets.
The new legislation allows the department to grant a waiver from the marketplace requirements if the marketplace facilitator can satisfactorily demonstrate that substantially all its marketplace sellers already are collecting and remitting taxes. If the department grants the waiver, then the taxes are collectible from the marketplace seller. The bill requires the department to promulgate rules to administer this waiver process.
Effective April 1, 2022, marketplace facilitators will be required to collect applicable prepaid wireless 911 fees. Before April 1, 2022, marketplace sellers that provide prepaid wireless services are not liable for the prepaid wireless 911 fees sold through a marketplace, unless the seller was granted a waiver.
In a separate provision from the waiver provision discussed above, the marketplace facilitator and marketplace seller can also contractually agree to have the marketplace seller collect and remit all applicable taxes and fees, if the marketplace seller has annual U.S. gross sales of more than $1 billion, provides evidence to the marketplace facilitator that it is registered and notifies the department.
As in most states with marketplace regimes, marketplace facilitators doing business in Kansas have the same rights and duties to collect and remit the applicable taxes as sellers. The new legislation gives marketplace facilitators the option to report the taxes from their direct sales on a separate form or to report the taxes from direct sales combined with any taxes paid by their marketplace sellers through the marketplace facilitators’ platforms.
For audits, the department must solely audit the marketplace facilitator on sales facilitated through the marketplace, unless (1) the department granted a waiver, or (2) the parties have met the requirements to contractually shift the burden to the marketplace seller. However, the marketplace facilitator may be relieved of liability in certain situations when the marketplace facilitator made a reasonable effort, but the failure was that of the marketplace seller providing incorrect or incomplete information. The relief provision does not apply if the marketplace facilitator and the marketplace seller are under common ownership and control.
The new legislation includes a welcome provision that most states have not included in their marketplace regimes. In Kansas, the marketplace facilitator can be relieved of liability if it can prove, to the department’s satisfaction, that the tax on a sale facilitated by the marketplace facilitator was paid by the marketplace seller.
S.B. 50 also included several important income tax provisions, some in response to federal tax reform and the CARES Act.
Corporate Income Tax Return Due Date
For tax years beginning after December 31, 2019, the bill changes the deadline for filing Kansas corporate income tax returns to one month after the due date established for federal corporation income tax returns, including any applicable extensions granted by the IRS. The bill goes on to provide that late filing penalties cannot be imposed if the return is filed within one month after receiving an extension to file a tax return with the IRS. Finally, the bill provides that taxpayers are not required to file an extension request in this scenario.
Decoupling From Federal Income Tax Provisions
For tax years beginning after December 31, 2020, Kansas decouples from the following federal income tax provisions:
- Business interest expense deduction, under IRC Section 163(j). Kansas now allows corporate and individual taxpayers to deduct business interest expenses disallowed by Section 163(j). However, taxpayers are required to add back to their federal adjusted gross income or federal taxable income starting point (as the case may be) any federal excess interest expense carryover.
- Global intangible low-taxed income (GILTI) as defined under IRC Section 951A may be subtracted by corporate or individual taxpayers from federal taxable income, but the GILTI deduction under IRC Section 250(a)(1)(B) must be added back by corporate taxpayers.
- Because Kansas starts with federal taxable income after NOLs and special deductions for corporate income tax purposes, the foreign-derived intangible income (FDII) deduction under Section 250(a)(1)(A) is allowed.
- Temporary increase in meal expense deduction allowed under IRC Section 274. Kansas now allows meal expenses to be deducted to the extent they were deductible under the Internal Revenue Code in effect on December 31, 2017.
- Similarly, Kansas decouples from the Tax Cuts and Jobs Act’s amendment to IRC Section 118, which treats certain state and local economic development incentives as included in federal gross income and not as non-shareholder capital contributions. For corporate income tax purposes, for tax years beginning after December 31, 2020, Kansas will apply Section 118 as in effect on December 21, 2017, so that those contributions will be non-taxable for Kansas state tax purposes (as they were for federal purposes before the enactment of the TCJA).
IRC Section 965 Inclusions
The bill updates the Kansas corporate income tax 80% dividends received deduction (DRD) with respect to dividends received from non-US corporations. For purposes of the DRD, the term “dividends” now includes amounts included in federal taxable income under IRC Section 965(a), net of the Section 965(c) deduction. Significantly, this amendment is not limited in effect to tax years beginning after December 31, 2020.
Net Operating Losses (NOLs)
For NOLs incurred in taxable years beginning after December 31, 2017, the legislation provides that a Kansas NOL deduction will be allowed in the same manner that it is allowed under IRC Section 172, but may only be carried forward. This change means that Kansas NOLs incurred after December 31, 2017 may now be carried forward indefinitely (and are no longer subject to the Kansas 10-year carryforward period that still applies to NOLs incurred prior to January 1, 2018). However, it also means that the federal 80% limitation added by the TCJA (but including the CARES Act temporary suspension of that limitation for NOLs carried forward to 2019 and 2020) will apply for Kansas income tax purposes.