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Buying online this holiday season? Kansas might not be getting a cut of the sales tax.

Andrew Bahl
abahl@gannett.com
Due to a gap in current law, Kansas is one of three states not to collect sales tax on certain online transactions.

Shopping on Amazon, Etsy or eBay these days? The state of Kansas might not be getting a cut of the sales tax from what you buy, whether that is a shiny new Playstation 5 or some holiday decorations.

Due to gaps in state law, there is no sales tax collected from out-of-state merchants that conduct a transaction on behalf of a third-party vendor.

While this may seem to be a Byzantine distinction hidden in the annals of the state’s tax code, critics say it costs the state at least $30 million a year in revenue and puts brick-and-mortar businesses at a disadvantage.

The good news for bean counters and small businesses alike? There appears to be bipartisan interest in closing the loophole during the next legislative session.

“If we’re going to do something and try and raise revenue ... that’s really low-hanging fruit,” said Rep. Jim Gartner, D-Topeka, and the top Democrat on the House Taxation Committee. “We ought to get this passed as soon as possible.”

State agency goes it alone

For years, Kansas was only legally able to tax purchases from out-of-state retailers if they maintained a physical presence in the state.

That meant a purchase from the website of Best Buy or Home Depot would result in sales tax being collected — but not something bought from an online-only retailer.

But as sales from websites like Amazon reached stratospheric heights, there was a desire to challenge legal convention.

This culminated in a 2018 U.S. Supreme Court decision, where it was ruled that a merchant would need only an economic presence in a state, not a physical one, in order to be required to remit sales taxes.

This opened up a floodgate for states to tap into a new revenue source — but not Kansas.

After lawmakers dragged their feet on allowing the state to take advantage of the Wayfair decision, the Department of Revenue issued a memo basically saying the agency would unilaterally begin requiring out-of-state companies to collect the sales tax.

“(The state) can, and does, require on-line and other remote sellers with no physical presence in Kansas to collect and remit the applicable sales or use tax on sales delivered into Kansas,” the notice read.

The move wasn’t without controversy. Attorney General Derek Schmidt issued an opinion arguing that the department didn’t have legal ground to take the action, something some still believe to this day.

“They need legislative authority to do some of what they are trying to do,” said Sen. Caryn Tyson, R-Parker, chair of the Senate’s tax committee.

Nonetheless, the agency has been collecting the tax and Department of Revenue Secretary Mark Burghart has said the department has been reaching out to retailers to ensure better compliance, raking in an additional $65 million between 2019 and 2020.

But the job isn’t done, legislators agree.

Brick-and-mortar businesses at a disadvantage

There are a few flaws with the current setup.

The current arrangement in Kansas, for instance, requires all out-of-state sellers to remit the tax, regardless of their size. This means that a small cheesemonger in Wisconsin must fundamentally behave the same way as Walmart for online sales.

Most other states address this problem by setting a threshold where a business would begin to have to collect and pay sales taxes once they hit a certain number of transactions. Legislation would be required to make that happen in Kansas.

And small businesses often get left behind, said Dan Murray, state director for the National Federation of Independent Businesses. That is especially true for those in a more niche field.

NFIB has been neutral on the matter at both a federal and state level, Murray said, but he was looking for a solution that made things more fair for small businesses.

Sometimes the cost of using a service to help collect sales tax on internet sales dwarfs the amount of money actually given to the government.

“When you have these niche small businesses that has found a life on the internet to support your existence on Main Street, yeah, it becomes an issue,” he said.

But there is another problem as well: The current setup doesn’t cover all retailers.

Some outlets are deemed to be “marketplace facilitators.” They don’t directly sell customers a product but rather connect them with someone who does. Amazon sometimes will do this, as will eBay, Etsy or Rakuten.

Additional legislation is required to authorize the Department of Revenue to collect the tax from marketplace facilitators and, for a variety of reasons, it hasn’t made it across the finish line in Topeka.

While lawmakers felt they were gathering steam on the matter in 2020, with a deal agreed to between the Kansas Chamber and other stakeholders, the COVID-19 pandemic abruptly halted session and derailed work on most non-pandemic bills.

“(The pandemic) definitely threw some things into a tailspin that normally would be addressed and did not get the attention that it needed,” Tyson said.

There continues to be a real impact on consumers, however.

Burghart said retailers in Missouri and other neighboring states will target Kansans with deals, knowing that brick-and-mortar retailers are at a disadvantage when compared to their online peers.

“That disadvantage ... is a promotional item for an out-of-state retailer to folks who want to buy goods from them,” Burghart told lawmakers last week.

At a time when COVID-19 is hurting businesses across the state, leveling the playing field is a top priority, members of both parties have said.

And there is a financial benefit to the state as well. Burghart said a conservative estimate shows taxing marketplace facilitators would haul in an additional $30 million for the state’s coffers.

But Gartner noted that number could be far higher, saying that some states have raked in upwards of $150 million from taxing marketplace facilitators.

That could be potentially important revenue at a time when the state is pondering over how to fill a $152 million budget shortfall created by the pandemic.

“It’s a nice revenue source that we’ve not been able to capture for two years,” Gartner said.

Taxes again set to be major touch point

The sales tax debate is likely to only be the tip of the iceberg next session when it comes to issues of taxation.

Republican lawmakers have already signaled an interest in pursuing legislation requiring more transparency from local governments seeking to raise property taxes. A similar bill was vetoed by Gov. Laura Kelly last year.

And conservative groups are also pushing for a major overhaul to the state’s tax environment, arguing it is a barrier to attracting new businesses.

“We keep doing the same things over and over again,” Dave Trabert, head of the Kansas Policy Institute, said during a hearing last week. “We might get some ribbon-cuttings and we might get some press releases but these things aren’t working ... We have some really serious negatives on our resume.”

That gives some a sense of deja vu from former Gov. Sam Brownback’s infamous tax initiatives, which didn’t produce the types of economic gains that proponents believed would come to pass.

But Tyson emphasized that something needs to be done differently, on both the remote sales tax issue and on taxation more broadly.

“We need to stop kicking the can down the road,” she said.