HB 2756: An innovative policy for the 21st Century economy

March 22, 2018

Kansans believe in fairness, whether in a ball game or tax policy. Fairness in tax policy means that no business should be disadvantaged and no revenue stream should be omitted or underutilized. The economy functions best when the three-legged stool of income tax, sales tax, and property tax is balanced. However, with the increase in online commerce, the state is having a difficult time ensuring the playing field is level for Kansas businesses and their online competitors. House Bill 2756 will modernize Kansas’ antiquated sales tax code to reflect the realities of the 21st century and will ensure fairness for all businesses.

HB 2756 enhances Kansas’ ability to collect sales taxes on internet sales, and it passed out of House Taxation committee earlier this month with overwhelming support. Currently, the 1992 United States Supreme Court decision in Quill Corp. v. North Dakota makes this difficult. The Court found out-of-state retailers cannot be required by a state to charge sales tax to residents in its territory unless the retailers have a physical presence in the state.[1] In January 2018, the United States Supreme Court agreed to hear arguments about the constitutionality of the Quill decision.[2]

Regardless of the Court’s decision, the Kansas legislature should strengthen its capacity to collect taxes on internet sales. In 2013, Kansas passed an “click-through agreement” law requiring out-of-state online retailers to collect and remit sales tax if the retailer pays a Kansas resident to host a link to the retailer on the resident’s website and the overall sales made through this link exceed $10,000 per year.[3] Though a good first step, more remains to be done. In January 2018, the Government Accountability Office (GAO) estimated that in 2017 there was between $113 million and $170 million of uncollected online sales tax revenue in Kansas.[4]

HB 2756 creates further opportunities to collect this revenue and help support Kansans’ priorities. The bill does three main things.

  1. Captures sales tax on third-party sales in online marketplaces by requiring the marketplace to collect and remit. This strategy is modelled on Minnesota’s recent legislation.[5]
  2. Broadens the definition of “physical presence” to include online code that tracks users, commonly known as “cookies,” and found on smartphones, computers, and other devices. Online retailers with cookies in Kansas would be required to collect and remit sales tax revenue. The “cookie nexus” strategy has been implemented in both Massachusetts and Ohio.[6]
  3. Removes arbitrary sales tax exemptions on digital goods.[7]

HB 2756 is a necessary step for Kansas to modernize its sales tax code as the retail industry increasingly moves online, as it both levels the playing field for Kansas businesses and provides a recurring and sustainable source of revenue for our state.

Lawmakers have a difficult task ahead as our state recovers from the failed 2012 tax plan, nine consecutive rounds of budget cuts, and years of disinvestment. The road to recovery includes finding recurring and sustainable sources of revenue to address our state’s most pressing priorities: providing great schools, affordable health care, and solid infrastructure, and building thriving communities throughout Kansas.

[1] See Michael Mazerov, “States Should Adopt a Version of Colorado’s Remote Sales Tax Law,” CBPP 2017. Available online: https://www.cbpp.org/research/state-budget-and-tax/states-should-adopt-a-version-of-colorados-remote-sales-tax-law#_ftn5

[2] See Greg Stohr, “U.S. Supreme Court to Review Bid to Collect Internet Sales Tax,” Bloomberg 2018. Available online: https://www.bloomberg.com/news/articles/2018-01-12/bid-to-collect-internet-sales-tax-gets-u-s-high-court-review

[3] See SB 83. Available online: http://www.kslegislature.org/li_2014/b2013_14/measures/documents/sb83_enrolled.pdf

[4] See Government Accountability Office (GAO) State Policy Reports, January 2018, Volume 36, Issue 1. Available online: http://www.ffis.org/sites/default/files/public/v36.1.pdf

[5] See Minnesota Department of Revenue. Available online: http://www.revenue.state.mn.us/businesses/sut/Pages/Marketplace-Providers-Online-Retailers.aspx

[6] See Reed Smith LLP, “Massachusetts ‘Cookie’ Nexus Regulation Challenged…In Virginia Circuit Court,” 2017. Available online: https://www.reed­smith.com/en/perspectives/2017/10/massachusetts-cookie-nexus-regulation-challenged-in-virginia-circuit-court; See Miles Consulting, “Ohio’s New Online Sales Tax: Now Cookies Can Create Nexus?” 2017. Available online:https://www.milesconsultinggroup.com/blog/2017/08/01/ohios-new-online-sales-tax-now-cookies-can-create-nexus/

[7] See Michael Mazerov, “States Should Embrace 21st Century Economy by Extending Sales Taxes to Digital Goods and Services,” CBPP 2012. Available online: https://www.cbpp.org/sites/default/files/atoms/files/12-13-12sfp.pdf

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