12 January 2021 | Tax and Budget

Internet tax changes could boost Kansas businesses, cushion pandemic effects

Emily Fetsch
Jan. 12, 2021

With the start of the 2021 legislative session, Kansas lawmakers should ensure Kansas businesses are on a level playing field with their out-of-state counterparts. Kansas businesses are struggling during the COVID-19 pandemic, and online sales have increase significantly. Lawmakers must modernize the tax code to reflect ongoing changes that have given out-of-state retailers a competitive advantage.

There are three areas ripe for change, including 1) continuing to collect sales tax from remote sellers, 2) collecting sales tax from marketplace facilitators, and 3) implementing a sales tax on digital goods.

Remote sellers

A remote seller is a seller that does not have a physical presence in Kansas but makes sales in the state. The Kansas Department of Revenue (KDOR) issued a notice to require out-of-state retailers, or remote sellers, to register, collect, and remit sales tax in Kansas. In 2018, the U.S. Supreme Court cleared the way to collect these taxes from out-of-state retailers. Since then, at least 43 of the 45 states that have sales tax have implemented collection and remittance obligations for remote sellers. Since KDOR released its notice, more than 5,000 remote sellers have registered with Kansas.

In addition, online sales tax revenue has increase significantly. With a new reliance on internet sales during COVID-19, Kansas was fortunate to be collecting this tax. Through the KDOR notice, Kansas has made its businesses economically competitive with other states’ businesses by collecting this revenue. reverse or alter KDOR’s decision would lose revenue and put Kansas businesses at an economic disadvantage to their out-of-state peers.

Marketplace facilitators

A marketplace facilitator is a third party that helps businesses make sales, such as Etsy, eBay or Amazon. While Kansas currently implements sales tax collection on remote sellers, if those same remote sellers are selling through a marketplace facilitator, they are not required to collect and remit sales tax. Since the U.S. Supreme Court decision mentioned above, at least 38 of the 45 states with sales taxes have implemented collection and remittance obligations for marketplace facilitators. Legislation should add Kansas to the majority of other states that collect this revenue, making Kansas businesses economically competitive with other states’ businesses.

In addition, legislation would increase revenue for the state, which could be used to meet vital needs. Without implementation of sales tax for remote sellers and marketplace facilitators, Kansas would place in-state businesses, which are required to pay our sales tax, at an economic disadvantage from their out-of-state competitors, which would avoid having to collect and remit sales tax.

Digital goods

Finally, Kansas brick and mortar businesses would benefit from the implementation of a sales tax on digital goods. Right now, if a Kansan goes to a bookstore and buys a book, they are subject to sales tax. However, if the same Kansan downloads a book for an e-reader, they are not subject to sales tax. Collecting sales tax on digital goods is an important step to modernize our tax code. When the sales tax was established in Kansas in 1937, legislators could not have predicted today’s digital landscape. Therefore, it is important lawmakers update legislation to capture unintended exclusions and make the Kansas market fairer and more equitable. 

Additionally, this legislation would capture a sustainable and renewable source of revenue our state needs. The implementation of a sales tax on digital goods would generate an additional $42.7 million in its first year (FY 2022). Collecting this sum would help our state in its economic recovery and ensure we achieve a structurally balanced budget.

Kansas Action for Children urges Kansas lawmakers to enact legislation related to the above three categories. Our state needs this legislation to modernize our tax code and remove the unfair advantage of internet sellers and out-of-state retailers over brick-and-mortar Kansas businesses. In addition, this policy change would establish a sustainable source of revenue during a time of profound economic hardship.

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