Kansas officials looking for ways to capture more sales tax from online retailers

Kansas Statehouse in Topeka, February 2014.

? A Kansas House committee could vote as early as Wednesday to endorse a bill that could bring an estimated $113-$170 million a year in sales tax revenue to the state.

That’s how much revenue the U.S. Government Accountability Office estimates Kansas could gain if it had expanded authority to tax retail sales made over the internet, many of which currently go untaxed.

Currently, states are only allowed to tax sales from companies that have a physical presence, or “nexus,” in the state, a rule laid out in a 1992 U.S. Supreme Court case involving North Dakota.

But House Bill 2756 represents an effort to get around that legal rule, essentially by declaring that any online retail website or smartphone app that is accessible to a Kansas user constitutes a kind of corporate presence in Kansas.

“The slang term is the ‘cookie nexus’ that they have,” said Rep. Steven Johnson, R-Assaria, who chairs the House Taxation Committee that is considering the bill.

The word “cookie” is not a reference to a food item, but rather to the packets of code that web servers put on a user’s internet browser in order to identify users and remember login information.

Johnson said that Massachusetts and a number of other states have enacted similar legislation, part of a growing trend among the 45 states that levy retail sales taxes and say their tax base is rapidly being eroded due to the burgeoning growth of untaxed online sales and e-commerce.

“What the bill states and recognizes, following the Massachusetts model, is that the things such as the phone you’re holding now do have a very real, physical presence in the state,” Johnson said in an interview. “And should that be a storefront you choose to buy, say, your tie from rather than going down the street to someone else who sells the tie, the tax on that same good is one that needs to be collected by whoever the seller is.”

The bill is one that appears to have bipartisan support as lawmakers struggle to find politically acceptable ways to raise new revenue in the face of a Kansas Supreme Court decision in October that said current funding levels for public schools are inadequate and unconstitutional.

Several estimates have put the potential cost of complying with that order at upward of $600 million a year in additional school funding.

But even without that challenge, Rep. Tom Sawyer, of Wichita, the ranking Democrat on the Taxation Committee, said in a separate interview that all states that levy sales taxes are facing the same problem.

“It’s big, because more and more sales are moving online, and as that becomes a bigger portion of the sales tax, it’s hard for us to collect that,” Sawyer said.

Sawyer said he and other lawmakers would prefer they didn’t have to enact such legislation. What they would prefer is that the U.S. Supreme Court reverse a 25-year-old decision that strictly limits the ability of states to tax “remote” sales such as those made online.

On Monday, Kansas Attorney General Derek Schmidt announced that he is joining in that effort by signing onto a brief, along with 40 other state attorneys general, urging the U.S. Supreme Court to do just that.

The issue dates back to 1992, when the court struck down an action by North Dakota’s tax commissioner who tried to collect sales taxes from Quill Corp., a large, national mail-order company that sold office equipment throughout the United States. The state argued that it should be allowed to collect the tax on items that were purchased for use in the state of North Dakota.

In the case of Quill Corp. v. North Dakota, the court struck down that action as an interference with interstate commerce, and it said the state could only tax sales from companies that had a physical presence in the state.

More than 25 years later, however, states are now facing a different challenge. They argue that at the time of the Quill decision, the World Wide Web was still in its infancy, and that the growth of online marketing has changed the entire nature of the retail industry and, consequently, states’ ability to tax it.

“While the rule at the time of those decisions was largely confined to the mail-order catalog industry, today the thriving online retail industry claims the rule’s protection to give itself a competitive advantage over brick-and-mortar retailers who must collect the owed tax,” the multistate brief argues. “The net effect is that the (states) lose billions of dollars in tax revenue each year, requiring cuts to critical government programs.”

So now, the neighboring state of South Dakota is asking the court to reverse its 1992 decision and give states more flexibility to tax internet sales.

The case is set for oral arguments on April 17. A decision is expected later this year.

If the court agrees to reverse its earlier decision, Kansas lawmakers say they wouldn’t need to enact legislation such as House Bill 2756.