Supreme Court laid out specific path for use tax, professor says

A tax law professor from Washburn University believes the Kansas Department of Revenue’s position on collection of use tax from out-of-state online retailers is not consistent with Supreme Court precedent.

“You’ve got four requirements that have to be satisfied,” said Roger McEowen. McEowen is the Kansas Farm Bureau Professor of Agricultural Law and Taxation at Washburn University School of Law. “The Supreme Court in Wayfair is only dealing with one. They’re only dealing with substantial nexus. Brady lays out, a state tax will be upheld, if it, applied to an activity having a substantial nexus with the state was fairly apportioned, did not discriminate against interstate commerce and it’s fairly related to the service the state provided. You still have to have all four of those elements.”

The idea is that companies have to be using state services in order to be on the hook for paying for them.

“If the state provides you no services, because you’re not there, you can’t tax the first dollar out of the box,” said McEowen. “That’s why South Dakota set a safe harbor level. You’ve got to have a certain volume, a certain number of transactions. That’s why Pennsylvania last week came in and said okay, $500,000 is our level. Once you get over $500,000 in sales, then that’s enough to trip all four of these requirements.”

McEowen sees a path for Kansas policymakers to clarify what they want from such a use tax.

“The model is set by what South Dakota did that was blessed by the U.S. Supreme Court,” said McEowen. “Clearly, if a state follows what South Dakota did, that’s going to be okay. If the Supreme Court said that’s fine in South Dakota, doing the same thing in Kansas is going to be fine. Pennsylvania went a little bit further. They set their threshold at $500,000, that’s more than South Dakota’s limit was.”

From a political standpoint, it might be good for legislators to put such a bill on the governor’s desk standing alone. The previous attempts rolled it in with other tax policy.