Kansas became the latest state to adopt effective economic nexus rules after the state legislature overrode a Governor’s veto to pass SB 50. The new law becomes effective on July 1, 2021, to apply to sales made after that date.
Under the new economic nexus law, remote sellers will face sales tax liability on their sales to Kansas residents if they make over $100,000 in total annual gross revenue in the state. Kansas state sales tax rate is 6.5%, which can be supplemented by local rates depending on where sales are made to.
On its face, the new Kansas economic nexus law is more notable for the contentious and Byzantine route it took to pass (including an attempt last year, which the Attorney General determined was unenforceable and the veto by Governor Laura Kelly in April). However, for direct-to-consumer (DtC) shippers of wine, there are additional considerations that attenuate the overall impact of this new general sales tax law.
Notably, Kansas is one of the few states that does not condition DtC wine shippers to accept a sales tax burden in the state as a condition of getting a DtC shipping license. As such, a DtC wine shipper’s sales tax burden in the state would only exist depending on generally applicable rules, such as the new economic nexus law.
There is a very good reason that this provision was left out of Kansas’ DtC wine shipping laws: sales of alcohol in Kansas are not subject to Kansas sales tax. Instead, the state imposes what is called the Beverage Occupational Tax of 8% on off-premises sales of alcohol (a 10% “Liquor Drink Tax” is applied to on-premises sales of alcohol).
The 8% Beverage Occupational Tax is imposed on DtC wine shippers, which they have been collecting and remitting to the state for many years providing millions of dollars to the state’s coffers.
However, under the new economic nexus laws, certain DtC wine shippers may now face an additional tax burden.
As written, the $100,000 annual sales threshold applies to total cumulative gross receipts made by a remote seller from sales to Kansas customers. While this threshold would exclude non-taxable sales for resale (e.g., sales made by wineries to Kansas wholesalers for three-tier distribution in the state), there does not appear to be any exclusion for sales that are exempt from sales tax but are otherwise taxable, such as DtC shipped wine.
Under the law as written, a DtC wine shipper would thus face a sales tax burden once they sell over $100,000 in wine into Kansas in a year. A DtC wine shipper reaching that threshold would be required to register with the Kansas Department of Revenue and file regular sales tax returns reporting their sales into the state. While they would be able to fully exempt their wine sales from their sales tax returns (providing that they are regularly filing and remitting their Beverage Occupational Taxes), they would still be required to file a return reporting their retail sales, and collect and remit sales tax on non-wine purchases made by Kansas customers.
It is this last point that makes the new Kansas economic nexus law peculiar for DtC wine shippers. While DtC wine shippers do often sell non-wine products, such as glasses or corkscrews, the overwhelming bulk of their sales are of wine. Under the new rules, a successful DtC wine shipper could be required to regularly file a sales tax return with Kansas even though a large majority of their sales will be completely deducted from that return. Nevertheless, such are the vagaries of sales tax law, wherein subtle nuances can have broad impacts.
It must be noted that the Kansas Department of Revenue has yet to provide specific guidance on its new economic nexus law. It may turn out that they will exclude retail sales that are not subject to Kansas sales tax (like DtC shipped wine) from their economic nexus threshold. However, in the absence of specific guidance to that point, DtC wine shippers who are making over $100,000 in total sales to Kansas consumers should at least anticipate that they will need to register for Kansas sales tax in the coming months.
With the passage of SB 50 and a similar measure in Florida last month, Missouri remains the only state that does not currently have economic nexus laws in effect. Missouri is also one of the few states that does not require DtC wine shippers to assume a sales tax liability. As such, we are paying close attention to that state’s legislature as it works to establish its own economic nexus laws.
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