New sales tax law likely to hurt businesses, governments

ORIGINALLY WRITTEN JANET HAMOUS

Many Kansas merchants were surprised to learn of a recent change in the Kansas sales tax law that will add significantly to their administrative burden and may potentially mean a loss of revenue to county and local governments.

The law, passed on the last day of this year’s legislative session and became effective July 1, changed the sale tax “sourcing” rules.

Under prior law, Kansas sales tax was generally calculated based on the tax rate in effect at the retailer’s place of business. Under the new rules, sales tax is based on the location where the purchaser receives the item.

For retailers whose sales are over-the-counter transactions where the purchaser takes possession of the goods at the store, it will be business as usual.

But merchants who ship or deliver goods or services to their customers are now required to calculate and collect the local sales tax in effect where the delivery is made.

For example, if a Durham resident goes to Hillsboro to pick up some groceries, the sales tax charged is the Hillsboro rate of 6.8 percent. But if that same Durham resident stops by the furniture store in Hillsboro, buys a couch and asks to have it delivered to Durham, the Durham sales tax rate of 6.3 percent applies.

What this means for merchants who ship or deliver goods or services is that they must set up systems to ensure the correct tax rates are charged and that those amounts are correctly reported and remitted to the state.

Motor vehicle sales are one of the few exceptions to the new sourcing rules. Motor vehicle sales tax will continue to be based on the retailer’s business location, and when the consumer registers the vehicle with the county treasurer, the consumer will owe the difference between the local sales tax rate and the sales tax rate in the dealer’s location.

Implementing the changes

Merchants in Kansas were first notified of the sales tax change through a bulletin issued by the Department of Revenue in mid-June. Many are just beginning to study the change and assess its impact on their business operation.

Carmen Jones, owner of the Prairie Flower and Garden Shop in Hillsboro, said her business would be affected since they deliver all over the county. But she said she hasn’t had time yet to work on the specific processes that will need to be changed to comply.

Baker Furniture and Carpet in Peabody delivers all over this part of the state.

“We’re just going to have to be really careful,” said Charlene Brooks, longtime employee. “The State of Kansas has given us a Web site where we can pull up a list of towns and what the taxes are. So if a customer is going to have something delivered to them, we have to charge it accordingly. We’re going to have to sort out our sales and figure it differently.”

Jami Williams, comptroller at Western Associates in Marion, is concerned about both the administrative aspects of the law as well as the revenue impact on Marion County and the City of Marion.

“There is no way-it is impossible-for me to have this up and running by July 1 with two weeks notice,” she said.

Western Associates is an advertising specialty company that ships to 20 states.

“Very little of our business is done out of our doors,” she said. “Ninety-nine percent of our merchandise is shipped outside of Marion County.

“We’ve already implemented well over 500 tax codes for the states we’re already collecting in, and we have 437 cities in Kansas that we’re collecting sales tax in,” she added.

“Our software company’s telling me they’re not adding another code and we’re going to have to manually go through our sales every month and determine what counties need to be paid sales tax.

“My problem with that is that the rates are different in all of them, so I’m going to have to bill out the correct amount of sales tax when I fill the order. It’s going to be a nightmare.”

Williams is also concerned about the potential revenue loss to the county and the city.

“The state of Kansas will probably benefit overall, but the small towns are going to be hurting,” she said. “Prior to this it has been source based, so all our sales originated out of Marion.

“Any transaction we had that was shipped in the state of Kansas collected Marion County tax and our new 0.75 percent Marion city tax that went to Marion city and Marion County,” she said. “We average anywhere from $150,000 to $200,000 a month in Kansas sales. At $150,000, that’s $1,100 for the city and $1,500 for the county that we’re losing each month.”

Williams said she believes even if the county eventually gains sales tax revenue from Internet purchases made by Marion residents, it won’t offset the revenue lost through the new destination-based sourcing.

“In the city of Marion, we’re not going to do $200,000 in Internet sales from individuals ordering shoes off the Internet-the city of Marion is going to suffer,” she said.

The city of Hillsboro collected nearly $300,000 through city, county and state sales taxes in 2002. Steven Garrett, city adminsitrator, said he only heard of the new law late last week and has no idea how it might affect Hillsboro’s budget.

Carol Maggard, Marion County clerk, said her office does not yet have a projection of the revenue impact to the county either.

“Of course it will have an impact for those that are sending their products outside of the county-it will be at the rate of where it’s going and not coming back to us,” she said. “Our sales tax is pretty important.”

Accountants throughout the state are trying to help clients develop processes and systems to comply with the new rules.

Lily Arthur, from Adams, Brown, Beran & Ball in Hillsboro, said her firm is providing clients with a booklet containing all the sales tax rates.

“There are going to be so many rates that they’re not going to be able to do them all in the computer,” she said. “So they’ll do a lot of hand calculations.”

The suddenness and complexity of the change had many merchants angry and confused, and phones were ringing at the Department of Revenue in Topeka and in the offices and homes of state legislators.

“The department has had quite a few phone calls from Kansas retailers since the bulletin on the change in sales tax sourcing rules arrived in your mailbox” began a follow-up memo to retailers from Revenue Secretary Joan Wagnon.

Wagnon acknowledged compliance with the new rules would be a “large undertaking” for businesses that ship or deliver products to customers in several locations. She assured merchants that during a six-month interim period, the Department of Revenue will “focus on service, not sanctions.”

She admitted “it will be several months before the Department of Revenue is fully equipped to work with” merchants in implementing the new rules.

As part of the requirements of the Streamlined Sales Tax legislation, the Department of Revenue is required to provide and maintain a downloadable database to assist businesses in determining tax rates. The database is not yet ready.

In the meantime, merchants are asked to refer to Publication KS-1700 to identify the correct local sales tax rates.

“All we ask now in this initial period, between now and the end of 2003, is that you study the new rules, do your best to collect the information and report the tax at the rates in effect where the product is delivered,” Wagnon’s memo stated. “We will do our best to get the new computerized information available widely, and to assist you.”

She asked merchants to “make an honest effort to comply” and said that “auditors and tax examiners will not penalize anyone for making errors in this initial six-month period.”

State Sen. Jim Barnett, who represents a large portion of Marion County, said he had also received many calls from constituents.

“This has not turned out to be what this senator thought it would be,” he said. “The bill we heard debated had a date of enactment of 2004.”

Barnett said after the Senate passed the bill, it went back to the House, and the effective date was changed to July 2003. He is still looking into why that happened.

“This is a significant change from past practices for decades,” he said. “In order to do this, the tax rates have to be readily available.”

Barnett said pressure needs to be placed on the Department of Revenue to not enforce the new law for a year to “work on understanding the process and trying to be helpful in finding solutions and not sanctions.”

The extra time would also give state and local governments an opportunity to assess the revenue impact of the changes, he said.

“This is terribly poor legislation to enact something that is not even enforceable,” he said. “What was supposed to be a benefit has turned out to be a major pain.”

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