How Trailing Nexus Impacts Sales Tax Account Cancellations
What happens when a company no longer has nexus in a state but still makes taxable sales into that state? Do the company’s sales tax obligations stop? The answer depends on the state. Some states invoke the concept of “trailing” or “residual” nexus which may require the company to continue collecting sales tax and to file returns for an additional period of time before the sales tax permit can be cancelled. The treatment of trailing nexus varies among states. A finding of trailing nexus could depend on the magnitude of the nexus-creating activity.
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Many states will assert this “trailing nexus” position by arguing that the sales activity or the other nexus-creating activities of the business established a market place for the company’s products in their state which will continue to generate sales even after these nexus creating activities have stopped. Existing customers may continue to buy products or new customers may be acquired based on historic nexus creating actions.
How Long Trailing Nexus Exists
States have yet to provide guidance on canceling permits when no longer meeting economic nexus, so companies may rely on the historical concept of trailing nexus, based on no longer having physical nexus.
The length of time that the trailing nexus provision applies varies by state. It is generally for the entire year in which a taxpayer ceases a nexus-creating activity, but some states have deemed it can be for one additional calendar year. Some states indicate that trailing nexus is determined on a case by case basis or is dependent on the initial nexus-creating activity.
State Provisions for Trailing Nexus
Several states have trailing nexus provisions. One example of trailing nexus can be found in the laws of the state of Washington. Washington's trailing nexus provision requires that a taxpayer whose nexus-creating activities cease to exist must still continue to report for the remainder of the calendar year and one full additional calendar year. A taxpayer may conceivably be required to report and remit Washington sales tax for as many as 23 additional months after all nexus-creating activity ceases. This also includes the Business & Occupancy gross receipts tax. Wash. Rev. Code §82.04.220(2); Wash. Admin. Code §458-20-19eff3(104)
In contrast, Missouri has a more moderate position. Missouri presumes that the vendor has nexus with the state for any sales to Missouri customers made during at least one (1) reporting period after the vendor no longer has physical presence in the state. Mo. Code Regs. Ann. tit. 12, §10-114.100(3)(E).
In some cases, the concept of trailing nexus may arise during an audit rather than immediately after the final return is filed or a registration cancellation is submitted. In those situations, the states may assess sales tax on untaxed sales for a period of time after the final return was filed and assert that the historical sales activities conducted by the company continued to create revenue for the company even after the nexus-creating activity stopped. If the company’s nexus-creating activity in a state was the presence of an employee who had nothing to do with soliciting sales, then the concept of residual or trailing nexus may not apply.
The Cancellation Process
Because the company is the remittance conduit for tax collections due to the state government, the state may not quickly approve a cancellation request if they believe that nexus exists or that trailing or residual nexus issues exist. Registration cancellations are essential to streamlining your sales tax compliance, but the final decision as to your registration status is made by the state’s revenue department, not by the business.
In Ohio, when an out-of-state seller no longer has nexus creating contacts, the out-of-state seller may cancel its license and stop collecting and remitting use tax on its sales in this state. However, if the out-of-state seller reestablishes nexus by engaging in any nexus-creating contacts within twelve months of canceling its license, the Department of Taxation will presume that the new contact remains part of a regular presence in the state. Thus, the out-of-state seller continued to have nexus during the interim period. The out-of-state seller will be required to reinstate its license and pay tax on all its sales in the state during the interim periodand continue collecting tax on a prospective basis. Ohio Information Release ST 2001-01
Some states make it easier administratively to cancel permits than others. Some states allow online cancellation and filing of a final return. Other states allow a return marked as “final” to serve as a cancellation request. Some states require answers to certain questions regarding the future of the business before cancellation is granted. This process can require follow up with the state to confirm the account has been closed and no further action is required.
While the concept of canceling sales tax permits may be appealing to keep the costs of compliance down, taxpayers should be very prudent about the timing of cancellation and always seek professional guidance before cancelling the permit.
Visit Cherry Bekaert’s website for more information about sales tax for eCommerce sellers. Let us know if you would like to talk with one of our sales tax professionals.