Does a sales tax nexus ever come to an end?
A nexus is created the moment a business meets either the physical presence or economic activity requirements of a state. But sometimes the events that trigger such a nexus are often once-off occurrences or exceptions to the general business activity.
Maybe you’ve triggered a physical nexus by attending an out-of-state trade show. Once your sales team is back home, do you still have a physical nexus in that state?
Or maybe a marketing fluke led to an influx of sales in a state where you rarely have customers. Should you stay compliant with that state’s sales tax regulations after the anomaly of increased sales?
The answer is … sometimes.
What is trailing nexus?
A trailing nexus, also referred to as a residual nexus, is when a state requires that a business collect sales tax for a period even if they no longer meet the nexus requirements.
Trailing nexus is the acknowledgement of the fact that the impact of business activities are far-reaching and impacts a business’s future just as much as its present.
Just because a sales person is no longer in the state doesn’t mean their sales pitch is no longer effective. Just because sales took a dip one year doesn’t mean word of mouth won’t continue to promote the company in that state. All of these small events continue to impact a business’s economic growth.
As such, many states require businesses to retain their sales tax permits and collect sales tax even after the business no longer meets nexus requirements.
Do all states have similar trailing nexus policies?
As with all things sales tax, uniformity is not the name of the game. As a result, trailing nexus laws vary greatly … and are often only found when reading between the lines.
One of the only states that have a clearly defined trailing nexus policy is Washington. Their laws cleary state:
“A person who stops the business activity that created nexus in Washington now continues to have nexus for the remainder of that calendar year, plus one additional calendar year.”
That’s pretty straightforward. Other states, on the other hand, have regulations that amount to much the same without referring directly to “trailing nexus”.
California and Colorado for instance, require remote businesses to continue to collect sales tax in the year it registered and one following calendar year. Conversely, Michigan and Minnesota require sellers with a nexus to continue to collect sales tax for 11 full calendar months following registration.
Key Scenarios Leading to Trailing Nexus
Keeping a physical presence and economic activity checklist nearby may not seem like too much trouble. But when it comes to less clear-cut scenarios that can trigger a trailing nexus, the compliance journey can easily become muddled.
Here are a few key scenarios that can lead to a trailing nexus:
- Delivering products to a new tax jurisdiction with a company vehicle
- Storing inventory in a different tax jurisdiction to where the company is located
- Exceeding the minimum transaction threshold of a state’s economic nexus laws
- Having a company representative or sales person attend trade shows
- Joining affiliate partnerships or referral programs that create traffic from other jurisdictions
These are only a handful of scenarios that could lead to a trailing nexus and increase a business’s nexus footprint excessively and subject companies to larger (and longer lasting) nexus obligations than they may realize.
Navigating Trailing Nexus Challenges
For eCommerce and marketplace sellers who sell to customers across the United States, trailing nexus can be a big challenge.
With nationwide sales fluctuating year-round, it often happens that a business loses a nexus it once had. But once a nexus has been established, businesses need to pay attention to the duration of the residual nexus periods in the states they have a nexus in and stay compliant with sales tax laws until that period ends.
Even then, sellers need to recognize the fact that deregistering may be more effort than simply continuing to stay compliant in that state and file zero returns, especially seeing as your customer base has already extended to that state and could grow in the future.
The dangers of trailing nexus are two-fold. One one side, you run the risk of liability, having nexus obligations that weren’t aware were still active. On the other side, you could be collecting sales tax and keeping compliant in a state where your registration is no longer necessary.
Either way, taking a proactive approach to trailing nexus is a vital part of sales compliance. And in today’s borderless marketplace and the eCommerce landscape, Complyt makes it easy to monitor your nexus simply and easily.
