What’s trailing nexus? And why should you cancel your sales tax registration?

You know all about reaching sales tax nexus: selling enough or having a physical presence in a tax jurisdiction sufficient to create a connection with that jurisdiction and create an obligation for you to collect and remit sales tax.

But business and sales patterns change over time. Your sales into a state where you once registered may drop off. Remote sales reps or techs could leave a state or leave your company. Maybe you don’t work with Amazon FBA anymore and no longer have inventory warehoused in a state.

Your nexus obligation can change and suddenly you may find yourself with “trailing” nexus (aka “residual” nexus). What, if anything, do you have to do then?

‘Nexus shall exist.’

Trailing nexus is when a state makes you maintain your sales tax permit and comply with sales and use tax laws after you no longer meet the requirements for nexus with the state.

For example, the state of Washington says: “A person has nexus with Washington for a calendar year if they meet an applicable nexus standard … during the calendar year, or if they met one in the previous calendar year. Nexus continues even after a person stops activities that originally established nexus … This one-year trailing nexus concept applies to all taxes you report on the excise tax return, including retail sales tax.”

In another state, “once nexus is established by a seller for use tax collection purposes, nexus shall exist for that seller from the date of contact forward for the remainder of that month and for the following 11 months,” says Michigan, which adds an example of physical nexus:

An out-of-state seller whose representative enters Michigan on January 17th and again on February 15th. The out-of-state seller has nexus with the State of Michigan beginning on the day of second contact – February 15th – forward. The seller must file appropriate use tax returns for the remainder of the month of February and the next succeeding 11 months."

In many states where it applies, trailing nexus lasts about a year, as in Minnesota, Wisconsin and Texas. Arizona and California also won’t let you cancel your sales tax registration until you fall below the economic nexus for both the current and previous calendar year. In Missouri the length of time is one reporting period, with verification of lack of nexus subject to review – a widespread condition to cancel.

When should you cancel?

Tough question, unless you can predict your future sales. And in fact, yes, you may be able to say for sure that you will no longer meet the sales tax nexus threshold in a tax jurisdiction and don’t expect to long-term. (Be certain of this so you don’t have to go through the whole process of re-registering down the road …)

The reasons? Maybe your business is closing or changing ownership. The state may also have enacted marketplace facilitator laws and how the marketplace is responsible for collecting and remitting the sales tax.

It’s always best to contact the state to make sure they agree that you in fact no longer have nexus. Never assume: States don’t like surrendering sources of revenue.

Sales tax isn’t getting any easier. Let TaxConnex manage the burden of keeping up with all the changes and challenges that come with staying compliant in this post-Wayfair world. Contact us to learn what it means when trailing nexus and sales tax compliance is all on us.