The June 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. reshaped the landscape of sales tax obligations across the United States, ushering in the era of economic nexus. This landmark decision overturned the previous requirement of physical presence for establishing nexus, opening the door for states to enact economic nexus legislation. Alongside this shift, a new focus on the concept of trailing nexus emerged, presenting a continuation of tax obligations even after a business no longer meets the nexus criteria.
In this article, we’ll define economic nexus and trailing nexus, and how the two may dictate your tax obligations regarding the states in which you operate. Here’s what we’ll cover:
- Understanding Economic Nexus and Thresholds: Discusses economic nexus thresholds and varying state regulations.
- What Is Trailing Nexus? Defines trailing nexus.
- Examples of Trailing Nexus Policies: Explores examples of trailing nexus policies by state.
- Practical Considerations for Businesses: Discusses tips on how to handle trailing nexus in your state.
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1. Understanding Economic Nexus and Thresholds
Economic nexus, as per the nexus definition, refers to the connection between a business and a state based on economic activity rather than physical presence. Each state sets its own threshold for economic nexus, determining when a business is required to collect and remit sales tax. For instance, in Arkansas, the nexus law sets the threshold at $100,000 in sales or 200 separate transactions, whereas in California, it’s $500,000. These thresholds vary significantly from state to state, adding complexity to sales tax compliance for businesses operating across multiple jurisdictions.
2. What Is Trailing Nexus?
Several states have a policy referred to as “trailing nexus,” where even when a threshold is no longer met, you must still collect and remit sales tax for a certain amount of time. Not all states have trailing nexus, and for those that do, the amount of time you are obligated can vary.
3. Examples of Trailing Nexus Policies
California Trailing Nexus Policy
California’s trailing nexus policy mandates that retailers with either a physical presence or economic nexus in the state must maintain registration for the calendar year in which nexus-creating activities occurred and the subsequent calendar year.
Washington State Trailing Nexus Policy
In Washington state, WAC 458-20-193 outlines their trailing nexus policy, stating that businesses ceasing operations that created nexus within the state are still subject to taxation for the remainder of the calendar year in which the activities ceased, along with the following calendar year.
Other States with Trailing Nexus Policies
States like Arizona, Massachusetts, Michigan, and Texas also enforce trailing nexus rules, necessitating businesses to remain compliant with tax obligations even after ceasing relevant activities.
States without Trailing Nexus Policies
Conversely, certain states explicitly do not impose trailing nexus rules. Examples include Florida, Connecticut, Idaho, New York, and the District of Columbia.
States with Varied Trailing Nexus Policies
Some states have ambiguous trailing nexus policies, with enforcement dependent on specific circumstances. This category includes states such as Colorado, Georgia, Hawaii, and Illinois.
4. Practical Considerations for Businesses
Deciding whether to maintain sales tax registration in a state where nexus criteria are no longer met involves careful consideration. Businesses are advised to take a long-term view of their nexus obligations, considering potential future sales and the impact on compliance processes.
For example, consider a scenario where a company surpasses economic nexus thresholds in one year, falls below them in the next, and then meets them again in the third year. Our recommendation is to adopt a forward-thinking approach and assess whether the company genuinely anticipates the cessation of nexus within the next few years. If a company registers for a year, then cancels its registration, only to re-register shortly afterward, it not only disrupts the compliance process but also raises red flags for potential audits by the state authorities. States generally prefer consistency in tax filings. Even in states without trailing nexus policies, it may be prudent to submit “zero returns” to confirm the cessation of business activities in that state. However, companies should generally refrain from continuing to file in states where the nexus was created solely based on minimal connections, such as having one employee or a couple of significant transactions, if they do not expect further business operations in that jurisdiction. In such cases, withdrawing from filing obligations is likely the appropriate course of action. As is often the case with matters involving multiple states, the optimal approach depends on the specific circumstances of each client.
Understanding trailing nexus policies is essential for businesses navigating multi-state sales tax compliance. As regulations evolve and enforcement varies, staying informed and seeking expert guidance are crucial. This is what we do – provide expertise in navigating economic nexus, trailing nexus, and then tailored solutions to help ensure your business is compliant. It’s a complex issue, but you don’t have to go at it alone. Come to Miles Consulting Group – book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.
