Nexus Will Continue for One Year After a Buisness No Longer Meets Any of the Nexus Threshholds

It has been over three years since the June 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc .  As a result of the ruling, most states across the country have enacted some form of economic nexus legislation.

We routinely share economic nexus updates on our blog – for the latest information read here and here .

In short: Previously, businesses needed to have a physical presence in a state in order to establish nexus there. With the Wayfair decision, in states that have enacted economic nexus law, any sort of economic presence can establish nexus for a company – as long as they meet that state's threshold.

What Is A Threshold?

While every state with statewide sales tax now has some level of economic nexus legislation, they each have a different threshold to meet in order to be required to collect and remit sales tax there. For example, in Arkansas you must have sold $100,000 worth of product or have had 200 or more separate transactions in the state to have sales tax obligations. In California , however, the threshold is $500,000. Once you meet the threshold in a state, you are responsible for fulfilling your tax obligations.

What happens if at one point you do meet economic nexus in a state, but then your sales fall below the threshold? Do you still have sales tax obligations in that state?

It should be no surprise that the answer to this question is that it varies by state.

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.

Examples Of  Trailing Nexus Policies

Our home state of California has a trailing nexus policy that requires retailers with a physical presence or economic nexus in the state to remain registered during the calendar year in which the nexus creating activities occurred as well as the following calendar year.

Another example of a state with a clear trailing nexus policy is Washington state. WAC 458-20-193 states, "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."

A few other states imposing trailing nexus rules include Arizona, Massachusetts, Michigan and Texas.

Some examples of states that specifically do NOT impose trailing nexus rules include: Florida, Connecticut, Idaho, New York and the District of Columbia.

And, of course, there are those whose policy "depends on the situation," like Colorado, Georgia, Hawaii and Illinois, to name a few.

To learn more about trailing nexus policies in the states you have economic nexus in, our team of tax experts would be happy to help.

Practical Considerations

We get a lot of questions about this as clients contemplate the complexities of sales tax compliance and generally want to file in as few states as possible.  Frequently, we're asked if they should withdraw from a state as soon as they no longer have nexus, but the answer to this can be complicated.

For instance, let's assume a company meets the economic nexus thresholds in one year, not the next, but then again in the third year?  Our advice is to take the long view and predict whether you will truly no longer have nexus within the next couple of years. If a company files for a year and then withdraws, only to re-register within a few months, it's not only disruptive for the compliance process, but can also be a flag for an audit in the state. States like consistency. Even in states that do not impose a trailing nexus policy, it might be easier to file a few "zero returns" to make sure that they are truly not going to continue to do business in that state.  That said, companies shouldn't continue to file in a state that they may have had an employee in, or into which they've had one or two significant transactions but no longer expect to have additional sales. In those cases, it likely does make sense to withdraw.  As with so many things multistate, the answer often lies with each client's fact pattern.

Do You Need Help With Your Economic Nexus Obligations?

As you can see, there is a lot that goes into figuring out what your economic nexus obligations are and your filing requirements.  The new year is a good time to get ahead of these matters, and working with an experienced team of tax consultants like Miles Consulting Group is a great way to ensure you are meeting all of your obligations. If you have questions about your tax liability or any other state sales tax compliance questions, please contact us today . We're happy to clarify any multi-state tax issues you're trying to navigate.

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Source: https://www.milesconsultinggroup.com/blog/2022/01/04/does-economic-nexus-last-forever-what-you-need-to-know-about-trailing-nexus/

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