Remote employees and nexus – compliance Q&A

Our clients pose a lot of interesting questions about sales tax. This week, we explore how remote employees trigger nexus and how long the effects of nexus can last.

We are based in California but have an employee working from his home office in Texas. Since he is a sales guy and meets with customers on a regular basis, we do account for sales tax nexus in Texas. If he leaves the company, do we still have nexus in that state? Is there a specific amount of time that we continue to have nexus there?

There are actually two parts to this fantastic question.

• Do remote employees trigger nexus?
• How long does nexus remain in effect after activities in the state cease?

What triggers nexus in other states?

Nexus determines whether or not a business has to collect and remit tax in another state or tax jurisdiction: if you have nexus, you have to collect; if you don’t, you don’t.

Businesses have sales tax nexus if they have physical presence in another state, such as an office or warehouse. Having a representative (a visiting sales rep or a remote employee) in another state also typically triggers nexus. These days, nexus may also be triggered through affiliates, as when an in-state business sends customers to an out-of-state business through links on a website.

The questioner correctly assumes her company to have nexus in Texas based on the presence of one remote employee, a sales representative.

Trailing nexus

Nexus can linger the way ivy remains on a tree after its roots have been cut. States with trailing nexus require businesses to keep their sales tax permit active for a certain period of time after activities in the state cease.

Trailing nexus has become a much more visible issue during the challenging economic environment of the last few years — it can be a way to boost revenue. An increasing number of states are providing formal guidance on trailing nexus policies. Unfortunately, most states still do not provide much guidance on this issue.

Our questioner asks about Texas, which is timely since the Lone Star State recently changed the trailing nexus policy that had been in effect for approximately 30 years. In May 2015, the Office of the Secretary of State announced that, effective retroactively, an out-of-state seller is only responsible for collection of Texas sales and use tax until the seller ceases to have nexus in Texas. However, out-of-state sellers are required to maintain records for at least four years after cessation of nexus-creating activities.

BNA reported in 2013 that 35 states presume nexus to exist for the duration of the taxable year in which activities ceased. In other words, if a company ceased to have remote employees in August, trailing nexus would remain in effect through December.

States with specific trailing nexus policies include:

• California: “After a retailer ceases activities that had caused it to be a "retailer engaged in business" in this state, … the lingering effects of the retailer's physical presence in this state may continue to generate sales for the retailer for a reasonable period thereafter. So long as the retailer continues to generate sales from the lingering effects of its physical presence in California, the retailer is considered to be engaged in business in this state.”
• Michigan: “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. Either the seller or the Department may submit proof that a longer or shorter period more reasonably reflects the sales that were proximately caused by the seller's in-state contacts under the facts and circumstances.”
• Minnesota: If an out-of-state seller does business in the state for a period of 4 days or more, “the seller is required to register, collect and remit Minnesota sales tax for a period of 11 months past the month of its last business activity in the state.”
• Washington: “A person who stops the business activity that created nexus … continues to have nexus for the remainder of that calendar year, plus one additional calendar year.”

States that may allow businesses to immediately close out a sales tax permit include:

• New York
• Tennessee
• Texas
• Vermont
• Virginia

Still confused about nexus-generating activities or trailing nexus? Take our nexus survey.

photo credit: purplemattfish via photopin cc