Trailing nexus: How long does economic nexus last?
You may know you need to register for sales tax in states where your business has sales tax nexus — a physical or economic connection that creates a sales/use tax obligation. You may also know that once registered, you need to comply with all applicable sales and use tax laws. But did you know your nexus doesn’t have to last forever? How long does it last? And is it possible to cancel your sales tax registration if you no longer have nexus with a state?
The answers to those questions depend on trailing nexus.
What is trailing nexus?
Trailing nexus is when a state requires a business to maintain their sales tax permit and comply with sales and use tax laws even after the business no longer meets the requirements for sales tax nexus with the state. Nexus can be established in several ways, including through physical presence or economic activity in a state (economic nexus).
You can establish physical presence nexus with some states simply by participating in a trade show or making a delivery in the state in your own vehicle. If the state has trailing nexus, you may end up liable for sales tax long after the trade show has concluded or the delivery was made.
How long does economic nexus last?
States can’t require a remote business to remain registered for sales tax indefinitely if all nexus-creating activity has ceased. However, trailing nexus can last for weeks, months, or even years.
Economic nexus is established when a seller with no physical presence in a state meets certain economic nexus thresholds, such as $100,000 in sales (Pennsylvania), or 500,000 in sales and 100 transactions (New York).
Many economic nexus thresholds are based either on the immediate preceding year or the current or preceding calendar year, so businesses generally need to remain registered the year after economic nexus was established, even if their sales during that year drop beneath the economic nexus threshold.
States whose economic nexus thresholds are based on the current or previous calendar year include California, Massachusetts, and Virginia.
What states have trailing nexus laws?
The following states have published information about their trailing nexus requirements.
|State||Trailing nexus policy|
A remote retailer must be registered and collect and remit California sales/use tax throughout the calendar year its California sales exceed the $500,000 economic nexus threshold, “and during the following calendar year.”
For example, a remote business that meets the $500,000 threshold in 2021 but not in 2022 must be registered in 2021 and 2022 but isn’t required to remain registered in 2023.
|Colorado||A remote retailer must register for Colorado sales tax within 90 days of meeting the economic nexus threshold and remain registered for the duration of that calendar year and the following year.|
If a business establishes physical presence nexus in Michigan, nexus remains in effect for the remainder of that month and for the following 11 months, on a rolling basis: If the seller establishes nexus during the trailing 11 months, a new 11-month period commences.
An out-of-state seller that has economic nexus with Michigan must continue to remit tax until an entire calendar year passes in which it does not meet either economic threshold.
There’s more than one trailing nexus policy in Minnesota.
A retailer not maintaining a place of business in the state must continue to collect and remit sales and use taxes … “until at least the last day of the 12th calendar month following the calendar month in which the retailer or marketplace provider began collecting and remitting sales and use taxes.”
However, a retailer or marketplace provider that “has sufficient physical presence nexus in Minnesota to be required to collect Minnesota sales or use tax … is required to register, collect and remit Minnesota sales or use tax on sales made from outside Minnesota to destinations in Minnesota starting on the fourth day of such activity and for all sales made that day through the following 11 calendar months.”
|Missouri||Once nexus has been established with Missouri, “it will continue to exist for a reasonable period of time after the vendor no longer has a physical presence in the state. The department presumes that the vendor has nexus with the state for any sales to Missouri customers made during at least one reporting period after the vendor no longer has physical presence in the state. A vendor registered with the department to collect tax will continue to have nexus until the vendor withdraws its registration.”|
Texas eliminated its 12-month trailing nexus policy in 2015, but that was before it adopted economic nexus.
Today, “a remote seller may terminate their collection obligations if their total Texas revenue falls below the threshold for twelve consecutive months.”
Sales tax nexus continues in Washington for the remainder of the calendar year when nexus was established and the following calendar year.
Once nexus is established with Wisconsin, it exists for the remainder of the tax year.
According to the Wisconsin Department of Revenue: “An out-of-state seller making sales at a temporary event in Wisconsin is engaged in business in Wisconsin and is liable for sales or use tax on its taxable sales in Wisconsin. If the seller has no further business activity in Wisconsin after the end of their tax year, the seller may inactivate its seller’s permit. Even if a seller does not make sales at the event itself, but promotes future sales (e.g., gives potential customers business cards or other promotional materials), the seller is still liable for tax on its Wisconsin sales through the end of the seller’s tax year. A seller with an active seller’s permit remains liable for Wisconsin sales and use taxes.”
States with no specified trailing nexus policy include Connecticut, Florida, and the District of Columbia. If you’re not sure whether you can cancel your sales tax registration, check with a trusted tax advisor or the state tax authority.
How does trailing nexus impact online sellers?
Online sellers are particularly susceptible to trailing nexus because they usually sell to consumers nationwide, and their sales volume in each state can fluctuate: A strong year of sales in Iowa may be followed by a year of softer sales in the Hawkeye State.
For online sellers with a nationwide client base, it may be best to remain registered even if sales dip below an economic nexus threshold. The Miles Consulting Group recommends businesses “take the long view” and try to predict future sales in the state. If you’re working to grow your business, it may be better to file zero returns for a while than to deregister then register again once your sales increase. “States like consistency.”
On the other hand, if you’re sure you don’t have nexus with a state and don’t plan to have it in the future, it could be best to deregister or allow your registration to lapse. Every business will have to decide what’s best for them.
How to tell if your business has trailing nexus
The first step toward determining whether you have trailing nexus is figuring out if you have sales tax nexus (physical presence nexus, economic nexus, or another type of nexus).
Stay up to date
Sign up for our free newsletter and stay up to date with the latest tax news.