Breaking Up With Your State: When Is Your Tax Nexus Really Over?
- December 20, 2015 | Mark Berens
A guy walks into a bar, orders a drink, sees someone who catches his eye, and before you know it, boom, there’s a connection. The days turn to weeks, then months, then a few blissful years before the two, sadly (or not), part ways. Once the decision to break up is made, however, will it be a clean break, a spiteful one, or one that lingers? When, oh when, will this thing finally be over?
In human relationships, we call this a romance and breakup. In the business, state, and sales tax relationship, it’s called nexus and trailing nexus -- nexus being that warm glow between a state and business that’s strong enough to warrant the collection and remittance of sales and use tax, and trailing nexus, the point where this same business, after it has packed up and moved on, finds out that it may still be obligated to collect and remit taxes after it’s hauled out its final milk crate of albums.
Trailing Nexus: The Ins and Outs
Trailing nexus is when a state requires a business to continue paying certain taxes after it no longer has the connection that originally led to nexus within those borders. How long this trail dangles is usually outlined in that state’s trailing nexus provisions. In the handful of states with these provisions, some offer specific guidelines while others take a less-rigid approach.
The reality is, however, that most states don’t have such rules. I spoke with representatives from Florida’s Department of Revenue (a state that doesn’t have the provisions) and the Texas Comptroller’s Office (a state that did, then recently eliminated its trailing nexus rule) to get some background on why they don’t use the provisions. Their responses quickly came down to two things: complexity and legality.
First, both reps agreed that establishing nexus has long been a complex issue in itself. More complicated is figuring out when nexus ends, a cut-off that few states even bother defining. (In fact, the public information representative from Florida I spoke with acknowledged that she was unfamiliar with the term. After reaching out to colleagues about why they don’t use the provisions, she responded the following day, “As this is not a simple issue, we will respectfully decline to comment but wish you well with the article.”)
It’s clear that modern technology -- the cloud; the reduced need for physical locations and on-the-ground employees to transact business; the ethereal, complex nature of online transactions, etc. -- makes establishing clear rules for “physical presence” almost impossible, let alone deciding when that tenuous connection ceases to exist.
Next, there are issues with trailing nexus's legality. Some argue that states that use trailing nexus provisions are teetering on the edge of constitutionality, not necessarily because of the provision itself but in the varying lengths of the “trail” some states require.
But in the case of Texas, the reason to scuttle their provisions was not the constitution but the state's own state statute, which stated that the business had to collect and remit taxes for twelve months after nexus ceased.
"We realized that we didn’t have statutory authority so we eliminated the rule," says Texas Comptroller's spokesman Kevin Lyons. "Today, an out-of-state seller who discontinues their product in the state is just required to maintain records for four years.”
The 3 General Types of Trailing Nexus Provisions
Trailing nexus provisions are all over the map. But in general, businesses that have cut ties with a state that has trailing nexus provisions will likely encounter one of the following three types of break-up scenarios.
1. Don’t Let the Door Hit You on the Way Out
2. Give it a Year, See Where We Are
Next are the states where the trailing nexus provision doesn’t go past 11 or 12 months -- a kind of cooling-off period. In California, for example, the trailing nexus period generally consists of the quarter in which the retailer ceases the activities that had caused it to be a "retailer engaged in business" there, as well as the entire following quarter.
Michigan does a little of both, stating that once nexus is established, it “shall exist for that seller from the date of contact forward for the remainder of that month and for the following 11 months [or] submit proof that a longer or shorter period more reasonably reflects the sales...” Someone should tell the Great Lakes State that waffling will only prolong the agony.
3. We Can Be Mature About This
Last are the states that gracefully accept that, yes, we had a good run and I’ll always think fondly of you. This is the attitude in the bulk of states whose trailing nexus provisions take a more realistic view: You’re only required to continue paying tax for some reasonable period of time after nexus is terminated (again, provisions vary but, for instance, Missouri considers “reasonable” to be one reporting period after physical presence ends).
Trailing nexus. It’s a little parting gift that some states offer up after the love has died. Call it a breakup with a string attached or consider it a brief, fiscal booty call. But whatever name you give it, check the rules in each state where you two have been doing your business or contact a tax expert once you’ve decided to call the whole thing off.
In a twist on the classic he said/she said, your state(s) may not agree with your assessment of its nexus requirements and set you up for an audit (and you thought heartbreak was painful).