It is very important for businesses that operate in multiple states to know if they have nexus, or a physical presence in a given state. Having a physical presence can subject a business to various forms of tax within that state. Equally important is understanding when tax requirements cease, particularly for sales tax. Making this determination is not always as simple as identifying when nexus, or physical presence ends.
Typically, as soon as nexus is established, the obligation to collect and remit sales tax starts. This can occur if you hire employees to work within a particular state, acquire property within a particular state, or move inventory or some other business property to a location within a particular state, among other things.
However, what happens to the obligation to collect and remit sales tax when those employees are no longer employed, that property is sold or that business property is moved elsewhere? The answer—it depends. In many states, the answer is that your sales tax obligations cease as soon as your physical presence no longer exists. The business will file its final sales tax return and remit the tax collected for the period through which physical presence existed. However, that is not the answer in every state, as the two following examples illustrate:
- California: Sales tax must continue to be collected and remitted to the state for as long as the lingering effects of the business’ physical presence continue to generate sales within the state. This trailing nexus period generally consists of the quarter in which the business ceases the activities that established a physical presence within the state, plus the entire quarter that follows. However, depending on facts and circumstances, it may be determined that the trailing nexus period should be longer or shorter than this general guideline.
- Washington: Excise/sales tax must continue to be collected and remitted to the state for the remainder of the calendar year in which nexus ceases, plus the following calendar year.
These two states identified above are not the only two that have similar provisions requiring businesses to continue collecting and remitting sales tax, even after physical presence ends. Therefore, if physical presence within a state appears to have ended, it is very important to examine that state’s sales tax rules to determine when the appropriate time is to cease collecting and remitting sales tax. Stopping too early may subject a business to penalties and interest relating to unfiled returns and unremitted tax. A careful review of the applicable state’s rules relating to trailing nexus will help minimize this risk.
Andrew Borowski is a senior based out of our Buffalo, NY office.