What is Trailing Nexus?

Some states are adopting rules referred to as “trailing nexus” or “residual nexus.” Rules that can require your business to maintain its sales tax permit and comply with sales tax laws even after you no longer have nexus in the state.

States can’t require you to continue to stay registered for sales tax when nexus-creating activity has stopped however, the amount of time until you are no longer liable for taxes varies by state.

Many economic nexus thresholds are based either on the current or preceding calendar year. 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.

It seems reasonable that you wouldn’t have to continue to remit tax if you don’t have nexus. Unfortunately, that’s not true for all states.

A $40,000 trailing nexus liability A company had created Nexus by having an employee in the state of Texas for the first 3 months of 2021. When the employee left Texas they assumed nexus had ended and they deregistered. This triggered an audit the following year and they were notified that they were liable for taxes for the following 12 months after the employee left.

We were able to negotiate on their behalf and the taxes and fines were reduced to $40,000.00. Fortunately, they were able to absorb the cost and remain in business.

The lack of a defined trailing nexus policy leaves room for interpretation and potential tax liability if not handled carefully.

You can establish physical presence nexus with some states simply by participating in a way the state decides you have nexus. This can be as simple as making a delivery in a company vehicle, attending a trade show, or having an employee reside in the state. If the state has a trailing nexus policy, you may end up liable for sales tax long after nexus has ended.

If your business is growing, it may be wise to file zero returns rather than deregister and register once again once your sales increase. If you’re sure you don’t have nexus with a state and don’t plan to have it in the future, it might be best to deregister.

A nexus study is the best place to start. We can help you determine if you have trailing nexus and what the best strategy will be for the future.

The information below does not constitute specific advice and should not be relied upon without further confirmation from the state(s). -

Arizona’s trailing nexus policy only applies to economic nexus through sales. Physical presence or other activities may create nexus with different rules. Once you cross the threshold, trailing nexus applies for the remainder of the calendar year in which nexus was established and the entire following calendar year. -

The trailing nexus policy applies to both state and district use tax. Once you cross the threshold, trailing nexus applies for the remainder of the calendar year in which nexus was established and the entire following calendar year. Learn more here. -

The process for de-registering in Colorado is not officially defined for trailing nexus scenarios. While there’s no set “trailing timeframe,” you can generally de-register if your Colorado sales continue to be below the $100,000 threshold for four consecutive calendar quarters. -

Illinois doesn’t have a specific “trailing nexus” timeframe. However, you can generally terminate your nexus obligations by falling below the $100,000 threshold for four consecutive calendar quarters. This means you wouldn’t need to collect and remit ROT starting the first quarter of the following calendar year. -

Trailing Period: Once nexus is established, it remains in effect for the remainder of the month and the following 11 months. This is the “trailing period.”

Renewal of Trailing Period: If the seller re-establishes nexus within the trailing 11 months, a new 11-month period commences. So, the trailing period can essentially be extended.

Ending Nexus: A seller must go a full calendar year without exceeding the economic threshold or engaging in activities that create physical presence nexus. -

Once you cross the threshold, trailing nexus applies for the remainder of the calendar year in which nexus was established and the following 11 calendar months. This means you must continue collecting and remitting Minnesota sales and use tax even if your sales fall below the $100,000 threshold during this period. -

While there’s no defined trailing nexus timeframe, Missouri allows you to de-register if your sales remain below the $100,000 threshold for four consecutive calendar quarters. -

Once you lose nexus by falling below the economic nexus thresholds for twelve consecutive months, you can stop collecting and remitting sales tax in the state. -

Once you cross the threshold, trailing nexus applies for the remainder of the calendar year in which nexus was established and the entire following calendar year. If your sales in Washington fall below the $100,000 threshold in the second calendar year after establishing nexus, you can deregister for the following calendar year. This means you wouldn’t have to collect and remit B&O and sales tax starting January 1 of the subsequent year.Call Now For A Free Consultation – 720.878.2280

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