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Thursday, December 27, 2012

Trailing Nexus - Constitutional?


Let's take a break from the drama of whether we go off the fiscal cliff to look at an interesting state tax issue - trailing nexus.  Trailing nexus means that even after the activity or event that causes a business to have either income or sales tax nexus in a state ends, the jurisdiction might say that nexus continues for some time afterwards.

For example, Washington, which has been specific on this topic provides for its B&O tax:

"A person who stops the business activity that created nexus in Washington now continues to have nexus for the remainder of that calendar year, plus one additional calendar year. (See RCW 82.04.220)"

Washington further provides for its retail sales tax:

"The trailing nexus period for retail sales tax (RST) is still four years, plus the current year, under WAC 458-20-193 (Rule 193)."

Bloomberg BNA State Tax Blog for 12/18/12 notes how a few states either specifically provide for trailing nexus or specify that it does not exist. They note that their 2013 State Tax Department Survey will include a question about trailing nexus. I think that is great. This is an issue that needs more attention.

Big question - is trailing nexus constitutional?  What is the difference between regular nexus and trailing nexus? Isn't only "regular nexus" constitutional?

Of course, when does "regular nexus" end?  That is a good question. California Board of Equalization Annotation 220.0275 describes how a retailer might have "lingering effects" of its physical presence after such presence ends. For example, the retailer distributed coupons in the state that continue to be effective after physical presence ends.

But, should the "lingering effects" be different from any non-present vendor who provides coupons to people in a state?  Does it really matter that one vendor previously had a physical presence?  Isn't it creating complications to the physical presence sales tax nexus standard?  Isn't it creating differences among states?

How do you advise your client as to how long nexus lasts? What is permissible constitutionally?  What if State X with a throwback rule tells you that the business no longer has nexus in State Y which has a statute providing for a long trailing nexus period, so a sale to State Y should be thrown back to State X? This is a big topic. I have it on my list for a more detailed research project.

What do you think about trailing nexus? How do you advise your clients as to when they can assume nexus has ended in a state?


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