Trailing Nexus - Extra Complexity

As if it isn't already difficult enough for a business to know if it has income or sales tax nexus in a state, it might have "trailing nexus."  Of course, if the business has a physical presence, it likely has nexus. It is challenging when a state uses economic nexus or for sales tax, the business has some type of relationship with someone in a state. When a state specifies that a company has nexus for an extra six months (or other time period), that does provide certainty, but is it constitutional? And most states don't talk about it so you really don't know when nexus ends.

I think states can do better although perhaps Congress needs to step in on this one for uniformity.

Here is a post originally posted on SalesTaxSupport (which shut down in 2018).

When a business has temporary or short-term presence in a state, how long does the sales tax nexus last? Assuming the presence was long enough to even create sales tax nexus in the state, how long does it last? Is it only during the time period when there was physical presence? The answer is elusive in many states.

The State of Washington recently issued a reminder on trailing nexus. In Special Notice dated Feb. 2, 2016, with respect to the retail sales tax (per WAC 458-20-193):

"nexus continues for the remainder of that calendar year when one of the following nexus standards is met and the following calendar year. This applies to all taxes reported on the excise tax return, including retail sales tax. The additional calendar year is also known as “trailing nexus.” (RCW 82.04.22)" ..."nexus is based on the business having a physical presence in Washington (RCW 82.04.067(6))."

Per the statute: "(104) Trailing nexus. RCW 82.04.220 provides that for B&O tax purposes a person who stops the business activity that created nexus in Washington continues to have nexus for the remainder of that calendar year, plus one additional calendar year (also known as "trailing nexus"). The department applies the same trailing nexus period for retail sales tax and other taxes reported on the excise tax return."

What is the rationale for extending nexus to the end of the next calendar year? Whatever the business was doing in the state that created nexus, has a lingering effect. For example, a business had sales staff at a trade show and they demonstrated their product and made sales and then left. Some people who saw the demo though decide to buy a few months later. Arguably that sale relates to the company's physical presence in the state. To make is easier for taxpayers and the state, an arbitrary date can be used as the cut-off for nexus. While it might seem more fair for that arbitrary date to be a specified number of months or weeks after the physical presence ends, that raises the complication of determining when the physical presence ended, which might not always be easy. But you can see that if a business ends its physical presence early in the year, it has more days of sales tax nexus than one that ends it on December 30.

In contrast, a California annotation from the Board of Equalization suggests that trailing nexus lasts to the end of the subsequent quarter after physical presence ends (220.0275). But this annotation is not a statute and it ends with this statement showing the uncertainty of truly knowing when nexus ends: "Depending on the facts and circumstances specific to each retailer, the period of trailing nexus may be shorter or longer than the general "quarter-plus-a-quarter" approach."

Is trailing nexus in line with the Quill physical presence nexus rule? It doesn't seem so. A state with a trailing nexus sales tax rule is requiring collection of sales tax by a vendor who has become an out-of-state vendor. But then again, the US Supreme Court did not address whether later sales might be attributed to the earlier physical presence. It is unlikely the Court would have found no nexus for a vendor who enters a state, does extensive solicitation, but tells all potential customers to log onto its website after date X and place orders, knowing that the vendor will have left the state before date X.

I think this is something that Congress should clarify and standardize under its commerce clause jurisdiction. Arguably, it can be made part of the Marketplace Fairness legislation. Of course, with that legislation, the issue is less important as more vendors would have sales tax collection obligations even without a physical presence. But the legislation, such as S. 698 (114th Cong), still includes a definition of remote sales and a trailing nexus sale would not be a remote sale, thus necessitating a definition of trailing nexus.

What do you think?