“Welcome to the Hotel California! Such a lovely place.” I never knew for sure what that song by the Eagles was really all about, but the line: “You can check out anytime you like, but you can never leave” is a classic. And it’s sounds a little like some state governments when it comes to getting out of a state where you’ve had nexus in the past. There’s a process for deregistering which varies by state, but deregistering may not mean you no longer have to collect sales/use tax in certain states. States just don’t want to let you go too easily.
Deregistering is a process for sure, but even once you are no longer registered in a state, you may still have a requirement to collect sales/use tax in certain states. This concept of having a continuing tax collection responsibility even after deregistration is sometimes referred to as “trailing nexus”. It’s kind of shocking that, even after a company cuts all “nexus” ties to a state, some states could still require the company to collect sales/use tax for some time after leaving the state. The whole idea seems like a government overreach. It has no basis in constitutional logic as far as I can determine. In fact, it seems to go contrary to Quill, in which the Supreme Court ruled that substantial nexus requires more than a slight physical presence. How about no physical presence at all? I do not see how “trailing nexus” is even permissible. However, neither do I find that any state has been overruled on this issue by any state supreme court or by the US Supreme Court.
It may seem a lot like the Hotel California with the trailing nexus, but if you pay attention to the details, you can do more than just checkout of a state -- you can stop collecting their taxes too.
Your question might be: What to do if I’ve had nexus in a state for sale/use tax purposes in the past and was collecting the taxes in that state, but because of changes in my business (I no longer have employees or offices or use third parties in that state) and wish to cease collecting sales/use tax in that state?
Well, to be conservative, you probably want to know which states assert this idea of “trailing nexus” and for what period of time do the states say you should continue collecting the tax.
You’ve come to right place. We have a chart for that.
Here is a chart for the states that claim a “trailing nexus” once you leave their state. Texas has circulated a draft rule change that would eliminate trailing nexus in Texas. See this post by our friend Allen Sherman for more information.
I hope this chart is helpful. If you have any questions, please give us a call.
We Have a Chart for That -- You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.
CALL THE STATE? -- This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.
But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.
Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.
GOOGLE IT? -- With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?
GET A RULING? -- What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.
ASK THE EXPERTS? -- Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.
And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.
Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.
Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.
CAUTION ON CHARTS --A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it's still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state's own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We're here to help, give us a call.