The word “nexus” simply means a connection or a link. From a sales tax perspective, if a company has the dreaded “nexus,” or a sufficient connection, then the state can impose its laws on the business and require it to charge, collect, and remit state taxes such as sales tax. Back in the 90’s, states were going too far and businesses began to push back. In 1992, Quill v. North Dakota was decided, in which a taxpayer defeated a state on a nexus challenge. Quill held that having a physical presence in a state was sufficient nexus to require a company to follow a state’s state and local tax laws. In other words, if your business has an office, a warehouse, some inventory, or a person (employee or, yes, an independent contractor), then it likely has nexus under the physical presence test in Quill.
Suppose, however, that a company has clearly established nexus with a state, but then vacates the state completely. Does nexus also cease when the company leaves a particular jurisdiction? Like most state and local tax issue, the answer is that “it depends.”
Many states, like Washington, treat sales tax nexus as an incurable disease. In other words, once you have nexus, you always have it or you have it for a period of time after the nexus stops. Specifically, Washington law provides that sales tax nexus exists for 5 years after the company leaves. Is such a law allowed?
In a recent case, a taxpayer attempted to fight this harsh 5 year trailing nexus law in the Washington Department of Revenue appeals Division. In the case, a company had a sales rep in Washington from 2006 through 2007. Following an audit, the Taxpayer requested a refund for the periods of 2007 through 2010 because it no longer had nexus. Unfortunately for the taxpayer, the appeals division of the Washington Department of Revenue determined that nexus continued for the statutory 5 year trailing period.
Although this taxpayer was unsuccessful, there may be an opportunity to challenge similar trailing nexus type laws. It is questionable at best as to whether a trailing nexus standard is constitutional. One can surmise from Quill that once physical presence no longer exists, then under Quill, nexus should end as well. Such a conclusion was found in New York in a 2002 advisory opinion.
If you or your company has left a jurisdiction, it is important to read and understand that jurisdiction’s trailing nexus laws. If a state has a trailing nexus standard then your company has a choice to either collect and remit the tax or stop collecting the tax and deal with the consequences. In many states, this may require challenging a trailing nexus type law. If your company did not know it had trailing nexus and stopped collecting then you may have no choice but to argue that a trailing nexus law is unconstitutional. Under a Quill analysis, this may well be the right answer.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Following Wayfair, Wyoming Issues Guidance for Remote Sellers
- Quill Killed! Court Overrules Physical Presence Requirement
- Kill Quill? South Dakota Awaits Supreme Court Answer
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?