Nexus, which generally refers to the threshold of contact that must exist between a taxpayer and a state before the state has jurisdiction to tax the taxpayer, has long been a gray area for which guidance in the form of case law or statutes from the states has generally been lacking.

  Many jurisdictions have provided further details of their nexus policies in the Bloomberg BNA State Tax Department Survey. The 2013 edition of the survey that will be published in April will cover each state’s policy regarding “trailing nexus.”

Some jurisdictions rely on the theory of trailing nexus to assert that an out-of-state corporation’s duty to collect tax lingers even after the company has ceased all activities within its borders. A number of states have issued guidance on how trailing nexus as it applies to use tax. The states that adhere to trailing nexus include:

• California:  State Board of Equalization Annotation 220.0275 (May 1, 2009): “After a retailer ceases activities that had caused it to be a "retailer engaged in business" in this state pursuant to Revenue and Taxation Code section 6203, the lingering effects of the retailer's physical presence in this state may continue to generate sales for the retailer for a reasonable period thereafter. So long as the retailer continues to generate sales from the lingering effects of its physical presence in California, the retailer is considered to be engaged in business in this state. This concept is generally referred to as "trailing nexus." The concept of trailing nexus was implicitly endorsed by the Board when it found that an online bookseller had nexus with California as long as coupons distributed by its in-state representative could be redeemed at its website. (See In the Matter of Barnes & Noble.com, State Board of Equalization Memorandum Opinion, September 12, 2002, at p. 5.)”

• Michigan:  RAB 1999-1, part III (May 12, 1999) “Once nexus is established by a seller for use tax collection purposes, nexus shall exist for that seller from the date of contact forward for the remainder of that month and for the following 11 months. Either the seller or the Department may submit proof that a longer or shorter period more reasonably reflects the sales that were proximately caused by the seller's in-state contacts under the facts and circumstances.”

• Texas:  34 Tex. Admin. Code sec. 3.286(b)(2) “An out-of-state seller who has been engaged in business in Texas continues to be responsible for collection of Texas use tax on sales made into Texas for 12 months after the seller ceases to be engaged in business in Texas.”

 The states that do not adhere to trailing nexus include:

• New York:  Advisory Opinion TSB-A-98(66), (Sept. 9, 1998) “...Petitioner’s nexus with New York ended when it closed all of its retail stores, assuming Petitioner has no other physical presence in New York.” 

• Virginia:  Rulings of the Tax Commissioner, Public Document 98-67 (April 9, 1998) “A retailer that closes all in-state stores and continues to make sales into the state remotely ceases to have nexus when the stores close, absent other physical presence.”

By Steven Roll

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