Expert Insight: Bright Line Rule or More Flexible Standard for Trailing Nexus?


In this “Expert Insight,” we interview Thomas Shimkin, director of the Multistate Tax Commission’s National Nexus Program. In the interview, Shimkin discusses why he believes trailing nexus is constitutional. “The only question up for discussion is how to fairly measure trailing nexus,” Shimkin says. Should it be a bright-line standard based on a specific time period, or a more flexible standard that takes into account other relevant factors such as the substantiality of the in-state presence?

BBNA: The 2013 Survey of State Tax Departments will include several questions aimed at identifying each state’s policy regarding so-called “trailing nexus,” which is nexus that exists even after a corporation ceases doing business within a jurisdiction’s borders.  

We also asked each to state to explain if its answers to these questions depends on the magnitude of the nexus-creating activity (e.g., three salesperson visits resulting in the sale of a used car, versus three CEO visits resulting in the sale of a petroleum super tanker).

What are some of the main factors that you think states ought to look at when evaluating if trailing nexus exists? 

Shimkin: The test in my view should be whether the nexus-creating in-state activity proximately causes the later sale or income sought to be taxed. Proximate causation does not necessarily involve simultaneity. If I partially fell a tree, leaving the tree upright but with little support, and wind blows it down after I have left the forest, I still felled that tree in that forest no matter where I am when it hits the ground.

Some states have a bright-line nexus standard, most commonly for sales and use tax. These include Michigan, Minnesota, Texas, Washington, and California. Michigan and California regulations have flexibility to use a different time period based on facts and circumstances. The advantage of a bright-line is greater certainty, but it takes account only of length of time, which is a good indicator of proximate causation, but not the only one. A more flexible policy has the advantage of taking into account other relevant factors, such the substantiality of the in-state presence, the substantiality of the trailing sale or income, the number of times an activity is performed, and whether the in-state activity recurs regularly or is ad hoc.  

One year seems reasonable to me as a benchmark for states without specific guidance, but a state may have unique considerations that dictate a different policy.  Your survey will be useful to answer these questions   

BBNA: Do you believe that trailing nexus policies are constitutional when applied to certain situations?

Shimkin: Yes, of course. The U.S. Constitution allows nexus so long as a taxpayer is doing business in the state (it must include physical presence is required for sales/use tax).  “Doing business” is the sum of two things: (1) the taxpayer’s in-state acts and (2) the sale or income that they proximately cause. The proximate results may occur after the in-state acts have ceased. An act cannot be separated from its effect. The test is whether the later sale or income is proximately caused by the in-state acts. To allow no trailing nexus would invite taxpayers to completely separate the in-state business acts from the income they create, which would be poor public policy and similar to the artifice of using independent contractors rather than employees that the U.S. Supreme Court dismissed as having no constitutional significance in Scripto. A world without some amount of trailing nexus would allow jumping-bean nexus, allowing taxpayers to conduct the in-state business solicitation at lunch and make the sale from the next state over before dinner, then go back and do it again the next day. Trailing nexus is constitutional. The only question for discussion is how to fairly measure trailing nexus.   

BBNA: Do you think trailing nexus is more likely to arise for income tax or sales tax purposes?    

Shimkin: Trailing nexus arises with respect to each tax when in-state acts proximately cause out-of-state sales or income. I am not aware of a substantial difference in the length of trailing nexus between the two tax types, except in Washington, which employs a current year plus four standard for sales/use tax and a standard of the current year plus the next for business and occupation tax.  

BBNA: Does the MTC have a position on trailing nexus?  

Shimkin:It does not. States could choose to develop a uniformity recommendation with public input through the Commission’s uniformity process if they want to.  

BBNA: Is trailing nexus a policy that more states are considering? 

Shimkin: Trailing nexus certainly has become a more visible issue within the state-tax community during the last few years, both among taxpayers and states.  People are talking about it more. Formal issuance of state guidance has increased over the past several years, but the number of states with specific guidance is low, so it is hard to draw a firm conclusion based on that sample.

Thomas Shimkin is director of the National Nexus Program at the Multistate Tax Commission and a speaker and instructor on nexus issues. Previously, he served as legislative counsel to the state government relations division of the Distilled Spirits Council of the United States, and worked as a legislative assistant in the U.S. House of Representatives.   

By Melissa Fernley

Follow us on Twitter at: @SALTax
Join BNA's State Tax Group on LinkedIn here.