Published February 5, 2025
What Is Trailing Nexus?
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With differing requirements, tax rates, and filing deadlines, managing sales tax can be complex for businesses. It becomes even more complex when businesses operate or make sales in multiple states, each of which has its own tax regulations.
As businesses grow, they can establish nexus in states and be required to pay sales tax. However, in some states, the requirement to collect and remit sales tax doesn’t end if a business moves out of the area. Trailing nexus can require businesses to collect sales tax, even after they’ve fallen below nexus thresholds.
All businesses should be aware of trailing nexus and how it impacts sales in various states. In this article, we’ll dive into trailing nexus, what it means, and where it is required.
Sales tax nexus determines whether a business needs to pay sales tax in a state. When a business reaches a minimum threshold of activity in a state (measured in a few different ways), it achieves nexus and has to apply for a sales tax license and collect and remit sales tax in that state. Understanding nexus and following the correct sales tax license process is the responsibility of the business.
There are two main types of sales tax nexus:
Nexus requirements differ in each state, so it’s important that businesses pay attention to their activity in each state and know when they have reached sales tax nexus and need to pay sales tax. For many businesses, nexus impacts strategic business decisions, including who to employ and what products and services to sell.
Trailing nexus, also referred to as residual nexus, requires that a business still collects and remits sales tax, even if it no longer has nexus in that state. That means that if a business reached nexus one year by making $100,000 in sales in a state but then dropped below economic nexus the following year, it could still be required to pay sales tax for additional weeks or months, depending on the state’s trailing nexus regulations.
Most states that implement trailing nexus do so to recognize that economic activity in a state doesn’t stop instantly as soon as a business closes its physical office in the state or drops below a certain revenue threshold. Business activity in a state has a long-term ripple effect that can lead to continued sales and growth, and states want to still collect taxes on that activity.
As with nearly all sales tax regulations, details for trailing nexus vary by state. It’s important to note that sales tax can change, so be sure to follow the current regulations for every state.
The following states have expressly stated that they don’t have trailing nexus rules:
The following states have trailing nexus provisions:
For other states, it’s generally accepted that there isn't a trailing nexus, but they haven’t outright said so.
Compliance is key in all areas of sales tax calculation, collection, and remittance. Failure to properly collect and remit sales tax (even during a trailing nexus period) can lead to fines, penalties, and even a state shutting down a business or revoking its license.
Unfortunately, sales tax is also tricky, especially for businesses that operate in multiple states. Adding trailing nexus to the mix only adds to the complexity. Staying compliant requires a strong focus on recordkeeping.
Businesses need to keep the following sales tax records as a minimum:
Along with staying compliant is properly registering a business once it reaches nexus in a state and deregistering it once nexus is no longer met.
A business must register for a sales tax license (also referred to as a sales tax permit) once it reaches nexus in a state. Most states offer a grace period of 90 days. To register for a sales tax license, most states require businesses to complete forms, either online or via mail. Businesses will likely have to submit basic information like their tax ID number, owner address, and business locations. Some states also require a small fee. Once that information has been processed, businesses will get a physical sales tax license that they must display.
Once businesses drop below the nexus threshold, they can cancel their sales tax license. Deregistering for a sales tax license tends to be a simpler process. Most states only require that businesses submit a final sales tax return. Some states require businesses to complete an additional deregistration form or cancel their license online. However, as we’ve discussed with trailing nexus, deregistering doesn’t automatically mean a business is clear from paying sales tax. Trailing nexus can still require businesses to collect and remit sales tax, even after they’ve canceled their license.
The most common challenges around trailing nexus can be solved through recordkeeping and organization.
One of the most common challenges is tracking obligations across states. Every state has its own requirements, schedules, and tax rates–all of which can change regularly. It’s a business’s responsibility to understand its nexus, tax rates, and filing deadlines in every state or risk penalties. As a business grows and expands into new states, it can be helpful to partner with a sales tax expert to ensure the business follows all processes and doesn’t miss deadlines.
Technology and software solutions can be invaluable for businesses to manage their sales tax needs and ensure all information is collected and stored properly. These systems often integrate with sales systems to calculate and collect sales tax based on the requirement of each state, which eliminates the need for automatic calculations.
Software can also flag businesses when tax deadlines approach, set reminders about nexus requirements, and track obligations across states. These tools help businesses in the short term with collection and calculation and in the long term with audit preparation and recordkeeping to ensure easy access to the right information and records during an audit.
Like all areas of sales tax, trailing nexus regulations can change over time. The 2018 U.S. Supreme Court Case South Dakota v. Wayfair reshaped the sales tax landscape by establishing an economic nexus and allowing states to collect sales tax for remote and e-commerce transactions. It also created the idea of trailing nexus, which a handful of states have adopted in the following years.
The court ruling is still in its relative infancy, which means states are still adjusting. In many ways, the states with established trailing nexus policies are pioneering the system for other states, who are watching to see the impact on businesses and state revenue.
Trailing nexus ties directly to digital commerce, which is growing rapidly. In 2023, e-commerce represented 22% of all retail sales in the U.S., a number that is steadily increasing. Establishing trailing nexus for digital and remote companies allows states to collect more revenue for these profitable transactions.
Sales tax experts can provide guidance and point to emerging trends, but no one has a crystal ball about the future of sales tax. The best thing businesses can do is pay attention to regulation, partner with a trusted expert to guide their strategic decisions, and stay organized with sales tax software.
Understanding the ins and outs of trailing nexus can be challenging, especially when operating a business in multiple states. The dedicated team at Peisner Johnson specializes in providing comprehensive sales tax services. Our in-depth knowledge and strategic approach help you navigate the intricate landscape of sales tax regulations, ensuring compliance and peace of mind. Schedule a call with us to learn how we can support your business.
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