Cancelling a sales tax registration

Last time, we looked at trailing nexus and a few reasons you might want to cancel your sales tax registration with a state.

You can want to do this for many reasons. A few of them: your company doesn’t have nexus in a state or jurisdiction anymore and you don’t expect to have it again soon; the state has enacted marketplace facilitator laws and now the marketplace is responsible for collecting and remitting the sales tax; your business is passing to new ownership. One of the more ironclad reasons is that your business has closed (it seems to be the only reason you can cancel in Maine and North Carolina).

We say “ironclad” because often a state will dispute whether you can cancel your tax registration because they don’t want to lose sources of tax revenue. You also have to ascertain your “trailing nexus,” if any, due to a time lag in your sales that won’t end until sometime in the future.

So, is canceling your sales tax registration simple? And do you always want to do it?

Process varies by state

Cancelling can be as straightforward as writing “Final” on your sales tax return. But that’s rare: Most states require a lot more effort.

For example, businesses registered to collect New Jersey sales tax, pay use tax and/or accept exemption certificates must file an ending quarterly return by the due date for the last quarter your business or organization was open, even if there is no sales or use tax due for that quarter. California may require many details, including the date you stopped being “actively engaged” in business and the reasons why; and the names of any partners who have dissociated from or been added to the partnership, with effective dates, among other details.

And if your company is sold, “If you fail to notify us of these changes, you may be held liable as a predecessor for taxes, fees, surcharges, interest and/or penalties which are incurred by a successor entity even though you cease to own or operate the business,” the California Department of Tax and Fee Administration.

In general, you’re legally responsible for filing until your de-registration is officially complete, and often through at least the next filing period. In Michigan and Minnesota, for instance, you have to have not met nexus thresholds for almost a year. In Arizona, you can’t cancel until you don’t meet the nexus threshold during the current and prior calendar year.

And sometimes the deadline to file a final return is slim. New York gives you just 20 days. Florida and Tennessee give you 15. Many states, though, seem purposely vague on cancellation and last-return conditions and timeframes.

Suppose you just stop filing? Won’t states get the message? Ask New Jersey: You must notify the State that your business or organization is no longer operating in New Jersey,” the state warns. “If you do not, you may receive Notices of Delinquency from the Division of Taxation for any tax returns due but not filed.”

Failure to file a final return, even if the amount of tax to be remitted is zero, can incur penalties in most states.

(Sometimes you just want to amend, not cancel, your sales tax permit if for instance details of your business change like the name, address, phone number or government ID number. You may have a short deadline to amend your license, too, so check with the state.)

Is it even the right move?

Be careful when cancelling your sales tax permit. If you need to re-instate it in the future, you’ll have to go through the entire process of registering again.

Assess your sales tax situation. Is your company growing? Do you plan to introduce products soon that could become hot sellers in states where you’re considering de-registering?

You may have heard that marketplace facilitator laws – which require online marketplaces such as Amazon, eBay, Etsy and others collect sales tax on behalf of third-party sellers who use the platform – have eliminated need for those sellers to have sales tax permits.

Maybe, maybe not. If you have sales tax nexus in a state and make other sales in that state, you must still collect sales tax from buyers in that state, and that means a valid permit. Not to mention that a facilitator like Amazon housing your inventory in a state can create physical nexus (but not always, as a Pennsylvania court recently determined).

Are you planning to hire employees or sales reps nationwide? That could create physical nexus. (The jury’s still out, by the way, on whether remote employees create physical nexus. But it’s safe to say that if states can make this new nexus stick in the future, they will. Stay tuned.)

Generally, the cost to manage sales tax compliance in a single state is a small incremental expense once you’ve invested in systems and a process to collect and remit the sales tax. There may in fact be no significant advantage to cancelling your permit, especially if your business is ongoing.

Sales tax registration cancellations, just like sales tax, are complex. The best thing to do when considering a cancelation is to consult an expert. Contact us to learn what it means when sales tax compliance is all on us.