Some time ago you did your homework regarding sales tax. You discovered which of the economic nexus thresholds that you meet, calculated your sales in those states and when required have collected and remitted the sales tax. To do this, you obtained a sales tax license in each jurisdiction where you established nexus.
But what happens if you no longer need a sales permit for a specific state or jurisdiction, or if laws change and you don’t need to be registered at all? Can you cancel your registrations? Short answer – yes, but be careful before doing so.
Reasons a Cancellation May Make Sense
There can be many reasons your business no longer needs a given sales tax permit such as:
You no longer meet the nexus threshold in a tax jurisdiction and don’t expect to in the long term
The state has enacted marketplace facilitator laws and in doing so the marketplace is now responsible for collecting and remitting the sales tax
Your business is restructuring or passing to new ownership; or your business has closed.
If you meet any of these qualifications, you may be able to cancel or withdraw your sales tax permits.
But, be wary that in the current economic and taxation environment, states may dispute your ability to cancel the permit – they don’t want to lose sources of revenue.
Closure of your company is the most solid argument for canceling a permit immediately. But if you haven’t shuttered, a state may claim that your “trailing nexus,” due to a time lag in sales will not end until sometime in the future.
The state of Washington offers a good example of what a state might consider regarding trailing nexus: “A person has nexus with Washington for a calendar year if they meet an applicable nexus standard … during the calendar year, or if they met one in the previous calendar year. Nexus continues even after a person stops activities that originally established nexus. This is often referred to as “trailing nexus.” This one-year trailing nexus concept applies to all taxes you report on the excise tax return, including retail sales tax. Most states have a similar trailing nexus concept.
You may have heard that marketplace facilitator laws require online marketplaces such as Amazon, eBay, Etsy and others to collect sales tax on behalf of third-party sellers who use the platform. These laws have eliminated the need for third-party sellers to have sales tax permits if this is the only method in which they are selling their products or services. But, if you have sales tax nexus in a state and make sales in that state separate from the marketplace, you must still collect sales tax from buyers in that state, and that means you need a valid sales tax permit. Laws for marketplace facilitators vary state by state (just like economic nexus laws), so before cancelling, be sure you know which states have these laws and in which states you meet the standards to have a marketplace facilitator collect the sales tax on your behalf.
What is the process to cancel?
Some states will cancel a sales-tax permit if you note Final on the last return. Some states won’t, and still other states may require additional paperwork from you.
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. You must also submit a Request for Change of Registration Information and complete the back of the Certificate of Authority for Sales Tax and the Business Registration Certificate.
California may require many details, including the date you stopped being “actively engaged” in business and the reasons why; names of any partners who have dissociated from or been added to the partnership, with effective dates; the means you used to dispose of your resale inventory, furniture, fixtures, and equipment, as well as the details of anyone to whom you sold them or your business; your current contact information; the address where you retain your books and records; and your business website.
In general, you’re legally responsible for filing until your deregistration is officially complete. And there’s often a slim deadline. For instance, in New York you have 20 days to file a final return and surrender or destroy your permit (aka your “certificate of authority”) after you cease business operations or the sale, transfer or change occurs to file your last return. In Texas, sales taxpayers closing a place of business are responsible for filing a sales tax return covering the final filing period; tax may also be due on items purchased tax free for sale through the business.
Florida requires you to file a final return and pay all applicable taxes due within 15 days of your inactivation or closing date; your final Florida return must cover the period from your most recent return filing to the inactivation or closing date. Tennessee gives you just 15 days to file a final return and pay tax to the state after your business closes regardless of the amount of income earned during the tax year.
In fact, failure to fail a final return even if the amount in question is zero can incur penalties in most states.
Is cancelling your sales tax permit right for you?
Is cancelling your permit the best option? Be careful when canceling 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. How can you tell if you’ll need the permit later?
First, assess your business right now. If your company is growing and you plan to introduce popular new products soon, those products might become big sellers in states where you’re currently considering cancelling your sales tax permit. That could be a mistake if those future sales give you economic nexus again. Are you looking to hire employees or sales reps nationwide? That could also give you physical nexus in a state where you’ve cancelled your permit. Generally speaking, 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. As such, there often is not a significant advantage for cancelling your permit – especially if you are an on-going business.
From time to time, survey states where you’re registered to see if you still have to file.
The best thing to do when considering a cancellation is to consult a sales tax expert. You don’t want to get yourself in a situation where you still hold the liability or have to duplicate efforts in the future. Sales tax registrations, just like sales tax, are complex. Contact TaxConnex to learn how we can alleviate the burden of sales tax compliance, including the registration process (or cancellation).