As your business changes, you may find that you’re no longer doing business in a state. And that may make you consider closing out your sales tax accounts. This guide will walk you through why you might want to cancel your sales tax permit, and some of the reasons you want to take caution before you take that step.
When can I cancel my sales tax account?
Generally, you can cancel your sales tax permit in a state when you no longer have sales tax nexus there. Nexus means a significant connection to that state, and can be created by the following activity:
- A location – this can be anything from you working from your kitchen table to a chain of stores and warehouses. If your business has physical presence in a state, then you’re generally required to collect sales tax from buyers in that state
- Personnel – Employees, contractors, salespeople, and other people who work in your business generally create sales tax nexus
- Inventory – Storing items in a warehouse in a state generally creates sales tax nexus
- Doing business temporarily – Many states consider brief periods making sales at trade shows, conferences or craft fairs to create sales tax nexus
- Economic nexus – Your business does a state-specified amount of business (either in dollars or number of transactions) in the state creates nexus
If you no longer have nexus in a state, you may consider closing your sales tax account. This means contacting the state, informing them that you no longer have nexus there, and asking them to close your account. In some states, you can simply click a checkbox on your final sales tax filing to close the account.
When you have an open sales tax account with a state, even if you haven’t made any sales in that state, you’re required to file “zero returns” to that state periodically. Canceling your sales tax permit with a state curtails that administrative hassle.
Of course, as with everything sales tax related, closing your account is not always so simple.
Questions to Ask Before Closing Your Sales Tax Account
However, there are a few reasons you might consider not closing your sales tax account. Ask yourself:
- Will I have nexus in this state in the future? If you’re in a business slump or shakeup, you may consider waiting. Say your sales fell in Illinois, where you formerly had economic nexus, or you no longer have an employee in Florida. You may want to wait and see if you re-establish nexus in either of these cases before permanently closing out your account. It’s more hassle, and sometimes even costs an administration fee, to open a new sales tax account than it is to hang on to one that may not be active for a few months.
- Do I purchase for resale in this state? Ten states don’t allow out-of-state vendors to purchase items tax free for resale. This means that if you are not registered with a state like California, you’re unable to buy items tax free from a vendor in that state, even if you plan to resell them. Take a look at your vendors before canceling your sales tax permit.
- Do I have trailing nexus? Some states have what is known as “trailing nexus.” This means that even if your business activities in that state cease, you’re still considered to have nexus for a period of time. The state’s reasoning is that your former business activities in the state may still drive sales. (This doesn’t make much sense when it comes to economic nexus, but when has that stopped a state from attempting to accrue tax revenue?) You can see Washington’s trailing nexus policy as an example.
There may be other pitfalls of closing your sales tax account, such as increased audit risk. We recommend contacting a sales tax expert before making the decision to close your account.