As part of the natural evolution of a company’s sales tax compliance process, the need to cancel active sales tax registration may arise from time to time. There are as many reasons to cancel an active tax registration as there were to register your company in the first place. Despite how obvious the need to cancel a registration may be to your company, the state where you are attempting to cancel the registration is the one that will make the final determination as to your ability to do so.
Reasons for Canceling
In most cases, the need to cancel a sales tax registration arises when the reason for the original registration no longer exists. (Example: your business closes or you change up your business activities so you no longer have sales tax nexus in the state.) As obvious as that may be, the state that has issued the registration you want to cancel may not see it that way. Your company’s registration and sales tax compliance with the state is a source of revenue with the state and they want to hold onto that revenue for as long as possible. Despite the state’s desire to keep your company registered, that should not deter you from canceling your registration if you meet the state’s requirements.
You Sell or Close the Business
One common reason to cancel a registration, and one that can’t be opposed by the state of registration, would be the sale or closing of your business so that your company will not derive any revenue from customers in their state. In a similar light, if your business will no longer have customers in the state and there is no long-term prospect that new customers will be obtained in that state, then canceling your registration is completely appropriate. If you acquire customers in the future and have the requisite nexus in the state then your company’s registration can be reactivated.
Over the years I have seen companies attempt to cancel their tax registration immediately after their company stops having nexus in the state. While the may be appropriate from your perspective, the state where you are registered has a significant vested interest in keeping your company registered for as long as they can to collect tax receipts on taxable sales to customers in that state. If you are a wholesaler and have not remitted sales tax to the state in the past, then canceling your registration or filing a “final return” may be the most appropriate action to take if the nexus creating activities stop in that state.
You No Longer Have Nexus in the State
If your company makes taxable sales and is currently collecting and remitting sales tax to the state and the nexus creating activity has just stopped, the states may invoke the concept of “trailing” or “residual” nexus which may require that tax be collected and returns filed for 6 months or longer before they will accept your cancellation permit. The states will to assert this position by arguing that the sales activity or the other nexus creating activities your business had in the states has established a market place for your product in their state will continue to generate sales even after these nexus creating activities have stopped. Existing customers may continue to buy products or new customers may be acquired based on historic nexus creating actions.
In some cases, the concept of trailing nexus may arise during an audit rather than immediately after you have filed your final return or submitted a registration cancellation. In those situations, the states may assess sales tax on untaxed sales for a period of time after your final return was filed and assert this the historical sales activities conducted by your company continued to create revenue for your company even after they stopped. If your company’s nexus creating activity in a state was the presence of an employee who had no nothing to do with soliciting sales then the concept of residual or trailing nexus may not apply.
How to Cancel Your Sales Tax Return
Companies currently filing sales tax returns in numerous states should periodically determine if the need to continue to file those returns still exists. Businesses change over time which can expand or contract the need to file sales tax returns in particular states.
In most cases, filing a “final” sales tax return is all that is required to accomplish this act. Some states have additional forms that must be completed to cancel a registration or they may send a questionnaire after they receive your cancellation request.
As noted above, there are many legitimate and noncontroversial reasons for canceling your sale tax registration number. However, because your company is the remittance conduit for tax collections due to the state government, they may not be too quick to approve your cancellation request if they believe that nexus exists or that there are trailing or residual nexus issues. Registration cancellations are essential to streamlining your sales tax compliance, but the final decision as to your registration status is made by the state department of revenue not by your business.