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Independent Contractors – Establish or Maintain a Market?

Independent contractors (ICs) have long been the nexus lynch pin for unsuspecting multistate businesses. Companies have utilized the services of unaffiliated individuals and entities in a variety of ways in virtually every business environment, both past and present. For example, contractors have been used to perform payroll or accounting functions, and to solicit sales, and to provide services to out of state customers. ICs are often less expensive to use than employees. There are no payroll filings to worry about and administrative costs and logistical concerns are lower, particularly when the business activity is directed at another state. In today’s world of electronic commerce, the internet has provided a virtual office link between businesses and nonemployee individuals that has blurred the definition of just what an independent contractor is. How is it then that some activities performed by non-employees seem to create nexus for sales tax and other business taxes, while other activities do not create nexus? The answer is deceptively plain. When an individual or entity is compensated for activities it conducts within a state that enable a business “to establish or maintain a market” in that state, a connection is created that is often sufficient to allow the state to impose a tax. This rule applies today in much the same way it has applied for the past 25 years.

The Commerce Clause of the US Constitution provides that only Congress has the power to “regulate commerce…among the states.” As such, the US Supreme Court has interpreted this clause to mean that there must be a “substantial nexus” between a taxing jurisdiction and a business activity before a tax can be imposed. For sales and use tax purposes, that means that a substantial connection must exist before collection and remittance of a state’s sales tax can be required. How can an individual who is not even and employee create such a connection? To answer this question, a brief review of recent US judicial history is in order.

In 1987, the US Supreme court decided the landmark nexus case of, Tyler Pipe Industries, Inc., Appellant v. Washington Dept. of Revenue (No. 85-1963), 483 US 232 263 (1987). In this decision, the court ruled that the activities of independent sales representatives (ICs) utilized by the Tyler Pipe allowed the corporation to “establish and maintain a market” in Washington. In other words, the conduct of the independent representatives in Washington created a tax nexus between Tyler Pipe and the state. Tyler Pipe used these representatives in the state to solicit sales, provide the company with local marketing information, and to maintain and foster close relationships with the corporation’s Washington customers. Through this contact and these close relationships, Tyler Pipe was able to maintain and improve name recognition, market share, and company goodwill inside the state. Additionally, the court declared, in referencing, Scripto, Inc. v Carson, 362 US 207, 4 L Ed 2d 660, 80 S Ct 619 (1960), that the distinction between actual employees and ICs or “salesmen” is “without constitutional significance!”

With the Tyler Pipe case as a backdrop, just five years later the US Supreme Court decided the most significant sales tax nexus case to date. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the court clearly defined what “substantial nexus” is. According to the court, substantial nexus exists only if a business has a “physical presence” (representatives, employees, property, etc.) within that state. This bright-line physical presence requirement that the Quill court established was a welcome change in 1992 that simplified the sales and use tax nexus equation for many years. Considering the fact that the Tyler Pipe court made it clear that there is little difference between an employee and an independent sales representative, the Quill bright-line nexus standard of physical presence certainly applies to ICs.

Of course, nothing lasts forever and in 2011, the idea of physical presence has drastically changed. Amazon.com, LLC has embarked in an epic legal battle with the state of New York as the New York has attempted to force the internet giant to collect and remit sales taxes on its sales to its in state residents. Since the facts in this case are quite well documented, there is no need for me to revisit how New York State has attempted to change the definition of an independent contractor by amending its law. It is only important to point out that, under the US Supreme Court’s decision in Tyler Pipe, no state can impose a sales tax collection responsibility on any out of state business entity using in state independent contractors, unless the state can demonstrate that those independent contractors are establishing or maintaining a market for the out of state business. Any other outcome is a violation of the US Constitution.

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77 Responses to Independent Contractors – Establish or Maintain a Market?

    • John Daly John Daly says:

      What do you mean by w2 contractor? W2 anything I think is an employee. Employees create nexus in most states regardless of what they are doing. Typically (not 100% of the time, but close), if an employee or contractor are in a state servicing a customer that will create tax nexus.

      • David says:

        In this case i should clarify that we use 1099 reps, independent sales reps, to sell our product. They rep multiple product lines and our CFO is convinced that because they are 1099 contractors, and not W2 employees, we are not creating nexus. In my research, i believe the 1099 relationship is creating nexus for our company.
        Thank you for your insight and expertise.

  1. matt says:

    Hi John, thanks for the article.

    We have an ecommerce site that ships products nationwide, and we generate referral sales through what we can an “Ambassador Network”. People who have purchased our products get a coupon code they can offer friends, and they receive a substantial product or cash reward for any purchases made with their coupon code.. Some customers have made a few thousand dollars or received several thousands of dollars in merchandise in exchange for their referrals.. Does this establish a nexus in the states where those customers live? We’re talking all 50..

    • John Daly John Daly says:

      Matt, based on the limited info in your post, I would conclude that your program could create nexus in different states. We would have to look at each state and your specific activities however to give you an answer. I recommend hiring a firm to do a nexus study for you.

      • Susan says:

        Hi John,

        I have a company that sells online and we hire customer service reps that work from home. At no time, do they only support or help customers in their state, it is random who calls in. Does it create a nexus if we hire them as employees or ind. contractors? We pay taxes in the states where our warehouses are located. Thank you.

    • Andy says:

      Hi John,

      I have a Single entity LLC in Texas.
      I am a programmer and write and maintain certain EDI programs and functions for a California based company. I have little contact with their clientele and when I do it is only related to data issues. In fact I generally don’t even know what state they are in.

      I have been told that I may create a Nexus for the California company, thus exposing them to “use tax” in Texas. Which of course would immediately vaporize my contract and any income I have here in Texas.

      Is this really considered helping them “establish and maintain” markets in Texas.

      I believe they do have clientele in Texas but, all of whom are part of national conglomerates with no real direct sales effort.

      • John Daly John Daly says:

        Well, if you are a contractor working in TX and working directly with TX customers (accidently or on purpose), there is a possibility the state could claim that sales tax nexus exists. Is this the only company you work for/with?

  2. Judy says:

    I am researching Nexus for a company. Their office is located in Texas where they sell and build steel forms and ship the forms to other states.
    They then contract with installers located in those states to install the steel forms.
    Does this create nexus in those other states?
    Thank you.

    • John Daly John Daly says:

      Hi Judy. Generally speaking, probably. Individual states have different rules on third party installations. Someone needs to check each state for nexus exemptions with this kind of activity before concluding that nexus exists.

  3. james says:

    Im working on creating a solely internet based LLC with no brick and mortar location besides the computers in my private residence in VA. The business would act as an intermediary that recruits independent contractors and connects them with customers online currently in VA, DC, and MD via a website. Does this create enough of a Nexus in all three states to require me to register my business for license and tax purposes in each location? Its not clear whether these independent contractors who set their own prices and work constitute as agents or representatives of my business for establishing Nexus. Also would marketing the website in any of these locations be enough to create a Nexus?

    • John Daly John Daly says:

      Hi James. Depends on how your contracts are worded and what you are being paid for and what the ICs are doing and how long they do it for. Lousy answer I know, but I would need alot more info.

  4. Nathan says:


    I have a question. The scenario is a CA retailer that has no employees, property, bank accounts, etc. in any other state. They sell TPP via an online app and collect payment from the customer. The manufacturer that the CA retailer buys from is packaging and shipping the goods to the retailer’s customers in potentially all states, including DC. The manufacturer also accepts returns where a customer would mail back the product, but the CA retailer is the one who issues the customer credit. Which states, if any, would the packaging, shipping, and acceptance of returns by the manufacturer create nexus for the CA retailer? Would the manufacturer’s activities be deemed to “establish and maintain” a market in any state for the CA retailer?

    • John Daly John Daly says:




      • Nathan says:


        With regard to DC, they have a definition of a “nexus vendor” in code sec. 47-2001 (h-2), which includes selling property via internet. Code sec. 47-3931 also defines “remote vendor,” but I thought these provisions did not go into effect until the MFA passes because Bill 19-203 mentions that it is effective upon an act of Congress.

        • John Daly John Daly says:

          Their current law, right now reads: (h-2) ” Nexus-vendor” means a vendor that has a physical presence within the District of Columbia, such as property or retail outlets, selling via the internet property or rendering services to a purchaser in the District.

          To me that says you have nexus if you sell to DC residents. I have called DC taxpayer services (stop laughing) in the past and been told exactly that also, just checking on it. It is not really worth my time to dig into it anymore because my clients do very little business in DC.

          DC does have some rules and definitions that take effect if MFA ever happens, and that is where they reference the “remote vendor.” Is the remote vendor the exact same thing as a nexus vendor? No.

  5. John says:

    Hi John -

    Thanks for all the great advice you’ve given everyone! I was hoping that you could make a couple things crystal clear (which I know is next to impossible when it comes to this stuff).

    1) I understand that an independent contractor sales person can create nexus in a state where they are “creating/maintaining a market” in that state even if the company that engages the independent contractor is domiciled out of state and has no other reason for nexus in that state.

    It seems that you are making a distinct line at the “creating/maintaining a market” (based on the court case.) Can you think of an instance where a sales person is not engaged in “creating/maintaining a market” (isn’t that the very nature of sales?) or is this pretty black and white and would you go as far as to say that “if you have independent contractor sales people living in a state where they are soliciting business in exchange for compensation paid by your company, you have nexus in that state?”

    1. (I apologize if this seems out of the scope of this blog) If you have an independent contractor that is not excluded from selling for anyone else but chooses to only sell for you – if all the other tests of independent contractor/statutory employee law are satisfied – would you think that it could be argued successfully that they are a statutory employee? I had seen some language elsewhere about “direct sellers” (AVON, etc.) being given special treatment to lean toward the independent contractor status.

    Thank you in advance for your time and advice!

    • John Daly John Daly says:

      Hi John. I will respond below to you Qs I copied and pasted:

      Can you think of an instance where a sales person is not engaged in “creating/maintaining a market” (isn’t that the very nature of sales?) I GUESS THERE ARE SITUATIONS WHERE THAT OCCURS BUT I CAN’T THINK OF ANY. IF A SALES GUY DOES NOT SOLICIT HE PROBABLY WON’T BE A SALES GUY FOR LONG :)

      or is this pretty black and white and would you go as far as to say that “if you have independent contractor sales people living in a state where they are soliciting business in exchange for compensation paid by your company, you have nexus in that state?” YES THAT ACTIVITY WILL CREATE S&U TAX NEXUS

      1. (I apologize if this seems out of the scope of this blog) If you have an independent contractor that is not excluded from selling for anyone else but chooses to only sell for you – if all the other tests of independent contractor/statutory employee law are satisfied – would you think that it could be argued successfully that they are a statutory employee? I had seen some language elsewhere about “direct sellers” (AVON, etc.) being given special treatment to lean toward the independent contractor status. FOR SALES TAX NEXUS PURPOSES IT DOES NOT MATTER IF YOU ARE AN EMPLOYEE OR INDEP CONTRACTOR IF YOU ARE SOLICITING. SOLICITING CREATES S&U NEXUS. INCOME TAX NEXUS RULES ARE DIFFERENT BUT S&U NEXUS RULES ARE VERY BROAD.

      Thank you in advance for your time and advice!

  6. Paul says:

    Hi John
    I own a 3rd party transportation company. I sell no goods and own/operate no trucks. I am simply a middle man between vendors of goods and contract carriers. I contact and dispatch the carriers to deliver goods. In Arizona (where transporting is taxable!!) would my relationship with these contract carriers (independent contractors) give me nexus? To your knowledge, do contract carriers give one nexus in any state? Remember, they are not delivering MY GOODS…?!

    • John Daly John Daly says:

      Hi Paul. Happy New Year! Going on the limited facts you present, you would not have sales tax nexus anywhere but your home state if you are simply making these arrangements. On the other hand, if you were arranging for goods to be picked up or delivered to residents in an economic nexus state like CA and you earned over $500k (in the year) from CA residents, you may have an income tax issue. Econ Nexus states are CA, CO, CT, OH, MI (350k), & WA (250k).

  7. Russell says:

    Sure, through email only and through a generic address. The customer does not know the names of our support team.


    • Russell says:

      My understanding is the nexus sales tax was implemented to help level the playing field for outside companies that compete against those that operate within the State. The intent was to tax companies that had a sales presence – a storefront, an independent sales rep or a sales warehouse. I get that and would support that logic.I would want the same here in GA.

      There are literally thousands of people in Texas that are contracted by small companies like ours. They perform some sort of work – data entry, support, web design, programming and many other services. These folks are are hired through companies such as freelance.com, monster.com etc…

      It seem as though it would not be in the best interest of Texas citizens to allow this to happen. Smaller companies like ours would elect to hire people in other states which would impact thousands upon thousands of workers in Texas. (Almost sounds like a juicy 60 minutes TV segment.)

      From a Tax standpoint – this seems unfair and unethical. I know Texas needs money but this is the wrong message if they are liberally interpreting the word “contractor” to mean “anybody” that works for a company outside their State.

      • John Daly John Daly says:

        Russell, the word nexus means “connection” that is sufficient to allow the states and cities to constitutionally (US Constitution) tax a business. It has nothing to do with leveling a playing field. Nexus was defined as a result of landmark cases (Wrigley & Quill) decided in the US Supreme Court. The nexus standards set in those cases protect businesses from over reaching tax jurisdictions. If those standards did not exist, many states would attempt to tax every dime somehow connected to their state.

        You are probably thinking of the “Main Street Fairness Act” which has not been passed by congress and has been promoted by certain politicians as being an act to “level the playing field.”

        In your case, you pay an independent contractor located in TX who is servicing your customers in TX. That activity creates TX tax nexus because the activity of that contractor in TX leads to a market for your company being created or maintained.

  8. Russell says:

    Hello John,

    Thanks for all the detailed information on this difficult tax issue.

    I own a small cloud-based CRM company in Atlanta. We sell an online software application to companies throughout the USA. We have no sales rep employees or independent sales contractors in Texas. We also do not have a storefront. Several years ago we hired a freelance web designed to help us with our online site. She also helps us with some customer support issues. This person works from her home and has other clients.

    The State of Texas is telling us that we owe taxes going back to 2007. They are saying this independent web designer justifies Nexus between our company and Texas..

    Do you think this type of contractor justifies Nexus in Texas? If not, do you have any recommendation in terms of how fight this?

    Thanks in advance for your comments.

  9. April says:

    I have an independent owner-operator that has 2-3 employees and the independent owner-operator only provides trucking services to one company. The independent owner-operator’s trucking service results in travel through multiple states. In this case who has nexus, the independent owner-operator or the company they are providing the service to?

    • John Daly John Daly says:

      Just so I understand, you are or you work for an independent owner-operator (“A”). A has a truck/trucks and a couple employees and A provides delivery services for one company (“B”) only?

      Please verify, but it sounds like both A & B will have nexus. Here is why….

      A will likely have nexus simply because A drives its trucks in a state and picks up or delivers in the state (Different states may have mileage threshholds for nexus, however). B will probably have nexus if a state ever really analyzes what is going on because if A only works for B, A will probably not be viewed as “independent.”

      However, I am just speaking in generalities. When you are trying to determine if nexus really exists, your tax advisor needs to do a thorough state by state (or city) analysis. Be careful

  10. David says:

    We are a Florida company. I’m considering hiring an independent corporate sales rep for corporate sales. He resided in NY but we would ask that he not talk to any NY companies. We currently generate significant revenue from NY on our consumer website.
    - Would we trigger Nexus in NY since he resides there? (even though he would generate no sales in NY directly)
    - Would we trigger Nexus in other states that he is calling on?

    I’m starting to think it’s just not worth the hassle to hire a field sales contractor.

    • John Daly John Daly says:

      Hi David. I will say this…… If your company (A) has an independent contractor (B) that does nothing other than solicit sales in states where B does not live in, that activity alone typically would not create nexus in B’s home state for A. There are different things you need to look at though. For example, is A the only company B is working for? If a state can make the case that your indep contractor is really a statutory employee, all kinds of problems can be created. I have seen companies have independent contractors work for them for a while and then file for unemployment upon termination. There is no dodging that bullet!

      Talk to your (SALT experienced) CPA before you make this kind of hire.

  11. JJ says:

    Hi John,

    We’re an NJ based online store. We received a sales/use tax audit letter from NY a couple days ago. We are strictly online, no catalogs, and ship using common carriers, and have no affiliates in NY so we do not collect NY sales tax. Most of our shipments are just drop off/ curbside, however some customers may requests white glove for bigger items and we help arrange it with the carrier. NY is claiming that if we do more than 12 white glove deliveries in 1 year then Nexus is established even though the carriers are not NY based as well. They want all records going back to 2007. Can they establish a Nexus based on that? Can you please advise what we should do? Thank you in advance.

    • John Daly John Daly says:

      What is a white glove delivery? Be specific. Thanks

      Btw, I strongly advise against handling these communications with NY on your own. Once you are notified by a state it is time to hire a CPA to handle the communications.

  12. Jennifer says:

    If we have employees going into a state(not their resident state) 15-20 days per year soliciting sales (no other nexus causing activities are present), I am assuming that we would have sales and use tax nexus in those states – Arkansas, Louisiana, Mississippi, and West Virginia.

    What if the employees were independent contractors?

    • John Daly John Daly says:

      Hi Jennifer. Yes, that will create S&U tax nexus. It won’t make a difference if you use independent contractors as long as those individuals are creating/maintaining a market for you in that state.

  13. Johnathan says:

    Hi John! WONDERFUL article!!
    Quick question…
    I live in TX and I would like to have a “home business” where I contact petroleum companies and ask them if they need any field production equipment (oil tankers, water separators, etc.), and then contact companies that manufacture these products and effect a sale at a discounted rate + a small increase for my profit (so I’m the “middle man”, i.e.: Independent contractor…?).
    My question is: Must I register my business in TX and apply for any licenses or permits? What if I conduct these types of transactions in other states from TX, say, in Colorado/Montana/North Dakota etc…?
    Thanks again in advance, you and your article are an enormous blessing!

    J. Adams
    7 October 2013
    7:35 PM

  14. Philip says:

    I have two employees living in NC which perform a service function in other states not in their state of residence. The service is phone base support of a california hospital. Does this create NEXUS in the NC for my company?

    • John Daly John Daly says:

      Phillip, geez sorry to take so long to get back to you. My number is 732 503-0178. If you post again here and i don’t get back to you right away please call me.

      Having independent contractors (ICs) in other states working for your customers in states other than the IC resident states will not typically create a problem. If however you have employees in a state you have income/S&U/payroll tax nexus. Count on it. Don’t wait for NC to catch you because with employees there and you being registered for SUI, NC will catch you. Let me know if you are unsure how to fix your situation.

  15. Diann says:

    Hi John, If a company sells their service contracts (vehicle and/or consumer goods) to out of state dealerships or retailers, and the dealerships or retailers sell the service contracts to the end consumer, would this create nexus for the company selling the service contracts to the dealerships and retailers?

    Thanks for all your great advice!

    • John Daly John Daly says:

      Hi Diann. I need more info. How exactly do the service contracts work? Who performs the service? Can you give me an example, using a widget as the item the service contract is purchased for?

  16. Mark says:

    John, There is no software involved in the services we provide to customers. We build online marketing campaigns which are put into action on our end through various interfaces provided by various interfaces (Google, Yahoo, Bing). Other deliverables are sent in the form on pdfs or word documents. Thanks again for your help!

    • John Daly John Daly says:

      Mark, if you are still out there after all this time, here is the deal. WA and CA are economic nexus states. If you have 500k or 25% of your total sales are to CA customers CA will want an income tax return. WA’s sales threshhold id 250k in sales. Make 250k in sales and WA will want a B&O tax return filed there.

      I think you are ok in TX since you have no sales to customers in that state, no worries there. Again, to anyone reading my responses, if I don’t get back to you here quickly enough call me on 732 503-0178.

      Original note from Mark” “Hi John. Thanks for a great article and all your subsequent advice in the comments. I own an LLC that provides online marketing services. I have sales from companies based in NC, NY, WA, and CA. I did not solicit their business and no member/agent of my business has set foot in those states during the year. All “deliverables” are electronically delivered. Would I have income tax nexus in those states? My partner and I work out of MA and CT respectively and we have no company property outside of CT or MA. Also, we do use independent contractors in TX but they work on clients from other states (we have no TX sourced revenue). Would their presence in TX trigger any Income Tax Nexus issues? Thanks again for your advice!”

  17. Laurie says:

    Hi John, I have just launched a baby product that I will sell direct to consumers online through my website and wholesale to retailers across the country. My business is in Oregon. I have a 3PL company warehousing my product and fulfilling orders in Illinois, a freight forwarder based out of Illinois, and an overseas sourcing agent based in California (sources manufacturing in Asia). Do I have nexus with Illinois and CA?

    Thank you!

  18. Mark says:

    Hi John. Thanks for a great article and all your subsequent advice in the comments. I own an LLC that provides online marketing services. I have sales from companies based in NC, NY, WA, and CA. I did not solicit their business and no member/agent of my business has set foot in those states during the year. All “deliverables” are electronically delivered. Would I have income tax nexus in those states? My partner and I work out of MA and CT respectively and we have no company property outside of CT or MA. Also, we do use independent contractors in TX but they work on clients from other states (we have no TX sourced revenue). Would their presence in TX trigger any Income Tax Nexus issues? Thanks again for your advice!

    • John Daly John Daly says:

      Before I answer, I have a couple questions. Are you licensing software to your customers? Do your customers use your software for free? If your customers use your software, how do they access it?

  19. Daniel says:

    I’m creating an online tutoring business. I am located in Georgia. Does this mean I only have to charge sales tax to customers that have Georgia adressess?

    Also, if I hire independent contractors for this service. (They would only help students online with homework) So all they do is electronic, and do nothing else in their respective state… Does that mean I am not liable for nexus in their states?

    Thank you!

    • John Daly John Daly says:

      Hi Daniel. On question 1…. if you are in GA and not present in any other state, yes, GA is the only state where you need to collect and remit on any taxable service/products you sell. If you have independent contractors in another state and they are servicing/tutoring customers in that state you could possibly say that they are helping to create or maintain a market for you in that state. One way to eliminate that exposure is to make sure the independent contractors do not tutor anyone in the states the independent contractors live in.

  20. Ragi says:

    I have a client who sells electronics through its show rooms in about 7 States, where they currently file. They are about to sign an agreement with an independent contractor to do the installation across the US. The agreement states that the relationship between the two entities is merely independent contractor and my client’s customer cannot hold the installer liable for damages in the equipment. Does this create nexus for my client? Will they be liable for filing franchise and income taxes? Are there any tax court cases or regulations that you can refer me to. Any advice will be greatly appreciated.

    • John Daly John Daly says:

      Ragi, yes that will create nexus in some states. In some states it will not. Depends on the state and I would have to spend some time digging into your facts and the relevant states. No easy or free way to answer that here though. Sorry.

  21. nexus says:

    I am a sole proprietor located in TX. I have no employees. I sell lab equipment, repair parts, and service or service contracts in multiple states. I have personally traveled to almost every state at some time during my business, or sent another independent contractor to do the job. My travel consists of installing, servicing, or repairing equipment. What states consider this establishing nexus for S&U tax? What states consider this establishing nexus for income tax and franchise tax?

    So far I anonymously contacted the following states: CA, MA, WI, OH, and CO. CA, MA, and WI each said I am responsible for S&U, Income, and Franchise tax. I am a sole proprietor with no employes. I don’t pay franchise tax in my home state of TX. How can other states charge franchise and income tax to an out of state person?

    Most of my transactions are to tax exempt entities, so I am mainly worried about the income and franchise tax. If these states come after me can they seize my property and bank accounts in TX?

    CO and OH both said my total sales are so low that I do not have nexus with their states. CA, MA, and WI said any sale accompanied with entry into their state created nexus. Can you confirm if the information I received from their representatives is true?

    I am in shock/disbelief, and I am having trouble coming to terms with the implications nexus. I just want additional confirmation from you before I filed for voluntary disclosure with CA, WI, and MA. I have many additional states to contact, but those are the ones with the highest level of activity.

    • John Daly John Daly says:

      Sounds like you are selling to hospitals? Careful, they say they are NFP but some may not be.

      I need some more info….. Identify the top 5 states you work/sold in during 2011 and 2012. For each year tell me what exactly you do in each state. Describe how many times you visited; how many days per visit; what you did while you were there, each visit.

      On the surface, based on what you have told me you are setting yourself up for problems down the road. All the states won’t knock on your door, but 1 or 2 might and if you are in and out of numerous states you may eventually get more than a couple states knocking on he door.

      It would be great if you can share your info here so others can benefit. You can also fudge some details if you get nervous about identity and then call me (732 503 0178) for clarification.

      • nexus says:

        Thank you for the response.

        I do sell some to hospitals, but mostly to biotechnology companies and universities (not exempt from sales tax in CA). Most of my customers paid use tax on items purchased from me. I discovered I may be liable for out of state taxes when a CA customer called me to say they paid use tax. The customer told me the State of CA told them I should be collecting sales tax.

        I mistakenly contacted CA to determine if this was correct. I gave them my info, and they told me I needed to apply for the CA sales tax, income, and franchise tax immediately, reporting the first date I travelled to CA for service or an installation. In addition, they told me I have to report any sale to a CA customer as State income and pay sales tax regardless of where the work took place. This did not seem correct and I have heard varied opinions on this. I am fearful that I am now on the radar for CA and that if I don’t file immediately they will come after me. CA is definitely my top sales state.

        I am in the process of adding locations to each invoice to get the exact numbers. A lot of my out of state customers send items to my facilities in TX to have them repaired. Do I make the location for the sale in TX, or in the purchaser’s state? All items are returned to the purchaser by common carrier. FOB my TX business location. I am receiving varied responses from different states on this issue.

        I’ll post more soon.

        • John Daly John Daly says:

          I sent you an email because so much time has gone by. If you can fill me in on where you are now if you still have questions.

    • John Daly John Daly says:

      Probably not but it depends on what else goes on in NY. NY has a bulletin (TSB-M-04(1)C, 02/17/2004) which covers trade show nexus for Franchise tax puroses. For SU nexus and trade shows, check out TSB-A-96(83)S, 12/26/1996 and see how it fts your facts. Good luck!

  22. Michael says:

    Hi John;

    Great Article,

    I have a client based in NC that sells Coffee grinding machines in WA to Costco and other businesses, The sales are not solicited in WA, no physical presence, ie. office, payroll or warehouse. The client was contacted by WA Dept of revenue and they filled out a Questionnaire and stated they had a one year limited warranty on there product. WA contacted them about the warranty and it turns out they had a total of 3 warranty claims in WA over the past 5 years and they sent out a for hire repair man that was found through the yellow pages to repair the machines at the customer location and the expense covered by warranty. This is a standard one year warranty that makes no mention of onsite repairs. Most of the grinders are small enough to send back to company headquarters but in some rare cases it is cheaper to hire a repair man to install a part on-site. Has this met the standard of creating or maintaining a market.

  23. John Daly John Daly says:

    Hi Brenda. If you have a LA customer, you deliver to LA and you have nexus in LA, you charge LA sales tax. If your customer is is in GA and you deliver to GA you charge GA sales tax. Sales reps in a state creating or maintaining a market for you in that state will ordinarily give you S&U nexus in that state. If they are approving orders they will also give you income tax nexus. If you have any more Qs, just ask.

  24. Brenda says:

    NEXUS – the word I once thought meant hair products….now hair raising product. I don’t know what to do or how to proceed. I know about Nexus now probably more than the average. But proceeding into this arena has me apprehensive. I believe having sales reps living in different states and obtaining orders on our behalf constitutes a link. Some have business entities and some are 1099′s. We sell pictures and mirrors to the hospitality industry, and nursing homes. So our sales rep may acquire an order from a business in Louisiana(where we have no rep) and the goods are then shipped to a hotel in Georgia where we do have a rep. The way I understand Nexus it is determined by the destination state and if no resale certificate is obtained by that state, I must charge and remit Georgia sales tax to my Louisiana customer?? Can you give me any advice on how to proceed. I was going to sign on with Avalara but until things become clearer – I just feel stuck. Thanks

  25. Marty says:

    John, nice explanation of impact of Tyler Pipe. Are you aware of any cases that deal with who is considered an independent contractor in the nexus context? In our situation the product is actually delivered by an cometitior of ours so even if they are considered an indedpendent contractor they are definately not soliciting sales for us.

    • John Daly John Daly says:

      Marty, it does not matter if the IC is soliciting. It only matters if they are creating or maintaining a market for you. In your case an unrelated party is delivering your product. That is kind of like the post office or fed ex or a drop shipper, right? What else is going on? Is your competitor doing a service or upgrade to your product and then delivering? What “exactly” are you paying the competitor for or is the ultimate customer paying your competitor for a simple delivery?

      • Marty says:

        It is the ultimate consumer that is paying our competitor for delivery. We are an out of state auto dealer for the sale in question. The automobile is delivered by common carrier or contract carrier. Drop shipped by the manufacturer to the unrelated delivery dealer who performs predelivery inspection which is typically paid for by the manufacturer not the selling dealer. Other services performed by the in state delivery dealer (which are paid for by the buyer and not us) may include washing the car, storing the car until the buyer picks it up, remove protective shipping wrapping. If we chose to, we could avoid the delivery dealer by shipping the car to the buyer ourselves rather than having the manufacturer drop ship the car, so I don’t think the delivery dealer is “creating or maintaining a market” as mentioned in the Tyler Pipe case. The delivery dealer is our competitor so it would not solicit sales for us.

  26. Anne says:

    If we have independent salesmen solicit manufacturing/contractor software sales in Texas, but the salesmen do not live or have an office in Texas does that create Nexus for sales tax? They sell through phone, internet and some travel into the state. Software is electronically delivered. Another independent contractor salesman has an office in Texas but does not make sales in Texas. His territory includes other states instead.

    • John Daly John Daly says:

      Your presence is just barely nexus. TX Tax Publication 94-108 says: “Using independent salespersons to make sales or take orders for taxable goods or services on behalf of an out-of-state seller” creates S&U nexus. So, if your IC is present in the state soliciting for hours, or days or weeks, TX would say you have nexus. They might let you slide if it is only “hours” a year b ut maybe not. You could fix this problem by telling your ICs soliciting in TX to stay out of the state and use the phone. Your exposure may be so small that you need to consider the costs of compliance vs. a potential audit vs. a VDA. TX does have a GREAT VDA program though because you only have to go back 3 years and they don’t get you for penalties or INTEREST!

      • Anne says:

        Thank you for your very quick and effective reply. That is the way I was leaning, but I can read so many areas of the statue different ways.

  27. Murray says:

    Our Texas company sold emergency housing to a North Dakota State University. There was a warranty claim & one of our employees fixed the minimal damage. North Dakota is telling me this established nexus & we must register for SUTA. Is this correct?

    • John Daly John Daly says:

      Murray, having an employee in a state gives you sales tax nexus, even if it is just for a day or 2. You have to find out if ND State is an exempt “state institution?” Call them and see if they have a sales tax exemption. That might get you out of having a liability. If they are private/for profit, you can try to collect the sales tax from them (business decision) so you don’t have to eat it.

  28. Julie says:

    Hi, John! We have employees in every state, but the ones in question include AR, GA,ID, OK, WY, MS, NC, SC, ND, WY, MS, NJ, UT, AL, NV, and KY. The company sells motors for manufacturing and mining companies. The employees working in these states do repair, installation, and warranty work on these engines. To my knowledge, they do not solicit orders (for property). In some cases, they do the work at the customer’s location, and in other cases they do the work from their garage –several work out of their homes, or from a shop. Thank you!!

    • John Daly John Daly says:

      Julie, you will have nexus in each of these states, both for sales tax and income tax (except NV & WY who don’t have an income tax). Please don’t just register and start complying. The states will hit you with back years returns and penalties. There are very effective ways to limit your back years exposures, but you have to go to the states before they find you. If you have employees in these states they will find you eventually because you are already filing payroll tax returns so you are in their computers. Give me a call at 732 503-0178 to discuss your options.

  29. Julie says:

    We have several employees who work in several different states throughout the year. They may work for 3 days in a state and then 60 days in another state doing repair, warranty, or installation work on equipment we’ve sold to the customer in that state. Just FYI – we also typically deliver the equipment to our customers via our own vehicles. Do we have nexus with every state our employees (a) deliver the equipment and (b) work even if for a few days a year.

    • John Daly John Daly says:

      Julie, you really have to address these questions on a state by state basis. If you would like, list the states, tell me what the employees are doing there, tell me what you you sell to customers in those states and I will let you know what the nexus deal is. Without knowing your individual facts you will probably have both income/franchise tax and sale tax nexus in each state.

  30. Tim says:

    Great article John. I’m talking to a company that provides telemarketing services to other companies and they have employees in every state but only file sales and use tax returns in 5 or 6 states. It amazes me how a company can take a position and not address change in the business situation.

  31. John Daly John Daly says:

    Not sure how this Holistic Network Exchange link got attached to my blog entry as a comment, but if you follow the link it takes you to an interenting and very accurate commentary. The suspended CA affiliate nexus law would constitutionally not apply to vendors that can demonstrate that they are not soliciting in CA. The Holistic Network Exchange points out that issuing some type of “Certification of Non-solicitation” agreement can be (should be) an effective counter measure to the over stepping affiliate nexus rule, as long as some new federal law does not alter the current nexus landscape. Much more to come on this..

  32. Pingback: Important Update California Affiliate Tax - Holistic Network Exchange

  33. Cody says:

    John – good article! so many companies roll over and let the states’ walk all over them, when in many cases they could not prove nexus!

    • John Daly John Daly says:

      Thanks Cody. As you know, it works both ways with contractors & nexus. I get clients all the time that think they only have to file a Jersey return as long as their out of state sales people are not employees. Keeps me busy.

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