In this blog we explore the state positions on whether or not independent contractors create nexus. In many states it depends on what activities contractors do and how much authority you have over them. Sales tax nexus is created in almost every state when a contractor performs the duties of a sales representative. However, other activities, such as warranty repair, only create a nexus occasionally.
What is nexus, exactly?
Nexus is established when a businesses crosses or meets a state threshold that then obligates them to register, assess, & remit sales tax. Nexus can be established in a variety of ways for each state - physical, economic, affiliate, marketplace, click-through just to name a few. If you are a company with a physical presence in the state and have employees there, it's easy to establish nexus.
However, when your business pays contractors, agents, representatives, or other types of agents (who aren't considered an employee) for services in another state, the situation becomes more complicated.
Let's look at each state:
Alabama
Does hiring independent contractors in Alabama create a sales tax nexus? In Alabama, hiring independent contractors usually creates a sales tax nexus.
Alabama requires that any seller who has independent contractors working in Alabama to make a sale, or to create a profit register with and collect the sales tax due to a substantial connection to the state.
Arizona
Does hiring independent contractors in Arizona create a sales tax nexus? In Arizona, hiring independent contractors will generally result in a nexus with sales tax.
Arizona decided in 2016 that an independent contractor in Arizona could satisfy the substantial-nexus requirements if they resided in Arizona at least two days in any given year.
California
Does hiring independent contractors in California create a sales tax nexus? If you're a California retailer, hiring contractors can create a sales tax nexus.
California requires that retailers with independent contractors who are in the state "for the purposes of selling tangible personal property, delivering it, installing it, assembling or taking orders" register and collect the sales tax.
Colorado
Does hiring independent contractors in Colorado create a sales tax nexus? In Colorado, hiring independent contractors usually creates a sales tax nexus.
Colorado requires that any seller who has independent contractors working in Colorado to make a sale, or to create a profit must register with and collect the sales tax due to substantial nexus.
Florida
Does hiring independent contractors in Florida create a sales tax nexus? In Florida, hiring independent contractors can create a sales tax nexus.
Florida requires that any seller who has a contractor (agent) working in Florida to make a sale, deliver goods or take orders must register for sales tax and pay it.
Georgia
Does hiring independent contractors in Georgia create a sales tax nexus? In Georgia, hiring independent contractors will generally result in a taxable sales nexus.
Georgia requires that any seller who has contractors (sales agent) working in Georgia to make a sale, deliver goods or take orders must register for sales tax and collect it due to nexus.
Illinois
Does hiring independent contractors in Illinois create a sales tax nexus? In Illinois, hiring independent contractors can create a sales tax nexus.
Illinois requires that any seller who has independent contractors working in Illinois to generate sales, deliver goods, or take orders of personal tangibles in Illinois register for and collect the tax.
New York
Does hiring independent contractors in New York create a sales tax nexus? In New York, hiring independent contractors generally creates sales tax nexus.
New York generally requires any sellers who have independent contractors in the state for the purpose of generating sales, deliveries, or taking orders to register and collect sales tax.
Texas
Does hiring independent contractors in Texas create a sales tax nexus? In Texas, hiring independent contractors generally creates sales tax nexus.
Texas generally requires any sellers who have independent contractors in the state for the purpose of generating sales, deliveries, or taking orders to register and collect sales tax. Any independent contractor who performs services in the state can also create substantial nexus.
Washington
Does hiring independent contractors in Washington create a sales tax nexus? In Washington, hiring independent contractors generally creates sales tax nexus.
Washington generally requires any sellers who have independent contractors in the state for the purpose of generating sales, deliveries, or taking orders to register and collect sales tax. Installing, servicing, or repairing personal tangible property in the state can also create substantial nexus.
Summary
In most states, hiring independent contractors who perform sales-related activities (making sales, delivering goods, taking orders) will create sales tax nexus. Some states also consider warranty repair, installation, and other services as nexus-creating activities. The key factors are:
- What activities the contractor performs
- How much authority you have over them
- Whether they are acting on behalf of your business
- State-specific rules and thresholds
When in doubt, consult with a tax professional or contact the specific state's tax authority for guidance.
Disclaimer: The information shared is general in nature, intended solely for informational and educational purposes, and may not be applicable to your individual circumstances. All content is provided "as is," without any representations, guarantees, or warranties.