State & Local Tax Blog

Third Party Contractors Give You Sales Tax Nexus

The area of sales tax nexus is not invariably direct or easy to determine. In fact, it’s never been more difficult to know what states you have to collect and remit sales tax in. Many retailers may not know that they could create physical nexus by working with a third-party contractor in another state. Let’s take a look into what that may mean for you. 

Do You Work With an Independent Contractor?

Many retailers utilize third parties for multiple services. This can include but is not limited to:

  • Salespeople
  • Suppliers
  • Fulfillment Services
  • Manufacturers
  • Delivery Services
  • Other Retailers

There is a common misconception by many retailers that working with independent contractors – anyone that is not directly managed by the company – does not create nexus for the retailer in the state where the contractor is located. 

However, the services that the independent contractors provide on behalf of the retailer are most often considered doing business in the state where the contractor is located which creates physical nexus

Many retailers utilize drop-shipping in their services which can further complicate your sales tax compliance. Drop shipping is when you have a third party fulfilling a service under an agreement contract or invoice on your behalf in another state.  This third party is not technically your employee but they still maintain a marketplace for you by being in that state and performing services on your behalf. This creates physical nexus for your company. 

The economic threshold may not have been met in that state but having a third party creates physical nexus. Common carriers like FedEx or UPS do not establish physical nexus, but a third party utilizing their own vehicle does.

Sound precarious? It can be. Utilizing a third party can simplify things logistically for a retailer, but it can create an intricate web of complications when it comes to sales tax and compliance. The transactions and indirect relationships between sellers, suppliers, and customers must all be taken into consideration, which can create an ambiguous challenge in figuring out who owes what to whom.

What Does That Mean For Me?

If your business utilizes an independent contractor in another state to deliver taxable goods and perform services to your customers on your behalf you may very possibly have physical nexus established within that state.

The South Dakota vs Wayfair decision of the supreme court has given the states more access to more revenue because it’s based on where their customers are located and their sales into those jurisdictions. It does not, however, supersede other policies or legislation that identify physical nexus in a particular state or jurisdiction. 

This information may leave you feeling puzzled and overwhelmed. But you’re not alone. If you’ve read this and identified that you may have physical nexus in states that you were previously unaware of, you may be asking: 

What Now?

As we like to say here at Peisner Johnson, “Start with Nexus”

Begin by asking yourself, “Do I have nexus?” As soon as you use an independent contractor in another state to fulfill a service you’re providing, you have nexus.

Next question: “Is what I sell taxable?”  You have to determine if the services you’re providing are taxable in that given state and from there we can help. We are available on our What’s Next Call to help navigate the complexities of sales tax compliance. We learn about your situation and will give you guidance to help provide you peace of mind and confidence in your next steps. We want to ensure you are moving in the right direction and getting what you need to stay compliant. We look forward to hearing from you.

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