Sales Tax 101

Do Independent Contractors Create Sales Tax Nexus?

by Ned Lenhart

Independent Contractors Sales Tax Nexus States

Before a state can require a non-resident retailer to collect and remit the state and local sales tax administered by that state, the retailer must first come under the legal jurisdiction of the state that seeks to impose the tax. The concept of legal jurisdiction, with all its rich and confusing constitutional, statutory, and judicial history is neatly expressed by the word “nexus.”

When we say that a company has “nexus” in a state, that’s shorthand for saying that the company has behaved in such a way to bring itself under the legal jurisdiction of the taxing state.   Once under that state’s jurisdiction, the non-resident retailer must comply with the tax rules in the same way as a resident business. There is no such thing as “just a little nexus”! You either have it or you don’t.

Most state laws do not contain the word nexus. Rather, they use phrases such as “engaged in business in the state” or “doing business in the state” or “is a retailer in the state.” Then, by rule or statute, the states will outline the activities that constitute “nexus.” Many of the activities that the state list as creating nexus in their state are perfectly legal. Others are not. The U.S. Supreme Court has made it clear that there must be some physical connection between the non-resident retailer and the taxing state before nexus is created. It’s up to the state, to determine what that physical connection must be.

Most states that have taken the time to outline the activities that constitute “doing business” in there state may state something like the following which is part of the California tax code:

Retailer engaged in business in this state” specifically includes, but is not limited to, any of the following examples: …

the retailer has a representative, agent, salesperson, canvasser, independent contractor, solicitor, or any other person operating in California on the retailer’s behalf, including a person operating in California under the authority of the retailer or its subsidiary, for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property, or otherwise establishing or maintaining a market for the retailer’s products, (Cal. Rev. & Tax. Cd. §6203(c)(2); Cal. Code regs.18 §1684(c)(1)(D))

Independent Contractors

Companies use third-parties to perform countless activities for their company. This may include accountants, attorneys, suppliers, salespeople, programmers, and fulfillment services. Most states consider anyone that is not directly supervised and managed by the company to be an independent contractor.

For purposes of “doing business” in a state, the nexus creating activities of any third-party or independent contractor must be centered around creating or maintaining a marketplace in that state for the goods and services sold by a non-resident retailer. The California provision is very clear that the presence of independent contractors in California creates nexus only if they are engaged in some activity that creates or maintains a market in California for your product or service or acting as your surrogate in some activity that occurs after the sales transaction.

Example: if your contract calls for your company to install the property you sold, you use an independent contractor in California to do that installation service, this will create nexus in California. Using others to do the work that your employees would do does not shield your business from the state nexus laws of most states.

The use of independent contractors to do programing, web design, product design, credit card processing, would not create nexus in the state where these independent contractors work since their activities are not directly connected with the creation or maintenance of a marketplace for your goods in the state where they work. Nor are these individuals performing any service related to products after they are sold and delivered to their state.

However, if the independent contractors (individuals or organizations) conduct activities on behalf of your company related to sales, inventory acquisition, marketing, product promotion, demonstration, fulfillment, product return, or similar activities, then those activities may create nexus for your company. Once nexus has been created, your company must evaluate what sales tax and income tax implications this has for your business. As I’ve said in previous blog posts, just because your company has nexus in a state, does not automatically mean that there is any sales tax obligation. The actual obligation to collect and remit tax is dictated by the nature of your customers and the products sold.


Using independent contractors, whether individuals or companies, in states outside of your home state must be carefully analyzed to determine the exact activities they provide. If the activities are unrelated to the sale, delivery, and installation of the products you sell, then the presence of independent contractors in that state will most likely not create nexus. The presence of independent contractors in other states that assist with sales, marketing, customer service, or any other activity that is related to the sales of products, will likely create nexus.

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