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Could Your Independent Contractor Trigger Nexus?

  • Jun 9, 2016 | Suzanne Kearns

Most ecommerce sellers who understand the concept of nexus know that having an employee in a state is enough to trigger nexus, which means you’ll have to register and collect sales tax on behalf of that state.

But when it comes to independent contractors, things get a little fuzzy. Does the law look at these types of workers differently than regular employees when it comes to nexus? And what’s the difference between an employee and an independent contractor, anyway? Here’s a brief overview that will help you determine whether your independent contractors give you nexus in the states you sell in.

Employees vs. Independent Contractors

According to the IRS, there are three common law areas that will help you determine whether a worker is an employee or an independent contractor. They are:

  • Behavioral: Do you control when and how the worker does their job? If so, you may have to classify them as an employee.
  • Financial: Do you control the financial aspects of the worker’s pay? In other words, do you determine how they are paid, whether they will be reimbursed for expenses, or who provides their tools and supplies they need to do the job? Controlling the financial aspects of a worker typically means you should classify them as an employee.
  • Relationship: If you have certain contracts with the worker or offer benefits such as a vacation plan, pension, or insurance, they should be classified as an employee.

The IRS offers a program that will help you identify your workers so you can classify them properly. Simply fill out form SS-8 (PDF) and the IRS will make a determination in about six weeks.

Remember, if you have an employee in any state, it will trigger nexus. But if the worker is classified as an independent contractor, things aren’t quite that simple.

When Does Hiring an Independent Contractor Trigger Nexus?

The sales tax nexus laws for the process of utilizing an independent contractor as a part of doing business differs in each state. (You knew I was going to say that, didn’t you?) But the basic laws all come down to the same principle: The type of service the independent contractor performs for your business determines whether or not you have nexus.

Generally, if the independent contractor performs services on behalf of your business, it will likely trigger nexus. For instance, if you sell a product online, and then have an independent contractor install it or repair it when it breaks, that will trigger nexus in many states. Here are a few examples to give you an idea of how the different states stand when it comes to nexus with this type of arrangement.

  • California: If your independent contractor sells, delivers, installs, assembles, or takes orders for personal tangible property for your business, you have nexus in that state.
  • Virginia: This state’s laws say that if the independent contractors you use perform services that your company relies on to stay in business, then you have nexus. In a court ruling, the state determined that an out-of-state window washing company that used independent contractors had nexus because it depended on those contractors to stay in business.
  • Florida: If you have independent contractors conducting sales or other business activities in the Sunshine State, you have nexus.

This is yet another area of nexus where it’s important to know the law for every state where you utilize independent contractors. To learn about the states you do business in, you can contact the Department of Revenue offices for each state, or visit our State Sales Tax Guides to find the information you need.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns