West Virginia Rules that Independent Contractors Create Sales Tax Nexus

A recent ruling held that independent contractors’ activities can establish physical presence if the activities are significantly associated with maintaining a market in the state.

By Jess Johannesen, SALT manager

A number of factors may be considered when evaluating your company’s sales and use tax nexus profile to determine if your company has established physical presence: the presence of real or personal property, the presence of inventory, the presence of payroll in the state, the presence of employees traveling in the state for solicitation or service activities, the presence of affiliated entities, etc. However, the presence of unrelated independent contractors is commonly overlooked.

Ever since the 1987 United States Supreme Court opinion in Tyler Pipe, it is well-settled that the sales and use tax nexus physical presence requirement may be satisfied by independent contractors or other representatives acting on behalf of your company when “the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” [1] On Jan. 27, 2016, the West Virginia Office of Tax Appeals (the “OTA”) released a decision illustrating that an out-of-state corporation can establish sales and use tax nexus solely through the presence of unrelated independent contractors. [2]

The taxpayer, an exterior facilities maintenance management company, was an out-of-state corporation with its principal place of business outside of West Virginia. Specifically, it provided snow and ice removal, landscaping services, parking lot maintenance, window washing and minor building repair services. The taxpayer provided these services in 20 states, including West Virginia, but it did not have any employees, offices or property in West Virginia. Moreover, the taxpayer’s employees did not actually perform the services; instead, it contracted with unrelated independent contractors to perform the work under its supervision. The taxpayer utilized a proprietary software which allowed it to remotely monitor in real time the services being provided. All parties agreed that the services in question would be subject to sales tax if there was sufficient nexus.

The OTA held that the independent contractors’ activities established physical presence for the taxpayer since the independent contractors’ activities are significantly associated with establishing and maintaining a market in the state for the taxpayer. Specifically, the OTA noted that, “without the independent contractors operating on the [taxpayer’s] behalf, nothing happens. The [taxpayer] can sell all the window washing services it wants, but without people in West Virginia to do the washing, it’s out of business.” The OTA concluded therefore that the taxpayer is entirely dependent upon the in-state representatives for establishing and maintaining a market in West Virginia, “without whom, no economic activity occurs.” Consequently, the independent contractors establish sufficient physical presence, and thus sales tax nexus, for the taxpayer.

Businesses should consider the use of independent contractors and the impact they may have on the business’ nexus profile. It is worth noting that the West Virginia Office of Tax Appeals released another decision to the public on Feb. 18, 2016, in which it held that an out-of-state seller of garage equipment had sales and use tax nexus due to the activities in West Virginia of a single independent sales representative and representatives from a manufacturer that the company utilized. [3] This decision illustrates that independent contractors have recently established nexus for service providers as well as sellers of tangible personal property.

The Aprio SALT group is experienced in evaluating a company’s nexus profile for both income tax and sales and use tax purposes. If your company utilizes independent contractors, we can assist in determining whether these representatives may be establishing nexus for you. The Aprio SALT group constantly monitors state tax nexus developments around the country, and we will include any notable updates in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the March 2016 SALT Newsletter. To view the newsletter, click here.

[1] Tyler Pipe Indus., Inc. v. Washington, 483 U.S. 232 (1987).

[2] West Virginia Office of Tax Appeals, Docket No. 12-432 U, 12-433 CU, 12-434 C, 12-435 NFN, 01/30/2015.

[3] West Virginia Office of Tax Appeals, Docket No. 14-081 CU, 10/14/2015.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.

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