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It is important for taxpayers to be wary of circumstances that could potentially trigger state and local tax. Simply selling to customers who are physically located in multiple states can trigger a nexus.

A "nexus" is having a connection to a state, which then allows that state to tax an individual/business. Contractors who qualify for income tax nexus are required to collect and remit tax on sales in that state. Generally, this tax is based on a company’s net income, although there are exceptions.

With each state having its own nexus guidelines pertaining to income, franchise/net worth, sales/use, and other general taxes, it can get more complicated. Contractors may find it difficult to keep up with all the rules, especially if they offer products or services online.

Although it is obvious that having a permanent or temporary physical presence in a state would trigger nexus, other associations are not as apparent. A contractor might decide to use independent subcontractors in certain states and use employees in others. Independent contractors acting on behalf of a company, represent a physical presence in some states, making the general contractor responsible for paying sales and use tax.

Public Law 86-272

The Interstate Income Act of 1959 (P.L. 86-272) generally prohibits states from imposing taxes on income derived from interstate commerce. Under this law, business activities in the state are limited to the solicitation of orders of tangible personal property that are sent outside the state for acceptance and fulfillment. The Multistate Tax Commission (MTC) adopted guidance on Aug. 4, 2021, to address internet activities.

Under the new guidance, taxpayers who sell tangible personal property over the internet may be protected by P.L. 86-272. Safeguarded activities include posting static FAQs that may be used to provide post-sale assistance or placing cookies onto the computers or devices of in-state customers to gather information used only for soliciting sales of tangible personal property.

Unprotected activities include, but are not limited to, providing post-sale assistance to in-state customers via an app or website, leaving cookies on a customer’s device to gather information on shopping trends or to track inventory, soliciting applications for branded credit cards on the business’s website, inviting customers to apply for non-sales positions and remotely fixing or upgrading products online.

Qualifying Standards

Many states are adopting metrics other than physical presence, to determine nexus. Methods such as the economic presence or factor-based are considered more equitable. “States using the economic presence standard can impose tax on out-of-state companies doing business in the state, but that do not have a physical presence in the state. Under factor-based nexus, or factor presence nexus, an out-of-state company has nexus if it has property, payroll, or sales that exceed certain thresholds during the tax period,” according to Wolters Kluwer.


The MTC adopted threshold amounts to determine if enough nexus exists to subject a business to state income tax. Under this standard, a company is doing business in a state if the property, payroll or sales exceed these thresholds (annually adjusted for inflation) during the tax period:

  • $50,000 of property;
  • $50,000 of payroll;
  • $500,000 of sales; or
  • 25% of total property, total payroll, or total sales.

Because the decision to adopt MTC guidelines or not is at each state’s discretion, these thresholds may not apply.

There are many factors that need to be addressed by contractors, along with their accountant and lawyer, regarding nexus. Implementing a new business practice such direct-to-consumer in a particular state or using independent contractors on a job instead of employees, can trigger nexus. The independent contractor working in a state in which the job is being performed may represent a physical presence for the general contractor. Each circumstance is different.

Contractors need to be aware of nexus triggers in each state in which they do business. State and local taxes should be factored into bids, and processes should be put in place for collection and remission of tax, as well as filing of necessary returns. Technological advances have made it easy for agencies to track down noncompliant companies. Interest and penalties may be assessed on unpaid taxes. It is, therefore, prudent for contractors to stay abreast of all state and local nexus standards prior to making a change.


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