If your business requires contractors that get paid on a 1099 to work for you in another state, then you might have created a nexus.
If that contract worker takes part in:
- Helping you build and/or
- Create a new market
Then, most likely, you have a nexus.
Activities That Can Create Nexus
If you have contractors for the purposes of:
- Generating sales
- Making deliveries
- Taking orders for personal tangible property or services
Then, they are required to register and collect sales tax.
In addition:
- Installing, servicing, or repairing personal tangible property in the state can also create substantial nexus.
State-Specific Considerations
In Michigan, for example, they state that using an agent to:
- Own, rent, lease, use, or maintain a place of business on your behalf
can also create substantial nexus.
But nexus factors are NOT ONLY limited to the above scenarios.
Importance of Local Rules
Depending on the state, you have to look into the local rules and court decisions.
Frequently Asked Questions
What is a nexus in the context of 1099 contractors?
A nexus refers to a business connection or presence in a state, which may require you to comply with local tax obligations. Hiring 1099 contractors in another state can create a nexus if they help build your business or develop new markets.
Can hiring a contractor in another state create tax obligations?
Yes, if your contractor engages in activities such as generating sales, taking orders, or providing services in the state, your business may be required to register and collect sales tax.
What activities by contractors commonly create a nexus?
Common activities include making deliveries, installing or repairing tangible property, or soliciting sales. These actions are considered substantial enough to establish a business presence in the state.
Are there differences in nexus rules between states?
Yes, nexus rules vary by state. Some states, like Michigan, consider additional factors such as maintaining a place of business or using agents to conduct business on your behalf.
How can I ensure compliance with state nexus laws?
You should consult each state’s tax authority, review local laws and court decisions, and potentially seek legal or tax guidance to understand your obligations fully.