Many companies use third-parties for multiple company activities. This can include suppliers, salespeople, developers, or even fulfillment services.
Generally, anyone that is not directly supervised or managed by the company is considered an independent contractor.
There is a false belief by many business owners that independent contractors do not create a sales and use tax obligation for the company within the states where the independent contractors are located.
The fact is that quite often the sales that independent contractors make and/or the services they provide on behalf of a small business, are generally considered doing business in the state in which they are located. A quick look at the “book club cases” illustrates how independent contractors can create nexus for a company.
The Scholastic Book Club operates one of the largest mail-order book clubs, distributing its books and related products only through schools, with the help of thousands of teachers that participate in the program.
The teachers distribute Scholastic’s flyers to their students, parents fill out the order form and return the payment to the teacher who then submits the order and payment to Scholastic. The order is fulfilled when Scholastic sends the products directly to the teacher, who then distributes the products to the students.
Many states, through legal decisions, have found that the act of receiving sales and distributing books by the teachers, even without compensation or a formal contract, created nexus for Scholastic.
This is just one example of a business activity by a third party that creates nexus for a company in multiple states. There are many other examples pertaining to various business activities and including post-sale services performed by independent contractors.
If your business is using independent contractors, be aware that this activity could create nexus and additional tax obligations for your company.