States Look To Contractors As Source Of Tax Revenue With the continued sluggishness of our economy and increasing government spending, states continue to seek additional tax revenues, some of which they hope to get from the construction industry. Many states have increased their income and sales/use tax audit staffs, and they are casting a wider net in order to include more taxpayers in their jurisdictions. Contractors are often selected for audit when a state becomes aware of their presence in that state. This could happen through licensing, permits, payroll, or through audits of a contractors’ customers or suppliers. Some states have even posted employees near state lines to watch for business vehicles with out-of-state license plates or out-of-state company names entering their state.
Contractors with operations in multiple states should identify if they have “nexus” in those states. For income tax purposes, nexus is a term that describes the amount and degree of activity a business engages in, or has a presence in a state, before a state is entitled to assess tax on the income generated within that state. Nexus is created for income tax purposes if an entity derives income from sources within the state, owns or leases property in the state, or employs personnel in the state in activities that exceed “mere solicitation.” In addition, states are now using the concept of economic nexus, which means that it isn’t necessary for an entity to have physical presence in their state. The entity only needs to derive revenue from the state. The amount of each of these factors is defined by individual state statute, case law or regulations.
It is often the case that a business will be subject to sales and use tax in a particular state without being subject to income taxes. Some factors that may cause a sales tax nexus in a state include if the business has a physical location in the state, if there are resident employees working in the state, if the business has property in the state, and if there are employees who regularly solicit business in the state.
State nexus issues vary greatly from state to state, particularly for companies providing services. Many contractors are now bidding on projects in other states in order to keep employees busy and to keep their backlogs or pipelines full. If your company is working on projects located in another state, you should contact your tax advisor to determine your potential tax exposure in that state.
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