United States

West Virginia: Service Provider has Nexus due to Presence of In-State Independent Contractors

Feb 22, 2016
From KPMG TaxWatch

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Recently, a West Virginia Administrative Law Judge (ALJ) addressed whether an out-of- state service provider was required to collect and remit West Virginia sales and service taxes. The taxpayer at issue provided exterior facilities maintenance services (e.g., ice and snow removal, landscaping, and window washing) to customers in over twenty states, including West Virginia. Rather than performing the services itself, the taxpayer engaged independent contractors to perform the services for the taxpayer’s customers. Using proprietary software, the taxpayer was able to monitor the work performed by the independent contractors.  The taxpayer had no physical presence in West Virginia and did not advertise within the state. The sole issue before the ALJ was whether it was constitutionally permissible under the dormant Commerce Clause for the Tax Commissioner to require the taxpayer to collect and remit West Virginia sales and service taxes.

The Commissioner, relying primarily on the U.S. Supreme Court’s holding in Scripto and similar cases, asserted that the taxpayer had nexus by virtue of using the independent contractors to perform services in West Virginia. The taxpayer, on the other hand, appeared to be arguing that because it lacked a physical presence in the state, it could not, under Quill, be compelled to collect and remit tax. The ALJ determined that even if it agreed with the taxpayer’s argument that a taxpayer had to have a physical presence to have substantial nexus with a state, the taxpayer had nevertheless failed to explain how it did not have a physical presence in West Virginia. Although the taxpayer attempted to differentiate its independent contractor service providers from the independent salespeople in Scripto, the ALJ was not persuaded. In fact, in the ALJ’s view, the taxpayer’s use of independent contractors was even more compelling in this case because without the independent contractors, the taxpayer could not provide its services and would have no market in West Virginia. In contrast, the taxpayer in Scripto (and the taxpayers in subsequent cases) would have been able to sell product absent the in-state salesperson or representative. The ALJ likened the taxpayer to an online hotel intermediary and noted that both entities would have no market in the state, but for the in-state hotels or in-state independent contractors. Please contact Chris Sray at 412-232-1565 with questions on this ALJ decision.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.