United States: West Virginia Imposes Sales Tax On Service Provider Due To Presence Of In-State Independent Contractors

The Chief Administrative Law Judge (ALJ) of the West Virginia Office of Tax Appeals recently ruled that independent contractors performing work within the state on behalf of a company with no physical presence in West Virginia created substantial nexus for the company.1 In ruling for the Tax Commissioner, the ALJ relied on prior U.S. Supreme Court rulings in this area to determine that sufficient nexus was created by the independent contractors' activities and the tax assessed by West Virginia was constitutional under the dormant Commerce Clause.


The company at issue in this matter was an out-of-state provider of exterior facilities maintenance management, and offered services including snow and ice removal, landscaping services, parking lot maintenance, window washing, and minor building repairs. The company had four national customers with locations in 20 states, including West Virginia.

The company contracted service providers that it characterized as independent contractors. The service providers completed the work under the supervision of the company, which was made possible through the use of proprietary software monitoring the services in real time and requiring the service providers to submit photographs of their completed work. The company did not have any employees or property in West Virginia, and did not advertise in the state.

In October 2012, the Auditing Division of the West Virginia State Tax Department issued four assessments against the company. The assessments covered various periods from 2007-2012 for the West Virginia use tax, sales and service use tax, sales tax, and corporate net income and business franchise taxes. The company filed an appeal in November 2012 arguing that it did not have a physical presence in West Virginia and was not subject to the sales and service use tax, or sales tax portions of the assessments.

Overview of Prior U.S. Supreme Court Rulings

The U.S. Supreme Court has addressed activities supporting substantial nexus determinations on numerous occasions dating back to 1960, when the Court was presented with the Scripto, Inc. v. Carson2 case. Scripto was a Georgia taxpayer in the business of shipping writing instruments to out-of-state jurisdictions including Florida. Scripto argued that, because it had no employees or offices in Florida, the imposition of use tax regarding its Florida sales violated both its due process rights and burdened interstate commerce. However, the Court determined that Scripto had sufficient nexus with Florida due to the presence of commissioned salesmen in the state acting on Scripto's behalf. As a result, the Supreme Court decreed that retailers could be physically present in a state through those acting on their behalf, such as agents.

Over 30 years later, in Quill Corp. v. North Dakota,3 an out-of-state mail order catalog vendor argued that the taxing state did not have the power to impose sales tax because the company lacked sufficient connections with the state. Quill's only contact with North Dakota was the delivery of catalogs to potential customers through the postal service, and the use of common carriers to deliver goods to actual customers. In contrast to Scripto, the Court found in favor of the taxpayer, ruling that a taxpayer must have a physical presence in a state in order to require collection of sales or use tax for purchases made by in-state customers.

In the intervening time between the Scripto and Quill cases, the Court weighed in on several state tax nexus controversies. In 1967, in National Bellas Hess, Inc. v. Department of Revenue,4 a mail-order company whose sole contact with the taxing state derived from the delivery of catalogs and goods sold via postal service and common carrier, respectively, was not subject to sales tax. In 1977, the Court created a four-prong test regarding the constitutionality of taxation under the Commerce Clause in Complete Auto Transit v. Brady.5 As a result, "[a] state tax on interstate commerce will not be sustained unless it: (1) has a substantial nexus with the State; (2) is fairly apportioned; (3) does not discriminate; and (4) is fairly related to the services provided by the State."

In National Geographic Society v. California Board of Equalization,6 a mail order vendor had two sales offices located in California. National Geographic argued that these offices were strictly used to support the advertising staff of the magazine and had nothing to do with their catalog sales. The Court ruled that, regardless of the nature of the offices, their presence provided National Geographic with an advantage to establish a market, in addition to access to municipal services, such as fire and police protection.

Finally, in Tyler Pipe v. Washington State Department of Revenue,7 a company did not have any employees or property in the state. However, the company did have one out-of-state sales executive and one in-state independent contractor, both of whom were soliciting sales from Washington customers on behalf of Tyler Pipe. The Court again cited Scripto and ruled that, although the salesmen were not employees of Tyler Pipe, the presence of instate representatives was sufficient to establish nexus and that it was not constitutionally significant whether the representative was designated an "employee" or "independent contractor."

Use of Independent Contractors Established Nexus in West Virginia

Generally, West Virginia imposes sales and use tax on the provision of services unless specifically exempt.8 Accordingly, landscaping and snow removal services are not excluded under West Virginia statute and as such, are subject to tax. Neither the company nor the Department disputed this conclusion. The issue at hand was whether or not the company had sufficient nexus in West Virginia to require it to collect and remit sales tax from its West Virginia customers pursuant to the dormant Commerce Clause.

The West Virginia Tax Commissioner relied mainly on Scripto, arguing that there was no difference between the salesman in Scripto and the company's independent contractors performing the landscaping and snow removal services in West Virginia. The company argued that Quill precluded the state from imposing sales tax on its activities, because it lacked a physical presence in West Virginia. In addition to Quill, the company also cited to National Bellas Hess, Complete Auto Transit and National Geographic to support its argument that a sufficient connection to West Virginia did not exist.

The ALJ agreed with the Commissioner, finding that the company's facts establishing nexus were stronger than those in Scripto, because the independent contractors at issue were performing all of the business activity in West Virginia. Additionally, without the independent contractors, the company would not be able to perform services in the state and thus, would not have any revenue derived from West Virginia customers. In contrast, the company in Scripto merely employed salesmen that were soliciting business and signing the contracts. In addition, the ALJ found that the company failed to specifically address how it did not have a physical presence in West Virginia.


The ALJ noted that the "sharp distinction . . . between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business"9 established by the Supreme Court in National Bellas Hess was evident in the current case, because the company had a direct presence in West Virginia through persons operating on its behalf. To expand upon this distinction and how it applies to current tax issues, the ALJ referred to cases involving Internet travel companies, such as Travelscape, LLC v. South Carolina Department of Revenue.10 Similarly, substantial nexus was created in South Carolina for Travelscape, an out-of-state Internet travel company, based on having employees visiting the state to negotiate contracts with South Carolina hotels. The South Carolina Supreme Court ruled that, without South Carolina hotels providing rooms, Travelscape would not have had business in the state.

As states continue to expand their definition of nexus and thus, their taxing authority, through interpretation of existing statutes and the introduction of affiliate and economic nexus statutes, it is important for taxpayers to continually monitor changing nexus standards and their own state activities. Using independent contractors on a multistate basis, especially in connection with solicitation of sales, customer service, installation, and other activity related to the sale of products or services raises the distinct risk that state tax authorities will impose significant sales tax obligations as a result.


1 Redacted Decision – DK#'s 12-432 U, 12-433 CU, 12-434 C, 12-435 NFN, West Virginia Office of Tax Appeals, Jan. 30, 2015 (released Jan. 27, 2016).

2 362 U.S. 207 (1960).

3 504 U.S. 298 (1992).

4 386 U.S. 753 (1967).

5 430 U.S. 274 (1977).

6 430 U.S. 551 (1977).

7 483 U.S. 232 (1987).

8 W. VA. CODE § 11-15-3(a).

9 Quoting National Bellas Hess v. Department of Revenue, 386 U.S. 753, 758.

10 705 S.E.2d 28 (S.C. 2011).

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