Expanding your contracting business into new states can open exciting growth opportunities, but it can also bring unexpected tax obligations. That’s exactly what happened to Rusty. As he took on projects in multiple states, he received an unforeseen tax bill. His accountant explained he had triggered nexus tax rules. Without realizing it, Rusty was now responsible for multi-state tax compliance, sales, and income taxes in those jurisdictions.
Rusty needed to understand each state’s nexus rules to avoid penalties and audits and register accordingly. By managing his tax obligations proactively, he ensured his expansion was profitable and sustainable, avoiding costly surprises that could undermine his growth.
What is Nexus?
Nexus is established when a business has a significant connection or presence within a state, creating a sales tax obligation. Companies can trigger sales tax nexus in several ways:
Physical Presence
Physical Presence
Owning or leasing property, maintaining an office, or having employees in a state represent triggers. Even temporarily stationing workers at a job site can create nexus. For example, Rusty leased a storage unit in a neighboring state to hold materials for a big project. Even though he had no permanent office there, the lease created nexus, requiring him to file state taxes.
Sales and Services
Sales and Services
Even if your company doesn’t have a physical presence, performing construction work, installations, or repairs in a state, even if the project is short-term, may trigger tax obligations. Many states consider this a taxable activity, requiring businesses to register for sales and use tax regulations.
Economic Thresholds
Economic Thresholds
Exceeding a state’s revenue or transaction thresholds can require tax compliance. For instance, Rusty didn’t have an office or employees in a certain state, but after exceeding $100,000 in revenue from multiple projects there, he triggered economic nexus thresholds. This meant he had to register for taxes, even without a physical presence.
Once nexus is established, a construction company may be responsible for various state and local taxes, including state income tax, sales and use taxes, and payroll or employment taxes.
Given the complexity of multi-state tax laws, construction businesses should take proactive steps to manage their nexus obligations:
Track Job Locations and Duration
Keep detailed records of where and how long your teams are working in each state.
Monitor Economic Nexus
Different states have varying thresholds, so staying informed is crucial to compliance. Your CFO or controller should remain well-informed on this.
Understand Sales and Use Tax Requirements
Determine whether your business must collect sales tax on materials, services, or subcontracted labor. If support is needed, your CPA will be able to provide knowledge where there are gaps.
As construction businesses expand into new markets, anticipating nexus is key to avoiding tax pitfalls and ensuring smooth operations. Don’t let tax compliance slow you down. Plan ahead and understand the complexities of multi-state construction taxation.
Resource for State-Specific Tax Information: https://www.streamlinedsalestax.org/Shared-Pages/State-Detail
