State-Specific Sales Tax Nexus

Sales tax nexus occurs when a business has some kind of connection to a state. Prior to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 585 U.S. (2018), physical presence was required to create nexus for sales tax. Physical presence can mean a number of things, including having an office, an employee, a warehouse, or storing inventory. After Wayfair, physical presence is no longer required and economic nexus comes into play. In Wayfair, the Court ruled that if a company had a minimum of $100,000 in sales or 200 sales transactions then economic nexus would apply.

Currently, more than 40 states have economic nexus provisions and some states have increased the threshold to $500,000 and above.

States that impose a sales tax on services generally follow either a “benefit received” or a “services performed” rule to determine sourcing for sales tax. To determine where the sale is taxed, you need to determine the location of where the benefits are received or performed. Every state that taxes services follow the “benefit received” rule. For example, if you are a Utah staffing company who provides services to a Connecticut client, you would source the tax for those services to Connecticut since that is where the benefits are received. Connecticut is a “benefit received” state and services are generally sourced to where the benefit is received regardless of where the service provider is located.

The following is a brief summary of the states that tax services for out of state business. The various rules are for those service providers that have sales in these states and do not have a physical nexus.

Connecticut

Connecticut imposes 6.35 percent sales tax rate for most goods and services. A company is required to register with the Department of Revenue for sales and use tax if the company is engaged in the sale of taxable services. Taxable services include employment services and personnel services. Employment services include the “procurement or offer to procure for a consideration: jobs or positions for those seeking employment; or employees for employers seeking the services of employees.” Personnel services include “providing temporary or part-time help to others by means of employing such temporary and part-time help directly.” The economic nexus threshold for requiring out of state businesses to collect and remit sales tax is $100,000 of revenue and 200 or more transactions.

District of Columbia

In the District of Columbia, the “service of procuring, offering, or attempting to procure job seekers for employers or employment for job seekers, including advice, counseling, testing, resume preparation, and any other related services are subject to tax.” Sales tax is imposed on the sale of or charge for the service of placing a job seeker with an employer. Out of state businesses whose gross revenue from sales into the District of Columbia exceeds $100,000 or who make 200 or more separate transactions into the District of Columbia are subject to collection requirements. For 2023, sales tax is stated at 5.75 percent.

Hawaii

Hawaii does not have a sales tax. It does have a gross receipts tax known as the “General Excise Tax” which applies to sales of goods and services. The General Excise Tax is charged to the business rather than the customer, but the businesses may pass some or all of the tax on their customers similar to the traditional sales tax. Hawaii imposes a 4 percent excise tax on gross income. Effective July 1, 2018, Hawaii defines engaging business in the state as to include businesses who in the current or immediately preceding calendar year to conduct 200 or more separate transactions into the state or earn $100,000 or more in gross proceeds from sales. Transactions that count toward these minimum thresholds include services used or consumed in the state. 

Iowa

The sales price from sales of services by private employment agencies are subject to sales and use tax. Effective January 1, 2019, Iowa’s economic nexus standard requires out of state businesses who have sales equal to or exceeding $100,000 to register and pay use tax. There is no transaction threshold.  Iowa’s sales and use tax rate is currently 6 percent.

Kentucky

Effective January 1, 2023, receipts from the sales of executive employee recruitment services became subject to sales and use tax. Executive employee services mean services provided by a person to locate potential candidates to fill open senior-level management positions. Kentucky has indicated that its definition of “executive” comes from the IRS guidelines for highly compensated employees along with common definition of executive as an administrator or manager. There is a minimum compensation threshold of $150,000. However, there is a de-minimis threshold for services which would generally apply if a seller’s gross receipts are less than $6,000. In 2024, the Kentucky sales and use tax rate is 6 percent.

New Mexico

Charges for job placement services are subject to gross receipts tax. The state gross receipts tax rate is currently 5.125 percent. This total rate can range from 5.125 percent to 8.8675 percent depending on the location. Staffing companies that do not have a physical presence in New Mexico are subject to the gross receipts tax if they have at least $100,000 of taxable gross receipts from sales of services. There is no transaction threshold.

Pennsylvania

Employment services are defined as “the service of attempting to procure or procuring temporary or permanent employment for prospective employees or employers, including executive placing services or labor contract employment agencies.” Effective July 1, 2019, out of state businesses with gross sales into Pennsylvania that exceed $100,000 are considered to be engaged in business in Pennsylvania and are required to collect and remit sales tax. There is no transaction threshold. In 2024, the state sales and use tax rate is 6 percent.

South Dakota

South Dakota imposes sales and use tax on employment services unless specifically exempt. “The exemption does not cover situations in which a firm temporarily assigns employees of the firm to support or supplement a client company’s regular work force in special situations, such as an employee absence, temporary skill shortages, seasonal workloads and special assignments, or projects. Temporary healthcare services provided by an agency or licensed healthcare practitioners on a contract or fee basis are not subject to sale tax.”

South Dakota enacted an economic nexus provision requiring businesses without a physical presence in the state to collect and remit sales tax if gross revenue is more than $100,000 or prior to July 1, 2023, has more than 200 separate transactions. South Dakota’s economic nexus threshold is based on gross revenue, which means all sales of services must be included when determining whether a seller has exceeded the threshold.

Washington

Temporary and permanent placement services are taxable if the worker performs an activity that is defined as a retail sale. Retail sales tax must be collected from the customer for services that constitute taxable retail services. Examples of services include carpentry, electrical work, repairs of computer hardware, and painting. Washington imposes collection requirement on out of state businesses that have more than $100,000 of cumulative gross receipts from the state in the current or preceding year. There is no transaction threshold. Washington imposes a 6.5 percent tax on the sale of certain services. Out of state businesses who provide employee placement services are also subject to the state’s business and occupation tax.

West Virginia

Sales of temporary employment agency is considered to be rendering services to the employer and the charges are subject to the consumers sales and service tax. West Virginia does not specifically address the tax treatment of placement services or permanent employment services. Effective January 1, 2019, out of state businesses who have more than $100,000 of services to the state or engage in 200 or more separate transactions are required to collect and remit sales and use tax. The sales and use tax in West Virginia is 6 percent.