In a recent determination, the Washington Department of Revenue (Department) concluded that an out-of-state company established substantial nexus in Washington due to the in-state activities of its contracted service providers.
The taxpayer, an out-of-state company, contracted local Washington providers to provide water mitigating services for insurance companies. The taxpayer would arrange for the services after an insured customer would file a claim. The taxpayer would then bill the insurance company directly and pay the service providers. The service providers would receive a1099 tax form from the taxpayer for the work performed. The taxpayer argued that it was not providing retail services but only administrative services, it did not have sufficient physical presence in Washington and that if found taxable, only its markup should be subject to tax.
The Department ruled that the taxpayer had substantial nexus in Washington under both constitutional and statutory nexus. Based on Washington’s code, a taxpayer has nexus if in-state activities are significantly associated with its ability to establish or maintain a market in the state, even if the activities are conducted via agents of the taxpayer. Additionally, the taxpayer’s in-state referral network and oversight of local service providers were essential in fulfilling its contractual obligations. These activities were significantly associated with the taxpayer’s ability to operate and serve clients in Washington. Lastly, the taxpayer assumed warranty obligations on the services, which further established its role as the seller and not just a facilitator. Citing Tyler Pipe Industries, Inc. v. Department of Revenue and Scripto, Inc. v. Carson, the Department emphasized that independent contractors could create nexus when their in-state actions support the taxpayer’s business presence or market development.
The Department’s determination confirms that physical presence through third-party contractors can be enough to trigger tax obligations even if you’re headquartered outside of the state. Whether you’re managing claims, dispatching technicians, or coordinating repairs through a local network, Washington sees that as doing business in the state. If your business activities are essential to maintaining your market presence, the Department will treat you like you’re in the state. Take a close look at how your third-party relationships function in each state because you can establish nexus even without physical presence.
(Det. No. 20-0171, 44 WTD, Washington State Department of Revenue, May 19, 2025)