A construction company usually creates tax nexus in another state the moment it performs work there, because crews, equipment and a fixed job site are physical presence. The federal safe harbor most businesses rely on, P.L. 86-272, protects only the solicitation of orders for sales of tangible personal property and does not cover services. Construction is a service performed on real property, so a contractor working across a state line generally has no federal protection from that state's income tax.
The contractor who takes one job in Alabama or Tennessee because a good client asked is not thinking about state tax registration. That is reasonable. It is also how a company ends up with an open filing obligation in a state it worked in once, three years ago, that never closes on its own.
Why contractors create nexus faster than other businesses.
Nexus is the connection between a business and a state that gives the state the right to tax it. For most companies the question is genuinely complicated, involving economic thresholds, remote sales and where customers are located. For a construction company it is usually simple, and the answer is usually yes.
Construction cannot be performed remotely. The work happens at a fixed physical location, performed by employees who are bodily present in that state, using equipment that sits there for the duration. Physical presence is the oldest and least ambiguous basis for state taxation. A contractor does not have to argue about whether it crossed an economic threshold, because it parked a truck in the state and left it there for four months.
The safe harbor that does not apply to you.
Most business owners have heard some version of "you do not owe income tax in a state unless you have a real presence there." That belief comes from a genuine federal law, Public Law 86-272, codified at 15 U.S.C. § 381. It prevents a state from imposing a net income tax on an out-of-state business whose only in-state activity is soliciting orders.
The limitation is in the operative language. The statute covers "the solicitation of orders… for sales of tangible personal property." That phrase runs through the entire section. It was written in 1959 for manufacturers sending sales representatives across state lines, and it was never extended to services.
Construction is the performance of services on real property. It is not the solicitation of orders for tangible personal property. The protection most businesses assume they have simply does not reach a contractor performing work out of state, and it does not matter how small the job was.
The five exposures to check before you bid.
Multi-state exposure is not one obligation. It is five separate ones, each with its own registration, its own filing calendar and its own penalty regime. They do not travel together, and satisfying one does nothing for the others.
| Exposure | What usually triggers it | What it looks like if ignored |
|---|---|---|
| State income or franchise tax | Performing work in the state | Unfiled returns with no statute of limitations running |
| Payroll withholding | Employees physically working in the state | Employer liability for tax that should have been withheld, plus penalties |
| Sales and use tax | Materials installed into real property there | Use tax assessed on materials, often years later |
| Entity registration | Doing business in the state | Loss of standing to enforce contracts or file a lien in that state |
| Contractor licensing | Performing licensed work | Unpaid invoices that become difficult or impossible to collect |
The last row is the one that surprises contractors most, because it is not a tax issue at all. In many states an unlicensed or unregistered contractor has limited or no ability to enforce payment through the courts. The tax exposure costs money. The licensing exposure can cost the entire receivable.
Payroll: the obligation that starts fastest.
Income tax filings are annual. Payroll withholding is immediate. When a crew works in another state, wages earned for that work are generally sourced to the state where the work was physically performed, and the withholding obligation attaches to the work rather than to where payroll happens to be processed.
What varies, and varies substantially, is when the obligation begins. Some states require withholding from the first day an employee works there. Others apply a day count or a wage threshold before it starts. A few have reciprocity agreements with neighboring states that change the answer again. There is no general rule that holds across all of them, which is exactly why it has to be checked per state before the crew travels rather than assumed.
Add one line to your pre-bid checklist: which state is this job in, and what is that state's withholding rule for a crew working there? It takes one phone call before the bid. After the job it takes an amended return.
Materials: you are the consumer, not the reseller.
Contractors often assume that because they resell materials to the owner as part of the contract, they buy those materials tax free. In most states that is backwards. A contractor installing materials into real property is generally treated as the final consumer of those materials, not as a reseller of them.
The practical consequence is that tax is generally owed on the materials somewhere. If it was not paid when the materials were purchased, the state where they were installed will typically expect use tax instead. Buying in Georgia and installing in another state does not eliminate the obligation, it usually just changes which state is owed and under what name.
Treatment differs by state and sometimes by contract type, with lump sum and time-and-materials contracts handled differently in some jurisdictions. This is a pricing question, not just a compliance question. A margin calculated without the material tax in it is a margin that does not exist.
The Georgia rule that applies at home.
Multi-state exposure runs in both directions. A Georgia construction company organized as a partnership, S corporation or LLC with an owner who lives outside Georgia has a withholding obligation of its own.
Under O.C.G.A. § 48-7-129, the entity must generally withhold 4 percent of the Georgia taxable income allocated to a nonresident member. An entity that fails to withhold and remit may face a penalty equal to 25 percent of the amount that should have been withheld. Filing a qualifying composite return on behalf of nonresident members is the recognized alternative.
This catches companies that took on a partner who later moved out of state, or that brought in an out-of-state investor, and never revisited the withholding question afterward.
Why unfiled returns do not age out.
The reason multi-state exposure is treated seriously is structural rather than punitive. A statute of limitations generally runs from the date a return is filed. When no return is filed, in most states nothing starts running, and the period stays open indefinitely.
A job performed in another state four years ago, with no registration and no return, is generally still assessable today, with interest that has been accruing the entire time. This is also why it surfaces during due diligence: it is one of the first things a buyer, a surety or a lender looks for, and it is difficult to quantify quickly, which makes it expensive to resolve under deadline.
Most states operate voluntary disclosure programs that limit the lookback period and commonly abate penalties for a taxpayer who comes forward before being contacted. The terms are meaningfully worse once the state initiates contact. If you know about an old out-of-state job, that asymmetry is the whole argument for handling it now.
What to do before the next out-of-state bid.
- List every state you have worked in over the last five years. Include jobs that were small, short, or subcontracted. Nexus does not have a materiality threshold you can rely on.
- For each one, check the five exposures separately. Income tax, payroll withholding, sales and use tax, entity registration, licensing. Satisfying one tells you nothing about the other four.
- Confirm the withholding rule before the crew travels, not after the job closes. This is the obligation that starts fastest and the one most often missed.
- Price the material tax into the bid. Decide which state is owed and under what treatment before you commit to a number.
- Check your own owner roster against O.C.G.A. § 48-7-129. If any member is a nonresident, confirm the 4 percent withholding or composite return is being handled.
- Register before you start. It is almost always the cheapest step in the sequence, and it is the one that stops the open filing period from ever beginning.
None of this makes out-of-state work a bad idea. Contractors expand across state lines successfully all the time. What separates the ones who do it cleanly is that they treated the state line as a checklist item during the bid, rather than as a detail to sort out once the money came in.
State thresholds, rates and rules change, and they differ enough that a rule which holds in Tennessee may not hold in Alabama or South Carolina. This article deliberately explains the categories of exposure rather than listing per-state numbers, because a stale threshold is worse than no threshold. Confirm the current rule with the state or with your CPA before you rely on it for a specific job.