When were a nonresident's personal services substantially performed in Nebraska for withholding purposes?

Plain-English summary

Nebraska looked first to activities that had to occur in the state for the service to be completed satisfactorily. If more-than-minimal essential activities were required in Nebraska, the service was substantially performed there and the covered payor generally had to withhold from qualifying payments to the nonresident.

The contract or engagement terms helped identify which activities were essential and where they had to occur.

Multistate and location-flexible work

When essential activities had to occur in multiple states, the payor could limit Nebraska withholding to the contract portion reflecting Nebraska's relative share of all essential activities.

If no essential activity had to occur in any particular state, Nebraska withholding applied only when more of the service would be performed in Nebraska than in any other single state.

The parties could use Form W-4NB to document why withholding did not apply when no essential activity had to occur in Nebraska or when another state had the greatest share of location-flexible work.

Examples from the GIL

A consultant's brief Nebraska site visit and board presentation caused the full contract to be subject to withholding because both were contractually essential, even though most work occurred elsewhere.

For an engineering project inspecting five factories, three in Nebraska and two elsewhere, the on-site inspections were essential. Nebraska withholding applied to 60% of the contract price.

A voluntary introductory meeting in Nebraska did not trigger withholding when all engineering work occurred outside the state and the meeting was not essential.

Common questions

Q: Did time spent in Nebraska alone determine the result?

A: No. The importance of the Nebraska activities and the amount of activity both mattered.

Q: Could a short Nebraska visit make the full contract subject to withholding?

A: Yes, when the visit was more than minimal and essential to satisfactory completion under the engagement.

Q: Was withholding all-or-nothing for multistate essential work?

A: No. The payor could use the relative share of essential activities performed in Nebraska.

Q: Did Form W-4NB eliminate the need to revisit changed facts?

A: No. The parties had to reconsider the form when requirements or circumstances changed substantially. A good-faith acceptance protected the payor only under the applicable facts.

Q: Did no withholding mean no Nebraska return?

A: No. A nonresident with Nebraska-source income still had to file Form 1040N and Schedule III.

Citations and references

• Neb. Rev. Stat. § 77-2753(2) — nonresident personal-service withholding
• Neb. Rev. Stat. § 77-2753(2)(c) — covered corporations, partnerships, and limited liability companies
• Form W-4NB — Nonresident Individuals Performing Personal Services in Nebraska
• Nebraska GIL 21-18-1 — “substantially performed in Nebraska” test and examples

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/general-information-letters-gils
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/gil/GIL21-18-01_Nonresident_Withholding.pdf

Original ruling text

GIL 21-18-1 Nonresident Income Tax Withholding for Personal Services
This guidance document is advisory in nature but is binding on the Nebraska Department of Revenue (Department)
until amended. A guidance document does not include internal procedural documents that only affect the internal
operations of the Department and does not impose additional requirements or penalties on regulated parties or
include confidential information or rules and regulations made in accordance with the Administrative Procedure
Act. If you believe that this guidance document imposes additional requirements or penalties on regulated parties,
you may request a review of the document.
This guidance document may change with updated information or added examples. The Department recommends
you do not print this document. Instead, sign up for the subscription service at revenue.nebraska.gov to get
updates on your topics of interest.
October 5, 2018
Dear XXXX,
Guidance has been requested from several taxpayers about what level of presence in Nebraska is necessary to
determine if personal services are being provided “substantially in Nebraska,” thus requiring a payor maintaining
an office or conducting business in Nebraska1 to withhold income tax from payments to nonresident individuals
that are in excess of $600.2 This issue arises frequently when the nonresident individual3 in question visits
Nebraska one or more times to conduct onsite testing, research, consultation, or other activities; and also spends
much of his or her time outside Nebraska at the home office, for example, performing important activities such
as analyzing data, consulting with other professional colleagues, or writing a report. Under these circumstances,
how is the payor to determine if the professional services were “substantially performed in Nebraska” and
therefore subject to the income tax withholding required by Neb. Rev. Stat. § 77-2753(2). To provide guidance
to taxpayers throughout the state, the Nebraska Department of Revenue (Department) has decided to answer this
question by issuing a General Information Letter (GIL).
GILs address general questions; provide analysis of issues; and direct taxpayers to the Nebraska statutes,
Department regulations, revenue rulings, or other sources of information to help answer a question. A GIL is a
statement of current Department policy, and taxpayers may rely on the Department to follow the principles or
procedures described in a GIL until it is rescinded or superseded. You may also find current regulations, revenue
rulings, information guides, taxpayer rulings, and other GILs at revenue.nebraska.gov that may be helpful to you.
Section 77-2753 contains no definition or other instruction as to what “substantially performed in Nebraska”
means. Consequently, the Department must discern the common and ordinary meaning of the word “substantially.”
The Oxford English Dictionary defines “substantially” as “to a great or significant extent” and “for the most part;
essentially.” Dictionary.com defines the term as “of ample or considerable amount” and “basic, or essential;
fundamental.” These definitions imply that “substantially” has both a qualitative and a quantitative aspect. That
is, the importance of the activity that must be performed in Nebraska and the amount of the activity that is
performed in Nebraska both contribute to the determination of what is “substantial.”
Recognizing that this definition remains mixed and indefinite, the Department believes that it is in the best interests
of both the state and the taxpaying public that the income tax withholding on personal services performed by a
nonresident should be administered in a way that simplifies the analysis to the greatest extent possible and allows
the payor to make an objective assessment. The payor is in position to know which activities it requires to be
performed in Nebraska and which may be performed anywhere.
Or making payments in excess of $5,000.
This income tax withholding requirement is in Neb. Rev. Stat. § 77-2753(2).
3
Or a corporation, partnership, or limited liability company that receives compensation for personal services in this state
and of which all or substantially all of the shareholders, partners, or members are the individuals performing the personal
services per Neb. Rev. Stat. § 77-2753(2)(c).
1
2

GIL 21-18-1

Page 2 of 3

Consistent with this viewpoint, the Department has determined that the withholding requirement applies,
unless it is clear based on the terms of service and the circumstances that: (a) no essential activities must
be performed in Nebraska; or (b) if no essential activities must be performed in any particular state, more
activities will be performed in another state than will be performed in Nebraska. When either of these
circumstances are true, the parties may execute Form W-4NB, Nonresident Individuals Performing Personal
Services in Nebraska, to document why the income tax withholding does not apply.
To be essential activities taking place in Nebraska, the activities must be performed in Nebraska to
satisfactorily complete the services. This can be determined by the contract or the terms of the engagement.
If the services cannot be performed satisfactorily without performing certain activities in Nebraska (that
are more than de minimis) the services are considered to be performed substantially in Nebraska. If the
activities that must be performed at a particular location must occur in more than one state, the payor may
limit the withholding to the portion of the contract that reflects the relative number of activities essential to
Nebraska compared to all essential activities. If no essential activities are required to be performed in any
particular state, Nebraska withholding applies only if the greater portion of the service will be performed in
Nebraska, as compared to any other state.
Example 1. A Nebraska business pays an out-of-state consultant to update its human resource
department procedures. The contract requires the consultant to make one on-site visit to view the
operation in person and another on site visit to present the final report to the board of directors
of the company in person. The first on-site visit is anticipated to be a half day with an overnight
stay and the presentation should be an hour with no overnight stay. The contracted price assumes
the consulting firm spends 200 hours on the contract, all of the rest of which will takes place at
the home office. Because the on-site visit and report presentation are essential activities that are
required by the payor to be performed in Nebraska, the services are substantially performed in
Nebraska and income tax withholding is required on the full contract price.
Example 2. An advertising agency that is a nonresident sole proprietorship makes a presentation
in person to a Nebraska business to develop a new advertising campaign for the business. The sole
proprietorship is successful and agrees to develop several print and video advertisements consistent
with the presentation. The photographs, graphics, and clip art are obtained from common sources
available anywhere and the agency hires a local video production company to shoot some film
of the business that he may use. The agency owner has other clients in Nebraska and maintains a
small office in Nebraska where he works once a week. He is also on site for the video shoot, but the
shoot could have been completed without him. However, most of the work for this client will be
performed while he is in the Nebraska office in case something comes up that may require personal
observation. In this situation, none of these essential tasks must be performed in Nebraska. The upfront presentation is not essential because it was not part of the services the payor was seeking, and
generated no obligation on the payor. However, since more of the work will be performed while in
Nebraska than any other state, the payment is subject to withholding on the full contract amount.
Example 3. A nonresident engineering consultant is performing a contract for services in Nebraska.
The nonresident individual voluntarily attends one 2-hour meeting in Nebraska at the beginning of
the project to simply meet the individuals he will be working with and be given an overview of the
project. The engineering services are all completed at the engineer’s office outside of Nebraska.
All future meetings are held by video conference. In this situation, the tasks performed in Nebraska
are not essential to the successful completion of the engagement. In addition, the duties are
predominantly performed in another state.

GIL 21-18-1

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Example 4. An engineering firm consisting entirely of nonresident partners is hired to examine and
test the efficiency of all of a Nebraska manufacturing company’s facilities. These inspections and
tests typically take three full days per manufacturing facility to complete. The company has three
manufacturing plants in Nebraska, one in Kansas and one in Iowa. After the inspections and testing,
the engineering firm believes it will commit 2,000 hours to study the inspection and testing results,
develop recommendations, and package its recommendations into a 500-page detailed report and
two-hour PowerPoint presentation to the manufacturing company’s Board which could be presented
in person or via Skype. The essential duties that must be performed on-site are the inspections and
testing at the factories, 60% of which are in Nebraska and 40% of which are in other states. In this
situation, withholding is required on 60% of the contract price.
To summarize, the requirement to withhold income tax from payments in excess of $600 does not apply
when the agreement between the payor and the nonresident individual makes it clear that: (a) no activities
must be performed in Nebraska and (b) if no activities are required to be performed in any particular state,
the most hours performed in any single state are performed in a state other than Nebraska. The payor and
payee should execute a Form W-4NB, Nonresident Individuals Performing Personal Services in Nebraska,
when applicable. If the requirements of the service or the circumstances change substantially, the payor and
payee should reconsider whether a Form W-4NB continues to reflect the understanding of the parties and
whether the withholding requirement should apply. Failure to reconsider will not relieve the payor from
liability when the facts and circumstances change.
If the payor accepts or reconsiders an acceptance of a Form W-4NB in good faith, the payor will not be
liable for withholding with respect to the personal services that are provided by the nonresident individual.
Please note that, whether or not income tax withholding is required by Neb. Rev. Stat. § 77‑2753(2),
nonresident individuals with Nebraska source income are required to file a Nebraska Individual Income
Tax Return, Form 1040N, and the accompanying Nebraska Schedule III.
For the Tax Commissioner
George Kilpatrick, Attorney
Nebraska Department of Revenue