Due Diligence and Ongoing Monitoring

What do your organizations require of your vendors regarding registration in your state?  Do you require all (or based on risk) of your vendors to be currently registered in the state(s) you do business in?  All of our higher risk vendors are registered in the states they are headquartered in but not all a registered in our state.  

I haven't heard much about this and I know it could have a negative impact on the vendor as far as ability to enforce contracts, etc.  Just wondering what others do.

Hi there,

The practice of requiring vendors to register in a specific state can vary significantly based on the type of business, industry regulations, and the state's legal framework. Keep in mind that state registrations typically serve the purpose of tax collection and governance of employment law.  Your vendors typically must be registered in the states where they do business. For practical reasons we can define doing business as:

·         Having Employees: If your vendor has employees in your state, they will likely need to register there. State laws govern employment-related matters.

·         Maintaining an Office: Regularly operating from an office in your state (with set hours) often requires registration.

·         Real Estate Ownership: Owning or renting real estate in your state establishes a "physical presence" and require registration.

·         Physical Inventory: Consider where your vendor stores their inventory. If they hold inventory in your state, they may have physical presence and registration obligations

To add complexity there are also Economic Nexus Thresholds. You would need to research your state's economic nexus thresholds. These thresholds define when a vendor is required to register based on sales volume or transaction count.

Obviously once you start diving into this level of compliance, it doesn't make sense to just look at your state, but to ensure that they are registered with all states where they do business.  Practically speaking this level of research and verification can be overwhelming for many TPRM and compliance teams and so they opt to include contract language and requirements addressing the vendor's compliance to all applicable laws and regulations. Of course, you need to work with legal and compliance departments to make sure that contracts are written in a way to transfer the obligation of compliance to the vendor.

However, a more important part of due diligence is to ensure that your vendor is properly professionally licensed, at the state level, to perform specific services on your organization's behalf.  From a compliance perspective that responsibility wholly rests on your organization's shoulders to ensure verify that your vendors are properly licensed in the states where they operate (not just your state). For example, contractors, food service providers, HVAC technicians, electricians, real estate agents and brokers, truck drivers, freight brokers, hazardous waste management and recycling vendors are all examples of vendors what would require state level licensing. And many states require collection services vendors to be licensed and bonded.

I know that's a lot of information, but I hope it is helpful. I would also love to hear from other members who can add to the conversation.

This topic is best handled by a contractual clause that requires the vendor to be "appropriately licensed/registered/etc in all jurisdictions where it does business". That contractual requirement places the obligation firmly on the vendor from your perspective - which is where it was originally. Your legal department can expand on that discussion and explain other reasons why this is important.

If you want to check on those registrations etc, it is hard to argue against that approach. Except.....if you're a big organization and/or have hundreds of third party service providers, you likely need an entire department dedicated to that exercise.