A current prevailing view amongst the states is that their nexus rules, which determine when an out-of-state company is subject to taxation, have not kept pace with the economic realities of how companies conduct business across state lines. To combat this, several states are moving away from the constitutional requirement to have a physical presence in order to create nexus by imposing new “economic nexus” standards. One of the more common variations on economic nexus is the “factor-based nexus standard” being imposed by various states. Under a factor-based nexus standard, nexus is created with a state when a minimum amount of property, payroll or sales is sourced to the state.
Nexus thresholds for states with a factor-based nexus standard for corporate income tax include:
- Alabama – greater than $50,000 of property or payroll; or greater than $500,000 of receipts; or greater than 25% of total property, payroll or receipts.
- California – greater than $53,644 of property or payroll; or greater than $536,446 of receipts; or greater than 25% of total property, payroll or receipts.
- Colorado – greater than $50,000 of property or payroll; or greater than $500,000 of receipts; or greater than 25% of total property, payroll or receipts.
- Connecticut – $500,000 or more of receipts.
- New York – $1,000,000 or more of receipts. A recent revision to New York’s draft regulation on nexus (see draft Regulation Section 1-3.2(f)) indicates that each corporate partner or corporate member of a LLC taxed as a partnership, may be required to include 100% of the partnership or LLC’s receipts in determining if the $1,000,000 receipts threshold has been met by the corporate partner or member regardless of the percentage of ownership interest.
- Tennessee – equal to or greater than $50,000 of property or payroll; or greater than $500,000 of receipts; or greater than 25% of total property, payroll or receipts.
- Virginia – any positive applicable apportionment factor percentage.
Having nexus from in-state property or payroll (in-state physical presence) should not be a surprise.
However, companies are getting caught off-guard when they have no physical presence in a state but have exceeded the factor-based nexus standard threshold for in-state receipts shown above. In-state receipts can come from shipping tangible property into the state or from performing services to customers located in a state if the state sources service receipts on a market-based approach rather than based upon where the costs are incurred to provide the services. Alabama, California, Connecticut (new for tax years beginning after 2015) and New York (new for tax years beginning after 2014) all use the market-based approach for sourcing service receipts.
In these states, companies performing services may erroneously believe they have no receipts in states where their customers are located when all of their costs are incurred at their place of operations. For companies selling tangible personal property, it may be possible to avoid corporate income tax nexus via PL 86-272 (mere solicitation exemption), however, this will not apply to protect against non-income based taxes nor will it protect companies that perform services.
Companies with customers in factor-based nexus states need to keep track of their in-state activities taking into consideration the bright-line nexus thresholds and receipts sourcing rules utilized by these states.
If you have any questions about this or other SALT issues, please email Bob Lamb at rlamb@tsacpa.com. For additional State and Local Tax insights and resources, or to sign up for our free newsletter, visit tsacpa.com.
