On Aug. 11, Alabama enacted a factor-presence nexus standard, following California, Michigan, New York, and other states that have passed similar legislation.
Effective for tax years beginning after Dec. 31, 2014, and subject to specific sourcing rules, a business entity will be considered to have Alabama nexus and be subject to Alabama income tax, the business privilege tax, or the financial institution excise tax if its activity within Alabama exceeds any of the following thresholds:
- Gross receipts in Alabama exceed the lesser of $500,000 or 25 percent of total receipts everywhere.
- Average value of real and tangible property owned or rented and used in Alabama during the tax period exceeds the lesser of $50,000 or 25 percent of total real and tangible property.
- Total compensation paid in Alabama exceeds the lesser of $50,000 or 25 percent of total compensation paid.
A business that exceeds any of these thresholds still may be entitled to the protections of Public Law 86-272 for Alabama income tax. However, because Public Law 86-272 applies only to income taxes imposed on sellers of tangible personal property, protection is not available for the business privilege tax and the financial institution excise tax.
The $50,000 thresholds are indexed for inflation and will be adjusted when the cumulative change in the consumer price index (CPI) has changed 5 percent or more since the previous adjustment.
It is important to note that depending on the circumstances, the sourcing rules for determining whether the bright-line sales threshold is met may be different from sourcing rules used for apportionment. For purposes of determining whether a taxpayer meets the threshold, sales of services, intangibles, or digital products are deemed to be made in Alabama if they will be used in the state. For apportionment-sourcing purposes, services are sourced based on where they are delivered or based on customer address, and sales other than those of tangible personal property are sourced based on cost of performance. Property is within the state if it is real or tangible personal property owned or rented and used in Alabama. Payroll is in the state if it is paid to employees for services performed within or directed from within the state. Financial institutions must determine the property, payroll, and sales factors for purposes of the nexus threshold in the same way they determine them for apportionment purposes.
The newly enacted statute applies the threshold amounts at the entity level. As such, the bill includes, but is not limited to, pass-through entities such as limited liability companies, limited partnerships, S corporations, and trusts. The threshold also applies to disregarded entities subject to the business privilege tax. If an entity's property, payroll, or sales exceed any of the stated thresholds, the entity's owners automatically are subject to state income tax on their allocable share of the entity's Alabama income.
This legislation follows a growing trend among states to move toward factor-presence nexus. It also comes on the heels of Alabama’s northern neighbor, Tennessee, passing broad changes this past May to its state tax regime, including a factor-presence standard. Taxpayers should be aware of variances among the states in sourcing methods required for determining whether the bright-line tests are met.