CORPORATE CLOSE-UP: ALABAMA’S FACTOR PRESENCE NEXUS STANDARD PRESENTS TRAPS FOR THE UNWARY

GPS

As part of its factor presence nexus standard, Alabama has created sourcing rules for purposes of measuring the value of property, payroll and sales located in the state. Taxpayers unaware of the not so subtle differences between these rules and the rules contained in its apportionment statutes may not reach the right result on nexus determinations.

Alabama has enacted factor presence nexus, under Ala. Code § 40-18.31.2 and effective for tax years beginning after Dec. 31, 2014, which states that an out-of-state business entity doing business in the state will have substantial nexus in Alabama under one of the following tests:

  • the entity has $50,000 worth of property in Alabama;
  • the entity has $50,000 of payroll attributable in Alabama;
  • the entity has $500,000 of sales in Alabama; or
  • the entity has more than 25 percent of its property, payroll or sales in the state.

With respect to the value of payroll in the state, Alabama’s MTC apportionment statute simply refers to compensation. However, the nexus statute contains a potentially expanded definition of compensation that includes “any other form of remuneration paid to employees and defined as gross income under the Internal Revenue Code §61.”

Further, Alabama has enacted substantially different rules for sourcing gross receipts for purposes of its nexus standard than it has in place for actually apportioning income to the state. For purposes of apportionment, Ala. Code § 40-27-1, Article IV §17(a)(3) states that services are attributable to the state to the extent the service is delivered to a location in the state.

However, Alabama’s nexus standard under Ala. Code § 40-18.31.2(d)(3) contains a slew of rules covering the sourcing of receipts including:

  • Sourcing receipts from services, intangibles and digital products to the location of use by a purchaser known to the taxpayer;
  • If the location of use is in multiple states, prorating the charges amongst those states based on evidence available to the taxpayer;
  • If the seller doesn’t know where the service, intangible or digital product will be used; the taxpayer must rely on its business records with respect to the purchaser in attributing the receipts to a particular state;
  • If the business records of the taxpayer do not indicate where the purchaser is located, then any address indicated by the purchaser during the sale or transaction or any address of the purchaser’s payment instrument must be used.

Contrast this approach with California, New York and Tennessee’s enactment of factor presence nexus standards. In those states, for purposes of determining the value of property, payroll and sales attributable to the state, the statute requires that the rules provided in the state’s respective apportionment statutes and regulations be applied. It should be noted that Colorado has enacted a factor presence nexus standard similar to Alabama’s that explicitly contains different sourcing rules than are required for purposes of apportioning income.

By Christopher Bailey

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think that enacting different sourcing rules for purposes of factor presence nexus is equally burdensome on both taxpayers and tax administrators? Are there Constitutional implications to doing so?

Sign up for a free trial of the Bloomberg BNA Premier State Tax Library, a comprehensive research service that delivers deep, unique analysis, and time-saving practice tools to help practitioners make well-informed decisions.