Corporate Close-Up: Tennessee Joins Trend Toward Factor Presence Nexus Standard

A key constitutional question that remains unanswered by the U.S. Supreme Court is whether the states making corporate income tax nexus determinations must use the physical presence test established by the high court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

In fact, physical presence and Quill are not the majority rule for income tax nexus, the Bloomberg BNA 2015 Survey of State Tax Departments shows. Instead, economic presence emerges as the standard recognized by most states for determining income tax nexus. This year, 34 states noted that they apply economic nexus. Only six states indicated that they do not apply economic nexus. These states were Delaware, Louisiana, Rhode Island, Tennessee, Texas and Vermont.

A basic question that arises from economic nexus standards is how much activity in a state is sufficient to trigger substantial nexus.

One solution that has emerged is the Multistate Tax Commission’s model statute: Factor Presence Nexus Standard for Business Activity Taxes. This model law, which was approved by the MTC in 2002, uses both economic and physical presence to determine nexus. Nexus is triggered for each type of contact only if the following thresholds are exceeded during the tax period:

  • $50,000 of property,
  • $50,000 of payroll,
  • $500,000 of sales, or
  • 25 percent of total property, total payroll, or total sales.

To date, the states that have adopted this approach include:

  • CA:  Partially conforms to the MTC’s model statute (adopted for tax years after January 1, 2011.)
  • CT: Partially conforms ($500K sales. No property or payroll min. threshold)
  • CO:  Partially conforms (e.g., deleted throwback rule).
  • KS: Partially conforms
  • NYPartially conforms in 2015 - $1 million threshold
  • OH:  Conforms, but wording is modified
  • TN: Conforms effective Jan. 1, 2016 under H.B. 644, enacted May 20, 2015
  • WA: Effective June 1, 2013 for the B&O (gross receipts) tax uses $267K and $53K for both property and payroll min. thresholds. 

The most recent state to adopt a factor presence nexus standard is Tennessee with the May 20 enactment of H.B. 644, the Revenue Modernization Act. Effective for tax years beginning on or after Jan. 1, 2016, the new law’s nexus standard also contains a bright line rule for nexus that is taken directly from the MTC model statute.  

The full text of the legislation can be found here:

Full text of the MTC’s model factor presence nexus standard can be found here:

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should more states adopt a factor presence nexus standard?

Take a free trial to 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.