State Tax Snapshot: Growing Minority of States Adopt Factor Presence Nexus Standards

State tax departments continue to show a broad and growing acceptance of “economic nexus” theories for purposes of income tax nexus determinations, according to Bloomberg BNA’s 2012 Survey of State Tax Departments.

As in the past, most of the states said income tax nexus could be triggered by conducting a certain amount of economic activity within their borders.

But most states lack specific guidance as to what types or how much economic activity is sufficient to trigger substantial nexus.

The Multistate Tax Commission attempted to create greater clarity on this issue by adopting the model statute Factor Presence Nexus Standard for Business Activity Taxes in 2002. The model law provides that substantial nexus is established if any of the following thresholds is 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.

A growing minority of states are adopting a factor presence nexus standard, the survey showed. These states include:

  • California: conforms to the MTC’s model law pursuant to amendments to Cal. Rev. & Tax. Code §23101, which are in effect for taxable years beginning on or after Jan. 1, 2011.
  • Connecticut: adopted a bright-line “substantial economic presence” test under which a company will trigger nexus by generating $500,000 or more in annual receipts that are attributable to the company’s economic contacts with the state. [Connecticut Informational Publication IP 2010(29.1) (Dec. 28, 2010).]
  • Colorado: 39 Colo. Code Regs. § 22-301.1(2)(b) partially conforms to the MTC’s model law. Unlike the model law, Colorado’s provision deleted the throwback rule.
  • Kansas: the state conforms to the MTC’s model law “to the extent it complies with Pub. L. No. 86-272,” Kansas Department of Revenue officials indicated on the survey.
  • Michigan: nexus established for purposes of the corporate income tax or business tax if active solicitation generates Michigan gross receipts of $350,000 or more. [Mich. Comp. Laws §206.621(1)]
  • Ohio: conforms to the MTC’s model law under Ohio Rev. Code Ann. § 5751.01(I).
  • Washington: partially conforms to the MTC’s model law for purposes of the state’s Business and Occupation Tax. The annual sales threshold is $250,000. [Wash. Admin. Code § 458-20-19401 and Wash Rev. Code § 82.04.067]

By Steven Roll
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