United States: Alabama Enacts Retroactive Factor Presence Nexus Standard

On August 11, 2015, Alabama Governor Robert Bentley signed legislation enacting a factor presence nexus standard for business activity for purposes of the business privilege tax, income taxes, and financial institution excise taxes.1 The legislation, which is effective for tax years beginning after December 31, 2014, was passed as part of a special session that was called after the regular legislative session did not result in a budget being passed for the state's fiscal year that begins October 1, 2015.

Factor Presence Nexus Standard Explained

Under the legislation, a non-resident individual or business taxpayer has "substantial nexus" in Alabama if it has a factor presence in the state.2 A factor presence is established if any of the following thresholds are exceeded within the state during the tax period: (i) $50,000 of property; (ii) $50,000 of payroll; (iii) $500,000 of sales; or (iv) 25 percent of total property, total payroll, or total sales.3

In addition, individuals who are residents or domiciliaries of Alabama and business entities that are organized or commercially domiciled in Alabama have substantial nexus with Alabama.4 The legislation also specifically notes that if Alabama lacks jurisdiction to impose income tax on a taxpayer due to the protection of Public Law 86-272, then Alabama does not gain jurisdiction to impose the tax even if the taxpayer's property, payroll, or sales exceed the established thresholds.5 The bill does not address implications for estimated tax payments and does not discuss any waiver of penalties.

Property counting towards the threshold is the average value of the taxpayer's real property and tangible personal property owned or rented and used in Alabama during the tax period.6 Payroll counting towards the threshold is the total amount paid by the taxpayer for compensation in Alabama during the tax period.7 Sales include the total dollar value of the taxpayer's gross receipts from transactions in the current period from the: (i) sale, lease, or license of real property located in Alabama; (ii) lease or license of tangible personal property located in Alabama; (iii) sale of tangible personal property received in Alabama; and (iv) sale, lease, or license of services, intangibles, and digital products for primary use by a purchaser known to the seller to be in Alabama.8


Corporate taxpayers should consider the factor presence nexus standard enactment when evaluating their Alabama tax positions. In particular, it is quite possible that taxpayers who previously did not have nexus in Alabama may now have nexus if they exceed one or more of the established thresholds. As a result, taxpayers should take a look at their payroll, property, and sales in the state in order to evaluate whether they have substantial nexus in Alabama under the new thresholds. This is time-sensitive for taxpayers because the legislation applies retroactively to tax years beginning on or after January 1, 2015, and as a result may impact current-year estimates and tax provisions. It is somewhat concerning that the legislation does not address implications for estimated tax payments that may need to be made and does not discuss any waiver of penalties that might result from underpayments.

The passage of this legislation in Alabama is also noteworthy because it continues a trend of states adopting factor presence nexus and represents a further departure from physical presence nexus. According to Bloomberg BNA's survey of state tax departments, Quill's physical presence nexus standard is not the majority rule for income tax purposes.9 In fact, 34 states use some form of economic nexus instead.10 Of these, nine states currently use factor presence nexus and the trend is that more states are moving to this model.11 Notably, in addition to Alabama, Tennessee recently passed factor presence nexus that will be effective beginning in the 2016 tax year, and New York has partially conformed to the model statute employed by the Multistate Tax Commission (MTC) for tax years beginning on or after January 1, 2015.12 In the states that use factor presence nexus, only Public Law 86-272 is in place to protect sellers of tangible personal property that may exceed the thresholds.

In addition to the factor presence nexus standard, Alabama has repeatedly attempted to pass mandatory unitary combined reporting. During the first special session, S.B. 39 would have adopted factor presence nexus, but also would have included model MTC language that implied the state allowed or required unitary combined reporting or that it might allow the Alabama Department of Revenue to forcibly utilize combined reporting in certain circumstances, but the bill was not considered by the full Senate.13 In addition, the Alabama legislature introduced a bill, S.B. 51, that would have required mandatory unitary combined reporting for corporations, but it was also not passed.14 Earlier this year, another bill that would have enacted mandatory unitary combined reporting was introduced and died in committee.15

According to the governor, enacting mandatory unitary combined reporting would raise at least $20 million per year for the state.16 However, combined reporting is widely opposed by the business community and many tax policy organizations on the grounds that it improperly attributes more income to a state than is justified by a business's actual economic activity in the state.17 In any event, it is likely that even though combined reporting did not pass in this session, it will be an ongoing debate that must be monitored by corporate taxpayers. The legislature was unable to pass a budget for the fiscal year that begins on October 1, and the governor will have to call a second special session sometime before then to address the budget issue. It is anticipated that mandatory combined reporting will be considered again during this session.


1 Act 505 (H.B. 49), 1st Spec. Sess., Laws 2015, adding ALA. CODE § 40-18-31.2.

2 ALA. CODE § 40-18-31.2(a)(2).

3 ALA. CODE § 40-18-31.2(b). The thresholds are subject to adjustment if the Consumer Price

Index has changed by 5 percent or more since January 1, 2015 (or last date of adjustment). ALA. CODE § 40-18-31.2(c).

4 ALA. CODE § 40-18-31.2(a)(1).

5 ALA. CODE § 40-18-31.2(e).

6 ALA. CODE § 40-18-31.2(d)(1).

7 ALA. CODE § 40-18-31.2(d)(2).

8 ALA. CODE § 40-18-31.2(d)(3). In cases where a service, intangible or digital product will be used in multiple locations, apportionment by the location of use is required. In cases where the seller does not know where a service, intangible or digital product will be used or where a tangible item will be received, the customer address may serve to source the sale if obtained through the seller's business records, or if unavailable, through other means, when the use of such address does not constitute bad faith.

9 Bloomberg BNA, 2015 Survey of State Tax Departments (2015).

10 Id.

11 Id.

12 Alex Dowd, "Corporate Close-Up: Tennessee Joins Trend Toward Factor Presence Nexus Standard," Bloomberg BNA SALT Talk Blog, June 1, 2015.

13 S.B. 39, 1st Spec. Sess., introduced on Aug. 3, 2015.

14 S.B. 51, 1st Spec. Sess., introduced on Aug. 4, 2015.

15 H.B. 142, introduced on March 5, 2015.

16 Alabama Governor Robert Bentley, Revenue Announcement Remarks to the Press, Feb. 27, 2015.

17 Ferdinand S. Hogroian, Council on State Taxation, Testimony in Opposition to Mandatory Unitary Combined Reporting (H.B. 142), April 1, 2015.

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