Overview
Under factor-based nexus, or factor presence nexus, an out-of-state company has nexus if it has property, payroll, or sales that exceed certain thresholds during the tax period.
The Multistate Tax Commission (MTC) adopted a Factor Presence Nexus Standard model statute. This model includes threshold amounts to determine whether substantial nexus exists, thus subjecting a business to state income tax.
Purpose of Factor Presence Nexus
Factor presence nexus provides an easily ascertainable standard. However, some states view factor presence standards as only an alternative method for determining nexus. Therefore, states can still establish nexus even if the taxpayer does not meet the factor presence thresholds.
Adoption by the Multistate Tax Commission (MTC)
“In an effort to promote uniformity among states and create a bright-line nexus test for business activity taxes, the Multistate Tax Commission (MTC) adopted a model statute, Factor Presence Nexus Standard for Business Activity Taxes, on October 17, 2002.” — The Tax Advisor
The statute calls for nexus to be established if any of the following thresholds are exceeded during a tax period:
- $50,000 of property
- $50,000 of payroll
- $500,000 of sales
- 25% of total property, total payroll, or total sales
Application of the Standard
“Under the MTC’s model factor presence nexus standard, an out-of-state taxpayer doing business in a state will have substantial nexus with the state and be subject to the state’s franchise and income tax if any of the following thresholds are exceeded in the state during the tax period:
(1) $50,000 or 25% of the total property;
(2) $50,000 or 25% of the total payroll; or
(3) $500,000 or 25% of the total sales.” — EY
Summary of Thresholds for Factor Presence Nexus
Threshold Criteria:
- Property:
- $50,000 or 25% of total property
- Payroll:
- $50,000 or 25% of total payroll
- Sales:
- $500,000 or 25% of total sales
These thresholds are designed to create a clear and uniform measure for when a business should be subject to state business taxes.
Frequently Asked Questions
What is factor presence nexus?
Factor presence nexus is a standard used to determine whether an out-of-state business has sufficient activity in a state to be subject to state income or business taxes. It relies on thresholds for property, payroll, or sales within the state.
What are the threshold amounts for establishing nexus under the MTC model?
According to the Multistate Tax Commission (MTC) model statute, a business establishes nexus if, during a tax period, it exceeds any of the following in a state: $50,000 in property, $50,000 in payroll, $500,000 in sales, or 25% of its total property, payroll, or sales.
Is the factor presence nexus standard adopted in all states?
No, not all states have adopted the MTC’s model statute. Some use it as a guideline, while others apply alternative or additional criteria to establish nexus.
Does a business have nexus if it does not meet the threshold amounts?
Possibly. While the factor presence nexus offers a clear benchmark, some states may still assert nexus using other standards even if a business does not meet the model’s thresholds.
What is the benefit of the factor presence nexus model?
The model provides a bright-line, easily ascertainable rule that promotes uniformity among states and simplifies tax compliance for multistate businesses.