Alabama Enacts Factor Presence Nexus Standards

September 17, 2015

On August 4, 2015, effective for tax years beginning after December 31, 2014, Alabama enacted legislation that establishes factor presence nexus standards for business activities for the purposes of income tax.  Nonresident individuals and business entities that are organized outside the state of Alabama and are doing business in the state have substantial nexus and would be subject to the income tax, business privilege tax, and the financial institution excise taxes if the individual or business property, payroll, or sales factors in this state exceeds the threshold anytime within a tax period.
The thresholds to establish substantial nexus are as follows:

  1. $50,000 of property;
  2. $50,000 of payroll;
  3. $500,000 of sales; or
  4. 25% of total property, total payroll, or total sales

The commissioner, at the end of each year, will review the cumulative percentage change in the Consumer Price Index (CPI) and adjust the thresholds if the CPI changes by 5% or more since 1/1/2015 or since the date that the threshold was last adjusted.  The adjusted threshold will be rounded to the nearest $1,000.  CPI means the CPI for all urban consumers.

In addition, pass-through entities, including but not limited to partnerships, limited liability companies, S corporations, and trusts, must determine their threshold amounts at the entity level.  If property, payroll, or sales of an entity in Alabama exceeds the nexus thresholds above, the all members, partners, owners, shareholder, or beneficiaries of that pass-through entity are subject to the portion of income earned in Alabama that is passed through to them.  For a copy of the bill, and other information, click here.

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