Factor presence nexus considerations for foreign companies

State taxation in a global environment

​This is the first in a series of ongoing articles by Charlie Fischer of Deloitte Tax LLP focused on US state tax considerations for the international operations of multinational taxpayers, whether headquartered in the US or elsewhere around the world, with a particular focus on state tax considerations for foreign entities.

State adoption of bright-line statutory nexus thresholds

A growing trend in state taxation is the adoption of bright-line statutory nexus thresholds in determining what it means to be doing business or otherwise have nexus in a state for income or gross receipts tax purposes.1 In 2002, the Multistate Tax Commission ("MTC") adopted a uniformity proposal with respect to a bright-line statutory nexus for business activity taxes.2 Under the proposal, "substantial nexus" would be established if any of the following thresholds are exceeded during the tax period:

  • USD 50,000 of property in the state
  • USD 50,000 of payroll in the state
  • USD 500,000 of sales in the state, or
  • 25 percent of the entity's total property, payroll, or sales are in the state.3

Some states that have adopted a factor presence nexus standard have included the threshold amounts proposed by the MTC while others have implemented variations that utilize different threshold amounts, particularly with respect to sales activity within the state. For example, effective for taxable years beginning on or after January 1, 2015, the nexus standard for the New York franchise tax has expanded such that corporations with sales of USD 1m or more to New York customers during the taxable year will be subject to tax. 4

As applied to foreign companies that lack a physical presence within a state that has adopted statutory nexus thresholds, the potential for nexus most typically arises from meeting the sales threshold. 5

1 Some form of bright-line, non-industry-specific statutory nexus threshold has been adopted in the following states: California (Cal. Rev. & Tax. Code § 23101(b)), Colorado (Colo. Code Regs. § 39-22-301.1(2)(b)), Connecticut (Conn. Gen. Stat. § 12-216a(a), Informational Publication 2010 (29.1)), New York (NY Tax Law § 209.1(b)), Ohio (Ohio Rev. Code § 5751.01(I)), and Washington (Wash. Rev. Code § 82.04.067).

2 For the MTC model statute regarding Factor Presence Nexus Standard for Business Activity Taxes, see

3 The model statute provides that the threshold property, payroll and sales amounts may be adjusted annually to reflect the cumulative percentage change in the consumer price index.

4 NY Tax Law § 209.1(b).

5 Note that 15 US Code § 381 (Public Law 86-272, "PL 86-272") prohibits a state from taxing out-of-state corporations on income from business activity within the state if such activity is limited to "solicitation of orders" for the sale of tangible personal property and the orders are approved and filled from outside the state. Consideration should be given to ascertain whether PL 86-272 protection may potentially still exist even where a business has otherwise triggered nexus based on a sales threshold nexus standard. In addressing this issue, taxpayers should consider that PL 86-272 protection is compromised where the tangible personal property is shipped from outside the United States, thus characterizing the sale as not arising from an interstate transaction.

Did you find this useful?