United States

Alabama: Factor Presence Nexus Bill Passed During Special Session

Aug 24, 2015
From KPMG TaxWatch

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During the Alabama Legislature’s first special session of 2015, lawmakers failed to agree on a budget for the upcoming fiscal year that begins on October 1, 2015. However, House Bill 49, which was signed by the Governor on August 11, 2015, adopts factor-presence nexus rules for business activity taxes for nonresident individuals and business entities. Specifically, for tax years beginning after December 31, 2014, a nonresident individual or business entity is deemed to be “doing business” in Alabama and will be considered to have “substantial nexus” with Alabama for purposes of business privilege, income, and financial institutions taxes if the entity has more than $500,000 in Alabama sales, $50,000 in Alabama property, or $50,000 in Alabama payroll. Additionally, substantial nexus exists if more than 25 percent of the taxpayer’s overall property, payroll, or sales are in Alabama. These statutory thresholds are to be reviewed annually and will be adjusted if the Commissioner determines that the Consumer Price Index has changed by five percent or more since January 1, 2015 or the date the thresholds were last adjusted.  The new law defines property, payroll, and sales for the purposes of determining whether a nonresident individual or a business entity has exceeded the thresholds. Taxpayers that use special industry apportionment will use the rules outlined in the special apportionment method for determining if they have the requisite property, payroll, or sales. Pass-through entities will determine the threshold amounts at the entity level, and if the pass-through entity exceeds the nexus threshold, the owners of that pass-through entity will be subject to tax on the portion of their pass-through income earned in Alabama.  Interestingly, House Bill 49 reminds taxpayers that Public Law 86-272 preempts Alabama from taxing out of state businesses— even those exceeding the factor presence nexus standards— if they fall within Public Law 86-272’s protections.  It appears a second special session will be forthcoming as there is no budget in place. It is unclear whether additional tax changes affecting business taxpayers will be enacted during the second special session. Although Governor Bentley had proposed moving to combined reporting earlier this year as part of a package to address Alabama’s budget shortfalls, combined reporting bills failed to pass during the regular session and the first special session.  Please stay tuned to TWIST for future updates on Alabama tax changes.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.