On August 11, 2015, Alabama Governor Robert Bentley signed into law HB 49 (Act No. 2015-505; the “Act”), which is effective for tax years beginning after December 31, 2014. The Act establishes objective factors for determining if nonresident individuals and foreign business entities have substantial nexus in Alabama, thus subjecting them to certain Alabama taxes. Under the Act, nonresident individuals and foreign business entities (i.e., those organized outside of Alabama) will be deemed have a “substantial nexus” with Alabama (and, thus, subject to Alabama’s state income tax, business privilege tax, and financial institution excise tax) for any tax period in which they exceed any of the following thresholds :
- More than $50,000 of property in Alabama, or
- More than $50,000 of payroll in Alabama, or
- More than $500,000 of sales in Alabama, or
- More than 25% of total property, or total payroll, or total sales in Alabama.
The Act sets forth detailed definitions of property, payroll, and sales, for purposes of these thresholds. Each year, taxpayers should monitor the dollar-based thresholds, as they will be subject to annual adjustments (rounded to the nearest $1,000), based on a 5% or more change in the Consumer Price Index.
Since the thresholds apply at the entity-level, the Act will impact tax filings of not only business entities and nonresident individuals, but also owners of certain pass-through entities (including trusts) doing business in Alabama. Thus, if either the property, payroll, or sales of a pass-through entity (or trust) exceeds a threshold amount, then an owner (or beneficiary) will be subject to Alabama income tax on its share of the entity’s (or trust’s) Alabama income.
Federal law (Pub. Law 86-272, 15 U.S.C. § 381) prohibits a state from collecting income tax on sales solicited within its borders as long as the orders are filled or shipped outside of the state by a business not otherwise having nexus with the state to which the goods are shipped; the Act acknowledges that this federal law preempts Alabama’s authority to impose state income taxation on such transactions. The Act does not grant Alabama jurisdiction to impose its income tax on any taxpayer protected by the federal law, even if the taxpayer’s property, payroll, or sales exceeds a threshold (see above). This is an important point for nonresident individuals and foreign business entities who do not have “nexus” with Alabama (e.g., physical locations) but solicit and fill sales orders from Alabama customers. In such an instance, the sales to the customers within Alabama that originate outside of Alabama will continue to be “thrown back” to (and subject to income tax in) the state-of-origin, assuming that the state-of-origin requires throwback.