In the current environment, states are aggressively fighting for every tax dollar, especially when it comes to the taxation of out of state businesses. State laws are constantly changing, presenting compliance challenges for businesses and requiring increased record keeping and tracking.


It used to be easy – if your business had physical presence in a state, your business had nexus in that state. Having nexus in a state subjects your business to paying income taxes based on sales in that state.

Enter factor presence nexus. Now, not only do you have to worry if your business has physical presence in a state, but you also need to consider where your business might have an economic presence.

In 2002, the Multistate Tax Commission (MTC) developed the concept of factor presence nexus in an effort to create “a simple, certain and equitable standard for the collection of state business activity taxes.”

The MTC uniform proposed law states that substantial nexus is established if any of the following thresholds is exceeded during an annual tax period:

  • $50,000 of property;
  • $50,000 of payroll;
  • $500,000 of sales; or
  • 25% of total property, total payroll or total sales

Since 2002, nine states have adopted some form of factor presence nexus standard – Alabama, California, Colorado, Connecticut, Michigan, New York, Ohio, Tennessee and Virginia.


To further complicate matters, states differ in their methodology of sourcing sales. Historically, receipts for service-type revenue have been sourced based on cost of performance, apportioning service revenue to the state where the income-producing activity is performed.

Market-based sourcing brings about a complete shift in the methodology. Under market-based sourcing, receipts for service-type revenue are apportioned to a state based not on where the service is performed, but where the service is delivered or where the benefit of the service is received by the customer. Twenty-three states and counting now use this method as the basis for apportionment of services and other business receipts.

Operating in a multistate environment can lead to either tax-free sales or double taxation.

For example, if your business is located in Pennsylvania (cost of performance sourcing) and performing services for a customer in California (market-based sourcing), the same revenue from this one transaction is subject to tax in two different states.


We have only just scratched the surface on the complexity of multi-state taxation.  We are here to help answer your questions and provide clarity in this area. Please contact me or other members of our tax team to help determine what impact these issues may have on your business filings.

Jennifer Crawford, CPA


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