Factor presence nexus is a bright-line test that decides when your business owes state income or business activity tax in a state where you have no office. Under the Multistate Tax Commission’s model, you have nexus in a state if any one of these is true for the tax year: property there exceeds $50,000, payroll there exceeds $50,000, sales there exceed $500,000, or any of those factors makes up 25% or more of your company-wide total.1Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes Crossing one threshold is enough. States that have adopted the standard often adjust the dollar amounts upward, so the numbers in your specific state may be higher.
What the Standard Actually Covers
The MTC adopted the Factor Presence Nexus Standard for Business Activity Taxes in 2002 to replace vague “doing business” tests with numbers everyone can check.1Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes It applies to corporate income tax, franchise tax, and similar business activity taxes.
It does not apply to sales and use tax. Sales tax follows its own economic nexus rules under the 2018 South Dakota v. Wayfair decision, with different thresholds and transaction counts. Your business can owe income tax in a state under factor presence rules while its sales tax obligations there work on an entirely different set of numbers, or vice versa.
The model uses the same definitions of property, payroll, and sales that businesses already apply under the Uniform Division of Income for Tax Purposes Act (UDITPA) when apportioning income across states.2Multistate Tax Commission. Explanation of the Multistate Tax Commission’s Proposed Factor Presence Nexus Standard If you’re already doing apportionment math, you have most of what you need.
The $50,000 Property Threshold
You have nexus in a state if the average value of your real and tangible personal property there exceeds $50,000 during the tax year.3Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes Real property means land and buildings. Tangible personal property covers equipment, inventory, furniture, and similar physical assets. Owned property is valued at original cost, not fair market value or depreciated book value.
Rented property is valued at eight times the net annual rental rate (rent you pay minus any income from subleasing). A company leasing warehouse space at $10,000 per year has $80,000 in property value under this formula and is already over the threshold.
Average value is usually calculated by adding property value at the start of the year to value at year-end and dividing by two. If your property levels swing during the year, a state tax administrator can require monthly averaging instead.
The single most common way businesses trip this threshold without realizing it: inventory sitting in a third-party fulfillment center. No employees, no office, no sales staff — just $50,001 worth of goods in someone else’s warehouse is enough.
The $50,000 Payroll Threshold
You have nexus if you pay more than $50,000 in compensation for services performed in the state during the tax year.1Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes Compensation means wages, salaries, commissions, and other pay to employees, tracking amounts you’d report for state unemployment insurance.
Payments to independent contractors and brokers don’t count. Only employee compensation goes into the total. A business paying $200,000 to freelancers in a state has $0 toward the payroll threshold from those payments.
When an employee works in multiple states, compensation is attributed to the state where services are primarily performed, or to the employee’s base of operations if that’s unclear. Two or three remote workers in the same state can quietly push you over $50,000 well before you’re paying attention to that state.
The $500,000 Sales Threshold
The sales factor is the most common trigger for nexus, especially for service and digital businesses that own no in-state property. You have nexus if sales into the state exceed $500,000, or if in-state sales are 25% or more of your total sales everywhere.3Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes Either one is enough on its own.
Sales include gross receipts from selling, leasing, or licensing tangible property and from performing services. Most states adopting the model use market-based sourcing, meaning revenue is assigned to the state where the customer receives the benefit of the product or service, not where the work was done. For software licenses and similar intangibles, receipts generally go to the location where the property is used.
The 25% Alternative Test
The 25% test is easy to overlook because it applies to all three factors, not just sales. Even if your property, payroll, or sales in a state falls below the dollar threshold, you have nexus if that state’s share represents 25% or more of your company-wide total for that factor.3Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes
A startup with $150,000 in total property nationwide and $40,000 in one state is below the $50,000 dollar threshold, but that $40,000 is about 27% of total property. Nexus. A company with $1.5 million in total sales and $400,000 into a single state falls short of $500,000, but $400,000 is roughly 27% of $1.5 million. Nexus. Businesses concentrated in two or three states are the ones most likely to trip this test.
The Public Law 86-272 Shield for Sellers of Goods
Crossing a factor presence threshold does not automatically mean you owe income tax. A federal law, Public Law 86-272 (codified at 15 U.S.C. §§ 381–384), bars states from imposing a net income tax on a company whose only in-state activity is soliciting orders for tangible personal property, provided the orders are approved and shipped from outside the state.4Office of the Law Revision Counsel. U.S. Code Title 15 – Section 381 This shield overrides factor presence nexus for income tax purposes.5Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272
The protection is narrower than it looks. It covers only sales of tangible personal property and only the solicitation of orders. If you sell services, license software, or stream content, PL 86-272 doesn’t apply at all. And for sellers of physical goods, common online activities can break the protection: providing post-sale customer support through chat, selling extended warranties on your website, accepting non-sales job applications online, using cookies that gather data for product development rather than just running the shopping cart, or pushing remote updates to products already sold.5Multistate Tax Commission. Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272 Static product pages, basic FAQ sections, and cookies that only remember cart contents or login information remain protected.
Protection is measured year by year. One unprotected activity at any point in a tax year loses the shield for the entire year. And PL 86-272 only blocks net income taxes; it does not cover gross receipts taxes, franchise taxes measured other than by net income, or sales taxes.
How States Change the Numbers
The MTC standard is a template, and states adopting factor presence nexus routinely modify it. Colorado and Tennessee have kept the original $50,000/$50,000/$500,000 numbers. Others have moved substantially.
California adjusts for inflation. For 2025, its thresholds were $75,707 for property, $75,707 for payroll, and $757,070 for sales, roughly 50% above the MTC baseline. The model itself directs each state’s tax administrator to review the CPI-U at year-end and adjust the thresholds when cumulative change reaches 5% or more since 2003 or the last adjustment, rounded to the nearest $1,000.3Multistate Tax Commission. Factor Presence Nexus Standard for Business Activity Taxes
Some states dropped the three-factor structure. Connecticut, Massachusetts, and Michigan focus primarily on sales receipts with no separate property or payroll threshold. New York triggers nexus at $1 million in receipts from in-state activity. Ohio uses an MTC-style framework for its Commercial Activity Tax but raised the threshold dramatically: as of 2025, only businesses with more than $6 million in Ohio taxable gross receipts owe the CAT. Other states assert economic nexus for income tax through broader statutory language or case law rather than the MTC’s specific factor test.
The practical consequence is that a company selling into 20 or 30 states may face a different nexus test in each one. Check your specific states before assuming the $50,000/$50,000/$500,000 numbers apply.
If You Already Crossed a Threshold and Never Filed
Businesses that discover unfiled returns from prior years usually do better coming forward than waiting. When a state finds unfiled returns on its own, it assesses the full tax plus penalties and interest, sometimes reaching back as far as the statute of limitations permits.
The MTC runs a Multistate Voluntary Disclosure Program that lets businesses negotiate with multiple participating states at once. Under a typical voluntary disclosure agreement, you file returns and pay tax for a defined lookback period, and the state waives penalties and generally doesn’t pursue years before the lookback window.6Multistate Tax Commission. Multistate Voluntary Disclosure Program Interest on unpaid tax is still due unless specifically waived, which is uncommon. The MTC program requires a good-faith estimate of at least $500 in tax due per state.
States also run their own individual VDA programs. Lookback periods usually run three to four years. The critical requirement in nearly every program: you must come forward before the state contacts you. Once an audit notice or nexus questionnaire arrives, the voluntary disclosure route generally closes.