Does an equipment lessor have income tax nexus wherever its lessees take the equipment?

Owned property as physical presence

The physical presence question for a lessor is whether it has things in a state, not people, and the statutes and regulations below treat the owner's title as enough. Massachusetts imposes its corporate excise on every business corporation "owning or using any part or all of its capital, plant or any other property in the commonwealth" (G.L. c. 63, section 39), and the Department of Revenue's nexus regulation lists, among the contacts that will typically subject a corporation to the excise, owning real or tangible personal property in the state, "including property that is possessed, held or used by another person" (830 CMR 63.39.1(3)(b)3.). That clause describes a lessor's position: the lessee holds and uses the equipment, and the lessor owns it. The same regulation provides that a corporation is not subject to the excise solely because it owns tangible personal property in actual transit through Massachusetts in the possession and control of a common or contract carrier (830 CMR 63.39.1(4)(b)), a limit a lessor might invoke only where a carrier lessee is moving the equipment through the state, and the regulation does not address leased vehicles in terms.

New York's statute lists "owning or leasing property in this state" as a separate basis for the Article 9-A franchise tax, alongside doing business, employing capital, and maintaining an office (Tax Law section 209(1)(a)). The Tax Department's regulation states the consequence without qualification: "The owning or leasing of real or personal property within New York State constitutes an activity that subjects a foreign corporation to tax," and property held for the corporation in the state is sufficient whether or not the corporation uses it in its business (20 NYCRR section 1-2.6(a)). The Department said the same thing to a truck lessor decades earlier: an Illinois company with no New York office that leases trucks without drivers to New York customers is subject to the Article 9-A franchise tax (TSB-A-86(11)C, June 6, 1986).

Texas puts leasing on its list of physical presence activities; item (10) is "leasing tangible personal property which is used in Texas" (34 TAC section 3.586(d)(10)). Washington's substantial nexus statute says a person is physically present in the state if it has property or employees there, and that physical presence need only be demonstrably more than a slightest presence (RCW 82.04.067(1)(c)(ii), (3)(a)). None of these provisions asks whether the lessor chose the location, controls the equipment, or ever sends anyone to look at it.

Why Public Law 86-272 does not help a lessor

Public Law 86-272 bars a state from imposing a net income tax on income derived within the state from interstate commerce "if the only business activities within such State" are "the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property," where the orders are sent outside the state for approval and, if approved, filled from outside the state (15 U.S.C. section 381(a)). Two words in that sentence exclude a lessor: "sales," because a lease transfers possession and use, not title; and "only," because a lessor whose equipment sits in the state has property there, a presence beyond solicitation whatever its sales force does. The Multistate Tax Commission's Statement of Information, fourth revision adopted August 4, 2021, states the point in terms: only the solicitation to sell tangible personal property is afforded immunity, and the leasing, renting, licensing, or other disposition of tangible personal property is not a protected activity (MTC Statement of Information Concerning Practices Under Public Law 86-272, section I).

The statute also has a limit of its own. "Net income tax" means "any tax imposed on, or measured by, net income" (15 U.S.C. section 383). The Texas franchise tax is measured by margin, and the Comptroller's rule states that Public Law 86-272 does not apply to it (34 TAC section 3.586(i)), a point the library's article on Texas franchise tax nexus without a Texas footprint develops; Washington's business and occupation tax is measured by gross receipts and is outside the statute for the same reason.

The bright lines: receipts and property

The Multistate Tax Commission approved its factor presence nexus standard on October 17, 2002, and the library's article on the history of economic nexus traces where it came from. Under the model, a business organized outside the state has substantial nexus if, during the tax period, it exceeds any one of $50,000 of property, $50,000 of payroll, $500,000 of sales, or twenty-five percent of its total property, total payroll, or total sales in the state, with the dollar amounts adjusted when the consumer price index has changed by five percent or more (MTC Factor Presence Nexus Standard for Business Activity Taxes, sections B and C). The model counts as sales the receipts from the lease or license of tangible personal property located in the state, and measures property by the average value of real and tangible personal property owned or rented and used in the state. The property test is a dollar amount of property, not of activity, so one installed machine of sufficient value trips it regardless of what the lessor does; the sales test counts rent, so a lessor with many small units can cross the receipts line even if no single unit would trip the property line.

California built its doing-business definition on the same structure. A taxpayer is doing business in California if it is organized or commercially domiciled there, or if its California sales exceed the lesser of an indexed dollar amount or 25 percent of its total sales, its California real and tangible personal property exceeds the lesser of an indexed amount or 25 percent of its total property, or its California compensation does the same against payroll (RTC section 23101). The Franchise Tax Board's published figures for the 2025 taxable year, the latest posted, are $757,070 of sales and $75,707 of property or payroll. California assigns rent to the state when the leased property is located in California (RTC section 25136), so rent counts toward the sales test wherever the equipment sits in the state, and owned property is carried at original cost. A lessor with equipment that cost $80,000 sitting at a California lessee's plant for all of 2025 cleared the property test on that unit alone. The library's article on California's bright-line thresholds and passive investors walks through how the property and sales tests are measured and averaged.

A second door stays open below every threshold. A corporation that is not doing business in California but derives income from California sources is subject to the corporation income tax rather than the franchise tax (RTC section 23501(a)), and the State Board of Equalization held that a lessor's rent from the public's use of its movable equipment in California was California-source income that made it a taxpayer, without any finding that it was doing business in the state (Appeal of U-Haul Co. of Van Nuys, 87-SBE-024, March 3, 1987).

New York's receipts test is a single number. A corporation is deriving receipts from activity in the state, and therefore subject to Article 9-A, if it has receipts within the state of one million dollars or more in the taxable year, adjusted for cumulative changes in the consumer price index (Tax Law section 209(1)(b)); the Tax Department's instructions set the adjusted amount at $1.283 million for the 2025 taxable year. Receipts within the state are those in the apportionment numerator, which includes rentals of tangible personal property located within the state (Tax Law section 210-A(3)(a)). For a lessor the receipts test is rarely the operative one, because the owning-or-leasing-property basis in section 209(1)(a) has no dollar floor.

Texas combines the two approaches. Item (10) of the physical presence list reaches a lessor, and for each federal income tax accounting period ending in 2019 or later, a foreign taxable entity has nexus even with no physical presence if its gross receipts from business done in Texas were $500,000 or more (34 TAC section 3.586(f)(1)). An amendment effective January 7, 2026 adds that the threshold is based on gross receipts even for an entity that apportions its margin by another method (34 TAC section 3.586(f)(3)). Rent from property located in Texas is a Texas receipt under the apportionment statute (Tex. Tax Code section 171.103).

Washington has no income tax, but its business and occupation tax asks the same nexus question and answers it with the same two tools: physical presence, which includes having property in the state, or more than $100,000 of cumulative gross receipts from the state in the current or preceding calendar year (RCW 82.04.067(1)(c)). The renting or leasing of tangible personal property to consumers is a retail sale (RCW 82.04.050(4)(a)), so equipment rentals to Washington users fall under the retailing classification, carry a retail sales tax collection duty on the rent, and count toward the $100,000 line as sourced under the retail sourcing statute (RCW 82.04.067(2)(a)(ii)), which sends periodic lease payments after the first to the primary property location (RCW 82.32.730(2)(a)), other than transportation equipment such as interstate railcars and registered interstate trucks, whose leases are sourced like a retail sale (RCW 82.32.730(4), (9)(g)).

The hard case: equipment that moves at the lessee's direction

The contested ground is equipment that a lessee, not the lessor, moves into and through a state: trucks leased without drivers, trailers in a rental network, railcars in interchange. Two administrative decisions on that pattern, thirteen years apart, reached opposite results.

California's State Board of Equalization considered a lessor that leased its trucks and trailers to a commonly controlled sister company, which placed them with local companies for rental to the public in California and other states, and paid the lessor a percentage of the rental revenue. Beyond holding the rent to be California-source income, the Board held that the lessor's movable equipment belonged in the California numerator of the combined report's property factor at original cost, and that constitutionally sufficient nexus was present by virtue of the lessor's "regular and systematic pattern of channeling its moveable property into this state through its commonly controlled sister corporation"; that the lessor conducted its rental activity through a related company made no difference (Appeal of U-Haul Co. of Van Nuys, 87-SBE-024).

An Illinois administrative law judge reached the opposite result in 2000 for a Wisconsin truck lessor with no Illinois employees, offices, customers, or bank accounts and no leases entered in the state, whose lessees took possession in Wisconsin, hired and controlled the drivers, and decided whether the trucks went into or through Illinois. The judge found that the lessor had no physical presence in Illinois ("Only its lessees do"), that the activities generating its income were in no way related to activities it conducted in Illinois, and that it lacked substantial nexus under the first prong of the test in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). The order granted the lessor's motion for summary judgment on that ground and recommended that it be the final disposition and the notice of deficiency be canceled (Illinois Department of Revenue, Office of Administrative Hearings, IT 00-6, August 25, 2000).

Three things separate the two decisions and limit how far the Illinois result carries now. First, the facts: the California lessor fed a related network that placed its equipment in the state as a matter of course, while the Illinois lessor's trucks entered the state only when unrelated lessees chose to drive them there; the library's article on attributed physical presence covers when a related party's activity becomes the taxpayer's own. Second, the statutes: the Illinois decision reasoned from the absence of physical presence and the lessor's lack of in-state activity; Wayfair later rejected physical presence as the measure of substantial nexus, so the judge's separate finding that the lessor lacked due process minimum contacts is the part of the reasoning that still stands, and the bright-line statutes ask about neither. A property threshold is met by value, a receipts threshold by rent, and New York's owning-or-leasing basis by title, so a lessor arguing that its lessees' control of the equipment defeats nexus in California, New York, or Texas is arguing against the statute's text. Third, the footprint: both decisions involved equipment on the road, measured in trips rather than years, the presence a dollar threshold is built to filter out, and neither spoke to a machine bolted to a lessee's floor for a five-year term. What the Illinois decision preserves is an argument for transitory equipment, unrelated lessees, and a state without a bright line; the Massachusetts exclusion for property in a carrier's possession in actual transit points the same way for that narrower case.

Sourcing the rent once nexus exists

Nexus brings the lessor into the state's return; apportionment decides how much of its income the state taxes, and for leases the rule is the same almost everywhere. The Multistate Tax Commission's model act assigns receipts from the rental, lease, or license of tangible personal property to the state "if and to the extent the property is located in this state" (Model Compact Article IV, section 17(a)(2) (2015)). California assigns the receipt to the state if the property is located in California (RTC section 25136), and its rule as the Franchise Tax Board's Schedule R instructions state it carries no "to the extent" qualifier. New York includes receipts from rentals of real and tangible personal property located within the state in the apportionment numerator (Tax Law section 210-A(3)(a)). Texas counts rent from property located in the state (Tex. Tax Code section 171.103). Washington sources periodic lease payments after the first to the primary property location, the address the lessee gives the lessor in the ordinary course of business, except for transportation equipment, which is sourced like a retail sale (RCW 82.32.730(2)(a), (3), (4)).

Two consequences follow. A lessor's California throwback exposure is not a seller's: the rule that assigns tangible personal property shipped from California to California when the seller's group is not taxable in the destination state governs sales (RTC section 25135), while rentals are assigned by the location of the property under their own rule (RTC section 25136), so rent on equipment located in a state where the lessor is not taxable stays in that state's column. No published Franchise Tax Board guidance addresses the point in terms, and the library's article on when California throwback applies covers the seller's side. And for mobile equipment, the model's "to the extent the property is located in this state" is a fraction, not a switch: a unit that spends part of the year in a state produces numerator receipts for that part, which requires a location record by unit and by period that many lease administration systems were not designed to keep. California's stated rule contains no fraction, so the treatment of a unit that spends part of the year there is a question the text does not answer. A lessor without a location record is apportioned by a state's estimate rather than its own.

Practice notes

A lessor's nexus review starts from the equipment schedule, not from the payroll roster. For each state, the schedule answers three questions in order: whether any unit is located there (which alone decides New York, Texas, and Washington and, for California, the corporation income tax if not the franchise tax), whether the value of the units located there over the year exceeds the state's property threshold, and whether the rent on those units exceeds the state's receipts threshold. Installed equipment under a multi-year lease answers all three on delivery; fleet equipment requires a location record by unit and by period, which also serves the apportionment numerator. The federal statute is not part of the analysis: no in-state activity is protected once the lessor's property is there, and in Texas and Washington the statute never applied. The Illinois decision and arguments like it are worth raising only where the state has no bright line, the lessees are unrelated, and the equipment's presence was transitory and small; elsewhere, the statute has already answered them. A lessor that collects a state's sales tax on rent while filing no income or franchise return there presents the registration mismatch the library's article on attributed physical presence describes. G&G State Tax Group provides multistate nexus and apportionment analysis for equipment lessors and other owners of property located in states where they have no personnel, alongside its state and local tax practice.