Out-of-State Company Exempt from Corporate Franchise Tax Since Its Business Is Limited to Sale of Tangible Personal Property, New York Tax Department Holds

In a tax advisory opinion, the New York Department of Taxation and Finance has held that an out-of-state company (“Petitioner”) is not subject to corporate franchise tax in the State because its business is limited to the sale of tangible personal property, and its orders are filled by third-party vendors which has no affiliation with the company.

By way of background, Petitioner sells gifts and awards to companies that wish to honor their employees. Many of Petitioner’s products are personalized or customized in some way, such as casting, stamping, or laser engraving.

Petitioner has manufacturing facilities and inventory warehousing facilities located in an unnamed city in North Carolina. Some of the gifts sold by Petitioner are

manufactured at its North Carolina factory.

However, Petitioner also sells other gifts that it acquires from third-party vendors. Some of these third-party vendors may be located in New York State. The Petitioner uses sales representatives throughout the United States,  including some in New York State, to solicit sales.

Typically, a company will send a list of its employees to Petitioner along with a list of

dates or milestones on which it wishes a gift or packet to be sent to each employee.  the employee can select a gift and place an order by calling the Petitioner by phone, mailing the order to the Petitioner, or logging on to the Petitioner’s website.

The Petitioner then has the gift shipped to the employee using the U.S. Mail or a common carrier.  Gifts produced at the Petitioner’s manufacturing facility are shipped by the Petitioner, but if the gift is produced by a third-party vendor, Petitioner merely directs the third-party vendor to ship the gift to the employee.  At no time does Petitioner assume title to any gift shipped by such a vendor.  Petitioner bills the company for each item that is shipped; there is no additional charge for any other services provided by Petitioner to a company.

Under Tax Law § 209.1 and section 1-3.2 of the Corporation Franchise Tax regulations (20 NYCRR § 1-3.2), a corporation organized outside of New York State is subject to the Business Corporation Franchise Tax imposed under Article 9-A of the Tax Law if the corporation is doing business, employing capital, owning or leasing property in a corporate or organized capacity, or maintaining an office in New York State.

Section 1-3.2(a)(3) of the Regulations states that, pursuant to Public Law 86-272, a foreign corporation is exempt from taxation under Article 9-A of the Tax Law if the only activity of its employees in New York is the solicitation of orders for sales of tangible personal property,  which orders are sent out of New York for approval, and, if approved, are filled by shipment or delivery from a point outside New York.

According to Tax Law § 209.2 (f), “the use of fulfillment services of a person other than an affiliated person and the ownership of property stored on the premises of such a person in conjunction with such services” does not constitute doing business in New York State.  Fulfillment services include the shipment of orders from an inventory of products offered for sale by a purchaser, as provided under Tax Law § 208.19.

“Affiliated persons” in this case are those “where one of such persons has an ownership interest of more than five percent, whether direct or indirect, in the other, or where an ownership interest of more than five percent, whether direct or indirect, is held in each of such persons by another person or by a group of other persons which are affiliated persons with respect to each other.” Tax Law § 209.2 (g).

Applying the foregoing provisions of law, the Tax Department held that Petitioner’s business appears to be limited to the sales of tangible personal property. 

Although some of Petitioner’s orders may be filled by third-party vendors located within the state, this use of “fulfillment services” will fall under the exemption in Tax Law § 209.2 (f) as long as Petitioner is not affiliated with any of the third-party vendors.

The Tax Department stated that because the use of fulfillment services is exempt from tax under Article 9-A, it does not disqualify Petitioner from the Public Law 86-272 exemption.

The Tax Department thus concluded that Petitioner’s activities fall within the scope of Public Law 86-272, and Petitioner is exempt from corporate franchise tax under Article 9-A.

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