Is an out-of-state manufacturer that keeps inventory at an unaffiliated New York firm which modifies the goods subject to Article 9-A franchise tax and required to register as a sales-tax vendor?
Plain-English summary
Ernst & Young LLP asked, for Company A, an out-of-state manufacturer of industrial blowers, whether it (1) is subject to the Article 9-A corporate franchise tax and (2) must register as a vendor for Article 28 sales and use tax. Company A ships finished blowers to Company B -- an unaffiliated New York distributor of electrical motors (not a public warehouse) -- and keeps a constant inventory there (about $35,000 in value). When a customer orders a modified blower, Company B attaches motors and pulleys to Company A's specifications (about one-third of the finished product cost) and ships directly to the customer, billing Company A; Company A bills the customer.
The Department held Company A is both subject to Article 9-A and a sales-tax vendor:
- Article 9-A: Section 209.2(f) shields a foreign corporation whose only New York contact is the use of fulfillment services of an unaffiliated person plus ownership of inventory on that person's premises. But Company B's work -- attaching motors and pulleys to customer specifications before shipping -- exceeds the statutory "use of fulfillment services." So the safe harbor does not apply, and Company A is subject to the Article 9-A franchise tax.
- Article 28 (sales tax): For the same reason, Company B's activities do not qualify as fulfillment services under section 1101(b)(18), so the vendor-exclusion for in-state inventory held by a fulfillment provider does not protect Company A. Company A's inventory and the modification activity in New York make it a vendor under section 1101(b)(8); it must register under section 1134 and collect sales and use tax on its sales (subject to resale/exemption certificates).
What this means for you
"Fulfillment services" is a narrow safe harbor -- modification breaks it
Section 209.2(f) (and the parallel sales-tax vendor exclusion) protects an out-of-state seller that merely stores inventory with, and uses pick-pack-ship fulfillment services of, an unaffiliated New York firm. The moment that firm alters or assembles the product -- here, adding motors and pulleys to spec -- the activity exceeds fulfillment services, and the protection is lost.
Losing the safe harbor flips on both taxes at once
The same fact -- in-state modification of the goods -- makes Company A subject to Article 9-A and a registered sales-tax vendor. Out-of-state sellers relying on a third-party logistics arrangement should confirm the in-state partner does only true fulfillment, not assembly or customization.
Collection still allows resale and exemption certificates
As a vendor, Company A must collect tax on taxable sales of blowers delivered in New York, but it may accept properly completed resale or exemption certificates in good faith under 20 NYCRR 532.4.
Common questions
Q: Does storing inventory with an unaffiliated New York firm create nexus?
A: Not by itself -- the fulfillment-services safe harbor can protect it. But here the firm modified the goods, which exceeds fulfillment services and defeats the safe harbor.
Q: Why is Company A subject to Article 9-A?
A: Because Company B's attaching of motors and pulleys exceeds the use of fulfillment services under section 209.2(f), so the exemption does not apply and Company A is doing business in New York.
Q: Must Company A collect New York sales tax?
A: Yes. It is a vendor under section 1101(b)(8), must register under section 1134, and must collect sales and use tax, subject to valid resale/exemption certificates.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax; doing business)
- Tax Law section 209.2(f) (fulfillment-services / in-state inventory safe harbor from 9-A)
- Tax Law section 1101(b)(8) (definition of vendor)
- Tax Law section 1101(b)(18) (definition of fulfillment services)
- Tax Law section 1134 (registration as a vendor)
- 20 NYCRR 526.10(a) (vendor)
- Ernst & Young LLP, TSB-A-01(3)S, TSB-A-01(14)C (Jan. 11, 2001)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2001.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a01_3s_14c.pdf
Original ruling text
New York State Department of Taxation and Finance
Office of Tax Policy Analysis
Technical Services Division
TSB-A-01(3)S
Sales Tax
TSB-A-01(14)C
Corporation Tax
January 11, 2001
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. Z000502B
On May 2, 2000, a Petition for Advisory Opinion was received from Ernst & Young LLP,
1400 Key Tower, 50 Fountain Plaza, Buffalo, New York 14202-2297.
The issues raised by Petitioner, Ernst & Young LLP, are:
(1) Whether Company A is subject to the Article 9-A corporate franchise tax.
(2) Whether Company A is a vendor required to register for purposes of the
Article 28 sales and compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Company A manufactures industrial blowers outside of New York State. Most of the
blowers are sold without further modification and shipped directly to customers located throughout
the United States. However, occasionally, customers request that various electrical components
(e.g., motor and pulley) be attached to the blower prior to shipment. Since Company A does not
supply the motors or pulleys, an arrangement has been entered into with Company B as follows.
Once the manufacturing process is complete, Company A ships a supply of blowers to Company B’s
facility located in New York State. When a customer wants to purchase one of the modified
blowers, it contacts Company A. Company A receives the order for a modified blower and relays
the order with specifications to Company B. Company B then adds additional parts (motors and
pulleys) to the blower according to the customer’s specifications. Once completed, Company B then
ships the modified blower directly to the customer and bills Company A for the modifications and
shipping. Company A then bills the customer for the full price of the modified blower.
The machine, as originally shipped to Company B, accounts for approximately two-thirds
of the finished product cost. The additional motors and pulleys added by Company B account for
the remaining one-third of the finished product cost. However, the process to attach the motor and
pulley is not time consuming since the blowers are manufactured so that the motor and pulley can
be easily attached.
Company B is not a public warehouse, but rather a distributor of electrical motors itself.
There is no affiliation between Company A and Company B, and Petitioner contends that
Company A has no employees or other nexus creating activity in New York State. In order to timely
respond to customer orders for the modified blowers, Company A maintains a constant supply of
-2
TSB-A-01(3)S
Sales Tax
TSB-A-01(14)C
Corporation Tax
January 11, 2001
blowers at Company B’s facility in New York State. On average, the value of this inventory that is
owned by Company A is approximately $35,000.
Company A does not distribute advertising materials of its products in New York. Any
advertising is done through industry trade journals and through Company A’s Web site. Company
A has one sales representative that makes approximately two trips to New York each year to visit
customers and solicit sales.
Discussion
Issue 1 - Article 9-A Franchise Tax
With respect to the franchise tax imposed under Article 9-A of the Tax Law, Section 209.1
imposes an annual franchise tax on domestic or foreign corporations for the privilege of exercising
a corporate franchise, doing business, employing capital, owning or leasing property in a corporate
or organized capacity, or maintaining an office in New York State for all or any part of each of its
fiscal or calendar years.
Section 1-3.2(b) of the Business Corporation Franchise Tax Regulations ("Article 9-A
Regulations") provides that:
(1) The term doing business is used in a comprehensive sense and includes
all activities which occupy the time or labor of people for profit. Regardless of the
nature of its activities, every corporation organized for profit and carrying out any of
the purposes of its organization is deemed to be doing business for the purposes of
the tax. In determining whether a corporation is doing business, it is immaterial
whether its activities actually result in a profit or a loss.
(2) Whether a corporation is doing business in New York State is determined
by the facts in each case. Consideration is given to such factors as:
(i) the nature, continuity, frequency, and regularity of the activities of the
corporation in New York State;
(ii) the purposes for which the corporation was organized;
(iii) the location of its offices and other places of business;
(iv) the employment in New York State of agents, officers and employees;and
and
-3
TSB-A-01(3)S
Sales Tax
TSB-A-01(14)C
Corporation Tax
January 11, 2001
(v) the location of the actual seat of management or control of the
corporation.
Section 1-3.2(c) of the Article 9-A Regulations provides that:
[t]he term employing capital is used in a comprehensive sense. Any of a large
variety of uses, which may overlap other activities, may give rise to taxable status.
In general, the use of assets in maintaining or aiding the corporate enterprise or
activity in New York State will make the corporation subject to tax. Employing
capital includes such activities as:
(1) maintaining stockpiles of raw materials or inventories; or
(2) owning materials and equipment assembled for construction.
Section 1-3.2(d) of the Article 9-A Regulations provides that:
[t]he owning or leasing of real or personal property within New York State
constitutes an activity which subjects a foreign corporation to tax. Property owned
by or held for the taxpayer in New York State, whether or not used in the taxpayer's
business, is sufficient to make the corporation subject to tax. Property held, stored
or warehoused in New York State creates taxable status. Property held as a nominee
for the benefit of others creates taxable status. Also, consigning property to New
York State may create taxable status if the consignor retains title to the consigned
property.
Section 209.2(f) of the Tax Law, effective September 1, 1997, provides that a foreign
corporation shall not be deemed to be doing business, employing capital, owning or leasing property,
or maintaining an office in New York State, for purposes of Article 9-A of the Tax Law, by reason
of "the use of fulfillment services of a person other than an affiliated person and the ownership of
property stored on the premises of such person in conjunction with such services". For purposes of
such Section 209.2(f), an affiliated person is an entity that either owns or controls a majority interest
in the foreign corporation, either directly or indirectly, or an entity the majority interest in which is
owned and controlled by the foreign corporation, either directly or indirectly.
Section 208.19 of the Tax Law, effective September 1, 1997, provides:
The term "fulfillment services" shall mean any of the following services
performed by an entity on its premises on behalf of a purchaser:
-4
TSB-A-01(3)S
Sales Tax
TSB-A-01(14)C
Corporation Tax
January 11, 2001
(a) the acceptance of orders electronically or by mail, telephone, telefax or
internet;
(b) responses to consumer correspondence or inquiries electronically or by
mail, telephone, telefax or internet;
(c) billing and collection activities; or
(d) the shipment of orders from an inventory of products offered for sale by
the purchaser.
In this case, Company A maintains a constant supply of its blowers in New York State at the
facilities of Company B, in order to facilitate the modification to the blowers and the shipment of
the blowers to its customers. Pursuant to Section 209.1 of the Tax Law and section 1-3.2(c) and (d)
of the Article 9-A Regulations, Company A is employing capital and owning personal property in
New York State on a regular basis.
Company B’s activities of adding motors and pulleys to Company A’s industrial blowers, per
the customer’s specifications, before shipping the blowers to Company A’s customers exceeds “the
use of fulfillment services” as provided in Section 208.19 of the Tax Law. Therefore, Company A
is subject to the Article 9-A franchise tax and the exemption from the Article 9-A franchise tax
provided for in Section 209.2(f) of the Tax Law does not apply.
Issue 2 - Article 28 Sales and Compensating Use Taxes
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
*
*
*
(8) Vendor. (i) The term "vendor" includes:
(A) A person making sales of tangible personal property or services, the
receipts from which are taxed by this article;
*
*
(C) A person who solicits business either:
*
-5
TSB-A-01(3)S
Sales Tax
TSB-A-01(14)C
Corporation Tax
January 11, 2001
(I) by employees, independent contractors, agents or other representatives;
or
(II) by distribution of catalogs or other advertising matter, without regard to
whether such distribution is the result of regular or systematic solicitation, if such
person has some additional connection with the state which satisfies the nexus
requirement of the United States constitution;
and by reason thereof makes sales to persons within the state of tangible
personal property or services, the use of which is taxed by this article. . . .
*
*
*
(v) Notwithstanding any other provision of law, the term vendor shall not
include:
(A) a person who is not otherwise a vendor who purchases fulfillment
services carried on in New York by a person other than an affiliated person; or
(B) a person who is not otherwise a vendor who owns tangible personal
property located on the premises of an unaffiliated person performing fulfillment
services for such person. . . .
*
*
*
(18) Fulfillment services. Any of the following services performed by an
entity on its premises on behalf of a purchaser: (i) the acceptance of orders
electronically or by mail, telephone, telefax or internet; (ii) responses to consumer
correspondence and inquiries electronically or by mail, telephone, telefax or internet;
(iii) billing and collection activities; or (iv) the shipment of orders from an inventory
of products offered for sale by the purchaser.
Section 1131(1) of the Tax Law provides, in part:
"Persons required to collect tax" or "person required to collect any tax
imposed by this article" shall include: every vendor of tangible personal property or
services; every recipient of amusement charges; and every operator of a hotel. . . .
Section 1134(a)(1) of the Tax Law provides, in part:
-6
TSB-A-01(3)S
Sales Tax
TSB-A-01(14)C
Corporation Tax
January 11, 2001
(i) Every person required to collect any tax imposed by this article . . .
commencing business or opening a new place of business, (ii) every person
purchasing or selling tangible personal property for resale commencing business or
opening a new place of business . . .shall file with the commissioner a certificate of
registration, in a form prescribed by the commissioner, at least twenty days prior to
commencing business or opening a new place of business . . . .
Section 526.10(a) of the New York State Sales and Use Tax Regulations provides, in part:
Persons included. (1) (i) A person making sales of tangible personal property
the receipts from which are subject to tax is a vendor.
*
*
*
(3) A person who solicits business by employees, independent contractors,
agents or other representatives and by reason thereof makes sales to persons within
the State of tangible personal property or services, the use of which is subject to tax,
is a vendor.
Example 5: A California based company uses independent manufacturers’
representatives, who are residents of New York State, to sell its product in New
York. The California company is a vendor.
(4)(i) A person who solicits business by the distribution of catalogs or other
advertising matter, without regard to whether such distribution is the result of regular
or systematic solicitation, if such person has some additional connection with the
State which satisfies the nexus requirement of the United States Constitution and by
reason thereof makes sales to persons within the State of tangible personal property
or services the use of which is subject to tax, is a vendor.
(ii) For purposes of subparagraph (i) of this paragraph, the additional
connection with the State a person may have in order to qualify as a vendor shall
include, but not be limited to:
(a) the operation of retail stores in the State;
(b) the presence of traveling sales representatives in the State;
(c) the presence of employees, independent contractors or agents in the State;
(d) the presence of service representatives in the State;
-7
TSB-A-01(3)S
Sales Tax
TSB-A-01(14)C
Corporation Tax
January 11, 2001
(e) the maintenance of a post office box in the State for receiving responses
to such person's solicitations; or
(f) the maintenance of an office in the State, even if such office performs no
activities related to the sales solicited by such person.
Company A has an employee that makes approximately two trips to New York each year to
visit customers and solicit sales, and Company A maintains a constant supply of its blowers in New
York State at the facilities of Company B to facilitate the modification to the blowers and the
shipment of the blowers to Company A’s customers. These activities, as described in this Advisory
Opinion, are sufficient to make Company A a vendor for purposes of Article 28 of the Tax Law.
Company B’s activities of adding motors and pulleys to Company A’s industrial blowers, per
the customer’s specifications, before shipping the blowers to Company A’s customers exceeds the
definition of fulfillment services in Section 1101(b)(18) of the Tax Law. Accordingly, in their
entirety the activities performed by Company B in New York do not qualify as a fulfillment service.
Therefore, Company A is required to register as a vendor pursuant to Section 1134 of the Tax
Law and is required to collect sales and use tax imposed on its sales of industrial blowers to
customers in New York. Company A is not required to collect tax on a sale to a customer in New
York if Company A receives in good faith from the customer a properly completed exemption
certificate within ninety days of the date of the sale. See Section 1132(c) of the Tax Law and Section
532.4 of the Sales and Use Tax Regulations.
DATED: January 11, 2001
NOTE:
/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division
The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.