Is an out-of-state company that hires New York subcontractors to do janitorial work, with no office or employees here, doing business in New York?

Plain-English summary

Tower Cleaning Systems, Inc., a foreign federal S corporation with no office, employees, representatives, or inventory in New York, hired New York subcontractors to perform janitorial services for its customers. It asked whether it must file Article 9-A franchise tax reports.

The Department held it turns on the subcontractors' status:

• Following Ernst & Whinney, hiring subcontractors as independent contractors to provide the services does not constitute doing business in New York, so Tower would not be subject to Article 9-A tax and not required to file Form CT-3/CT-4.
• But if Tower is authorized to do business in New York, it must still file Form CT-245 (Maintenance Fee and Activities Return for a foreign corporation disclaiming tax liability) and pay the $300 maintenance fee.
• However, if the subcontractors have an agency relationship with Tower, or if any of Tower's own employees or officers (not just contractors) perform services in New York, then Tower is doing business (20 NYCRR 1-3.2(b)(2)) and is subject to Article 9-A tax, filing CT-3 or CT-4.
• Whether an agency relationship exists is a question of fact not resolved in an advisory opinion.

What this means for you

Genuine independent contractors do not create nexus

A company with no office, employees, or inventory in New York that merely hires independent contractors to do the work is not doing business here and owes no Article 9-A tax.

Agency flips the result

If the so-called subcontractors are really your agents, or if your own employees or officers perform services in New York, you are doing business and become a franchise-tax filer. The label "subcontractor" does not control -- the relationship does.

Authorization still costs the maintenance fee

Even with no tax liability, a foreign corporation authorized to do business in New York must file Form CT-245 and pay the $300 maintenance fee.

Common questions

Q: Does hiring New York subcontractors make an out-of-state company taxable?
A: Not if they are genuine independent contractors and the company has no office or employees here -- then it is not doing business.

Q: What changes the answer?
A: If the subcontractors are actually agents, or if the company's own employees or officers perform services in New York, it is doing business and owes Article 9-A tax.

Q: Are there any filing obligations if it is not taxable?
A: Yes. If authorized to do business in New York, it must file Form CT-245 and pay the $300 maintenance fee.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (franchise tax on corporations doing business in New York)
- 20 NYCRR section 1-3.2(b) (doing business; comprehensive sense)
- 20 NYCRR section 1-3.2(b)(2) (agents and employees in New York)
- Tax Law section 209.2 (maintenance fee; foreign corporation disclaiming tax liability)
- Tower Cleaning Systems, Inc., TSB-A-02(6)C (May 31, 2002)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a02_6c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(6)C
Corporation Tax
May 31, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C990630A

On June 30, 1999, a Petition for Advisory Opinion was received from Tower Cleaning
Systems, Inc., 1880 Markley Street, 2nd Floor, Norristown, Pennsylvania 19401.
The issue raised by Petitioner, Tower Cleaning Systems, Inc., is whether it is required to file
franchise tax reports under Article 9-A of the Tax Law, based on its type of business activities.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner does not have an office, employees, representatives or inventory in New York
State. Petitioner hires subcontractors in New York to conduct its janitorial service for its customers.
Petitioner is a federal S corporation. For purposes of this advisory opinion, it is assumed that
Petitioner is organized outside of New York State.
Discussion
Section 209.1 of the Tax Law imposes, annually, a franchise tax on every corporation for the
privilege of exercising its franchise, or of doing business, or of employing capital, or of owning or
leasing property in New York State in a corporate or organized capacity, or of 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 with respect to a foreign corporation:
(1) [t]he 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;

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Corporation Tax
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(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
(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 1-3.2(e) of the Article 9-A Regulations provides that:
[a] foreign corporation which maintains an office in New York State is
engaged in an activity which makes it subject to tax. An office is any area, enclosure
or facility which is used in the regular course of the corporate business. A
salesman’s home, a hotel room, or a trailer used on a construction job site may
constitute an office.

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Corporation Tax
May 31, 2002

In Ernst and Whinney, Adv Op Comm T&F, September 29, 1988, TSB-A-88(22)C, a general
insurance agency located outside of New York appointed licensed agents as associated independent
contractors to market its insurance products in New York. These independent insurance agents also
sold the insurance products of several unrelated insurance companies. The opinion held that the
licensing or appointing of these independent insurance agents in New York and the selling of
insurance policies in New York by such agents for the issuing company did not create nexus for the
general insurance agency for purposes of Article 9-A of the Tax Law.
In GEF Funding Corp., Adv Op Comm T&F, January 26, 1988, TSB-A-88(2)C, a
corporation located outside of New York engaged in mortgage loan origination and resale activities
under various scenarios. The corporation had an arrangement with an unrelated bank whereby the
corporation did all of the work regarding a loan but did not extend the funds. The bank actually
made the loan to the borrower, and subsequently, the corporation purchased the loan from the bank.
The opinion held that if the corporation’s arrangement with the unrelated bank did not create an
agency relationship with the bank, the activities of the bank would not create nexus for the
corporation for purposes of Article 9-A of the Tax Law. However, if the bank was found to be an
agent of the corporation, the corporation could be found to have nexus. The totality of the
corporation’s circumstances and its relationship with the bank would determine the corporation’s
taxable status.
In this case, it appears that Petitioner is not employing capital in New York, does not own
or lease property in New York and does not maintain an office in New York. Therefore, the
pertinent question in determining whether Petitioner is subject to tax under Article 9-A of the Tax
Law is whether Petitioner is doing business in New York State.
Following Ernst and Whinney, supra, the hiring of subcontractors as independent contractors
in New York to provide services for Petitioner for its customers does not constitute “doing business”
in New York State by Petitioner and Petitioner would not be subject to the franchise tax imposed
under Article 9-A of the Tax Law. In that case, Petitioner would not be required to annually file a
franchise tax report. Nevertheless, if Petitioner is authorized to do business in New York State,
Petitioner would be required to annually file form CT-245 – Maintenance Fee and Activities Return
For a Foreign Corporation Disclaiming Tax Liability, and pay the maintenance fee of $300.
However, if it is established that the subcontractors have an agency relationship with
Petitioner, or if any of Petitioner’s employees, including officers, perform services in New York
State, then pursuant to section 1-3.2(b)(2) of the Article 9-A Regulations and GEF Funding, supra,
Petitioner would be considered to be doing business in New York State. In that case, Petitioner
would be subject to the tax imposed under Article 9-A of the Tax Law and would be required to
annually file form CT-3 or CT-4 – General Business Corporation Franchise Tax Return.
Note that the determination of whether an agency relationship exists is a factual matter not
susceptible of determination in an advisory opinion. An advisory opinion merely sets forth the

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applicability of pertinent statutory and regulatory provisions to “a specified set of facts.” Tax Law,
§171.Twenty-fourth; 20 NYCRR 2376.1(a).

DATED: May 31, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.