Does an out-of-state food distributor lose Public Law 86-272 protection when its delivery drivers pick up damaged goods and collect payments in New York?

Plain-English summary

TFS & Sons, Inc., a Pennsylvania food-service distributor, sold to New York customers. Its salespeople solicited orders in New York (sent to Pennsylvania for approval), and it delivered by its own trucks once a week. But its delivery drivers also: (1) picked up damaged products from customers (about once a week) to return to Pennsylvania, and (2) sometimes collected checks for the prior delivery. It asked whether it was subject to Article 9-A tax for 1994-2002.

The Department held yes, it lost Public Law 86-272 protection:

• Solicitation plus own-truck delivery is protected. Soliciting orders and filling them by delivery from outside New York (20 NYCRR section 1-3.4(b)(9)(i)(a)) does not, by itself, create taxability.
• But the pickups and collections are not. Picking up damaged/returned goods and collecting amounts due are post-delivery activities (like the backhauling in KPMG Peat Marwick LLP, TSB-A-97(8)C) that go beyond solicitation under section 1-3.4(b)(9)(v).
• Not de minimis. Done about once a week, these activities were more than a trivial connection with New York, so PL 86-272 did not apply and TFS was subject to Article 9-A tax for 1994-2002.

What this means for you

Delivering by your own trucks is fine -- extra errands are not

Under Public Law 86-272, soliciting orders and delivering them from out of state stays protected. But when your drivers do more -- picking up damaged goods or collecting payments -- those are post-delivery activities that can destroy the protection.

"De minimis" is a low bar to cross

Activities done regularly (here, about once a week) are not de minimis. Even modest, routine extra tasks beyond solicitation can tip a company into taxability.

Watch what your drivers actually do

A company relying on PL 86-272 should make sure its drivers and reps are limited to solicitation and delivery. Collecting checks or handling returns in the state can create a franchise-tax filing obligation -- here, for nine years (1994-2002).

Common questions

Q: Does delivering goods by your own trucks break Public Law 86-272 protection?
A: No. Soliciting orders and delivering them from out of state is protected by itself.

Q: What activities cost TFS its protection?
A: Its drivers picking up damaged products and collecting checks for prior deliveries -- post-delivery activities beyond mere solicitation.

Q: Were those activities too minor to matter?
A: No. Done about once a week, they were not de minimis and established more than a trivial connection with New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (franchise tax on corporations doing business in New York)
- 20 NYCRR section 1-3.4(b)(9) (Public Law 86-272 exemption; activities beyond solicitation)
- Public Law 86-272 (15 U.S.C. sections 381-384)
- TFS & Sons, Inc., TSB-A-03(13)C (Dec. 24, 2003)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a03_13c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(13)C
Corporation Tax
December 24, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C030613A

On June 13, 2003, a Petition for Advisory Opinion was received from TFS & Sons, Inc., 25
Dundaff Street, Carbondale, Pennsylvania 18407-1820. Petitioner, TFS & Sons, Inc., submitted
additional information pertaining to the Petition on August 26, 2003.
The issue raised by Petitioner is whether it is subject to tax under Article 9-A of the Tax Law
for taxable years 1994 through 2002.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a food service distributor selling refrigerated, frozen or dry food and grocery
products to all types of establishments. Petitioner does not own, rent, lease, or maintain any real
property in New York. Petitioner has employees who are not based in New York but serve
New York customers. Salespeople solicit orders from a territory consisting of Pennsylvania and
New York. Orders are taken back to the Pennsylvania office for approval. As of 2003, Petitioner
has 14 customers in New York. Four of these customers are seasonal with sales only occurring
during a four month period per year.
Goods are shipped from Pennsylvania warehouses via company owned trucks. There is one
delivery per week into New York. Goods are delivered in boxes with no visible damage. If the
customer later claims the goods were received damaged, and informs Petitioner about the hidden
damage, the items are usually replaced. To replace damaged items, customers either contact their
salesperson, who then contacts the main office, or the customer contacts the main office directly,
in Carbondale, Pennsylvania. The office issues a pick-up ticket and includes it with the delivery
person’s orders, authorizing him or her to pick up the damaged items. Pick-up tickets average one
per week. When the damaged items are received in Carbondale, they are reviewed and the damage
claim is either approved or denied. If approved, a credit memo is issued to the customer.
Delivery personnel normally do not collect amounts due. However, at times delivery
personnel may pick up checks for the amount due from the previous delivery when delivering
current shipments for active customers. Petitioner states that this is done as a convenience to the
customer who normally remits payment by mail. Delivery personnel do not perform collections for
delinquent accounts.
It is assumed for purposes of this Advisory Opinion that these facts applied to the taxable
years 1994 through 2002.

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Applicable law and regulations
Section 209.1 of the Tax Law provides, in part:
For the privilege of exercising its corporate franchise, or of doing business, or of
employing capital, or of owning or leasing property in this state in a corporate or organized
capacity, or of maintaining an office in this state, for all or any part of each of its fiscal or
calendar years, every domestic or foreign corporation ... shall annually pay a franchise tax,
upon the basis of its entire net income base, or upon such other basis as may be applicable
as hereinafter provided....
However, section 1-3.4(b)(9) of the Business Corporation Franchise Tax Regulations
(Article 9-A Regulations) provides for an exemption from taxation under Article 9-A for
corporations which are exempt pursuant to the provisions of Public Law 86-272 (15 USCA §§
381-384) and provides, in part:
(i) A foreign corporation whose income is derived from interstate commerce is not
subject to tax under article 9-A of the Tax Law if the activities of the corporation in
New York State are limited to either, or both of the following:
(a) the solicitation of orders by employees or representatives in New York State for
sales of tangible personal property and the orders are sent outside New York State for
approval or rejection; and if approved, are filled by shipment or delivery from a point outside
New York State; and
(b) the solicitation of orders for sales of tangible personal property by employees or
representatives in New York State in the name of or for the benefit of a prospective customer
of such corporation if the customer’s orders to the corporation are sent outside the State for
approval or rejection; and, if approved, are filled by shipment or delivery from a point
outside New York State.
*

*

*

(iv) In order to be exempt by virtue of Public Law 86-272, the activities in New York
State of employees or representatives must be limited to the solicitation of orders. The
solicitation of orders includes offering tangible personal property for sale or pursuing offers
for the purchase of tangible personal property and those ancillary activities, other than
maintaining an office, that serve no independent business function apart from their
connection to the solicitation of orders. Examples of activities performed by such employees
or representatives in New York State that are entirely ancillary to the solicitation of orders
include:

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(a) the use of free samples and other promotional materials in connection with the
solicitation of orders;
(b) passing product inquiries and complaints to the corporation’s home office;
(c) using autos furnished by the corporation;
(d) advising customers on the display of the corporation’s products and furnishing
and setting up display racks;
(e) recruitment, training and evaluation of sales representatives;
(f) use of hotels and homes for sales-related meetings;
(g) intervention in credit disputes;
(h) use of space at the salesperson’s home solely for the salesperson’s convenience.
(However, see subparagraph (vi) of this paragraph as to loss of immunity for maintaining
an office.)
(v) Activities in New York State beyond the solicitation of orders will subject a
corporation to tax in New York State unless such activities are de minimis. Activities will
not be considered de minimis if such activities establish a nontrivial additional connection
with New York State. Solicitation activities do not include those activities that the
corporation would have reason to engage in apart from the solicitation of orders but chooses
to allocate to its New York State sales force. In determining whether a corporation’s
activities exceed the solicitation of orders, all of the corporation's activities in New York
State will be considered. Examples of activities which go beyond the solicitation of orders
include:
(a) making repairs to or installing the corporation’s products;
(b) making credit investigations;
(c) collecting delinquent accounts;
(d) taking inventory of the corporation’s products for customers or
prospective customers;
(e) replacing the corporation’s stale or damaged products;

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(f) giving technical advice on the use of the corporation’s products after the
products have been delivered to the customer.
(vi) Maintaining an office ... in New York State will make a corporation
taxable....
Opinion
Pursuant to section 1-3.4(b)(9) of the Article 9-A Regulations, a corporation is not subject
to franchise tax in New York State if it is exempt pursuant to the provisions of Public Law 86-272.
To be exempt pursuant to Public Law 86-272, a corporation’s activities in New York State must be
either (a) limited to the solicitation of orders by employees or representatives in New York State for
sales of tangible personal property, or be entirely ancillary to such solicitation of orders, or (b) if the
activities exceed the solicitation of orders, the activities must be considered to be de minimis. In
addition, the orders must be sent outside New York State for approval or rejection; and if approved,
must be filled by shipment or delivery from a point outside New York State.
In KPMG Peat Marwick LLP, Adv Op Comm T&F, March 27, 1997, TSB-A-97(8)C, a
manufacturing company employed a sales staff that solicited orders from customers in New York
State. The orders were approved at the company headquarters in Indiana, and the company
delivered the products from its facility in Indiana to its New York customers via its own commercial
vehicles. In addition, the company also did backhauling. That is, it used the vehicles that delivered
its products to customers in New York to pick up products in New York that did not meet customer
specifications and returned them to the company’s facility in Indiana. The customer either received
a replacement product or got a credit for the cost of the product. The company also transported the
trim and scrap of its New York customers back to Indiana, for which each customer received a credit
against the price of future products. The opinion held that the backhauling activities were post
delivery activities in New York that went beyond the solicitation of orders and the company would
be subject to tax under Article 9-A of the Tax Law pursuant to section 1-3.4(b)(9)(v) of the Article
9-A Regulations, unless such activities were deemed to be de minimis.
In this case, Petitioner has salespersons who solicit orders from customers in New York
State. The orders are taken back to the Pennsylvania office for approval. Once a week, Petitioner
delivers the products from its warehouses in Pennsylvania to its New York customers via company
owned trucks. Pursuant to section 1-3.4(b)(9)(i)(a) of the Article 9-A Regulations, these activities
would not make Petitioner subject to tax under Article 9-A of the Tax Law.
However, in addition to these activities, Petitioner’s delivery personnel pick up damaged
products from customers in New York that do not meet customer specifications and return them to
its Carbondale, Pennsylvania facility. These delivery personnel also pick up checks for the amount
due from the previous delivery when delivering current shipments. These activities are similar to
the post delivery examples contained in section 1-3.4(b)(9)(v) of the Article 9-A Regulations;

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particularly, collecting delinquent accounts and replacing the corporation's stale or damaged
products. These post delivery activities by Petitioner for New York customers are activities that go
beyond the solicitation of orders as contemplated by Public Law 86-272, and will subject Petitioner
to franchise tax under Article 9-A unless they are deemed to be de minimis.
When viewed in a comprehensive sense and giving due consideration to section
1-3.4(b)(9)(v) of the Article 9-A Regulations, Petitioner’s post delivery activities in New York State
of picking up damaged products from customers on an average of once per week, and sometimes
collecting from customers amounts due from the previous delivery are not considered to be
de minimis, and they establish more than a nontrivial additional connection with New York State
as contemplated in section 1-3.4(b)(9)(v) of the Article 9-A Regulations.

Accordingly, Petitioner’s activities in New York State are not exempt pursuant to the
provisions of Public Law 86-272. Petitioner is doing business, employing capital, or owning or
leasing property in a corporate or organized capacity in New York State pursuant to section 209.1
of the Tax Law, and is subject to tax under Article 9-A of the Tax Law for the taxable years at issue,
1994 through 2002.

DATED: December 24, 2003

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.