Is a foreign corporation that rents a small New York office for its New York-resident president subject to New York franchise tax under Article 9-A?

Plain-English summary

WaterChef Inc., a Delaware corporation headquartered in Arizona that manufactured its products in Montana and China, hired Mr. Conway, a New York resident, as its President, CEO and Chairman in 1998. He spent 75-80% of his time at the Arizona headquarters or traveling, and tried to spend about one week a month working in New York. In 1999, to keep him, the company rented a small New York office for his use; the company paid for it with its own checks, and the office telephone was listed in the company's name.

The Department held that for taxable years 1999, 2000 and 2001 the company was subject to franchise tax under Article 9-A (Tax Law section 209.1) because it:

• Leased property in New York -- under 20 NYCRR section 1-3.2(d), owning or leasing real or personal property in New York is itself an activity that makes a foreign corporation taxable.
• Maintained an office in New York -- under section 1-3.2(e), the rented space, used by its top officer about a week a month and with a phone listed in the company's name, was regularly used and held out as a place of business.
• Was doing business in New York -- under section 1-3.2(b), considering the totality of its activities.

What this means for you

Renting space for a resident executive can create nexus

A foreign corporation does not have to sell anything in New York to be taxable here. Leasing an office -- even a small one used by a single officer part-time -- is by itself enough under 20 NYCRR section 1-3.2(d) and (e) to subject the corporation to Article 9-A franchise tax.

Small facts matter

The office phone listed in the company's name and the officer's regular (about weekly) use of the space helped show the office was "held out as a place of business." Convenience arrangements for a remote executive can have tax consequences.

It applies for every year the office exists

The corporation was taxable for each of the three years the office was rented (1999-2001), regardless of profit or loss.

Common questions

Q: Does renting an office in New York make a foreign corporation taxable?
A: Yes. Under 20 NYCRR section 1-3.2(d) and (e), leasing property and maintaining an office in New York each independently subject a foreign corporation to Article 9-A franchise tax.

Q: Does it matter that only one officer used the office part-time?
A: No. Regular use of the space by the President/CEO about one week a month, with a phone listed in the company's name, was enough to treat the office as a New York place of business.

Q: Does the company owe tax even if it had no New York sales or profit?
A: Yes. Doing business, leasing property, or maintaining an office triggers the franchise tax regardless of whether the activities produce a profit.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (franchise tax on corporations doing business, employing capital, owning/leasing property, or maintaining an office in New York)
- 20 NYCRR section 1-3.2(b) (doing business defined comprehensively; factors)
- 20 NYCRR section 1-3.2(d) (owning or leasing property in New York creates taxable status)
- 20 NYCRR section 1-3.2(e) (maintaining an office in New York; a salesman's home or hotel room may be an office)
- WaterChef Inc., TSB-A-03(2)C (Apr. 4, 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_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(2)C
Corporation Tax
April 4, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C021106A

On November 6, 2002, a Petition for Advisory Opinion was received from WaterChef Inc.,
1007 Glen Cove Avenue, Glen Head, New York 11545.
The issue raised by Petitioner, WaterChef Inc., is whether it is subject to franchise tax under
Article 9-A of the Tax Law for the taxable years 1999, 2000 and 2001.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner, a Delaware corporation, was headquartered in Arizona and manufactured and
serviced its product from its factories in Montana and China.
Mr. Conway, a resident of New York State, was retained as an employee of Petitioner in
1998. Mr. Conway, as Petitioner’s President, CEO and Chairman of the Board, spent 75 percent to
80 percent of his time at Petitioner’s headquarters in Arizona, or traveling on Petitioner’s business.
Mr. Conway left his family in New York when he accepted the assignment and tried to spend one
week a month working in New York.
In 1999, in order to keep the services of Mr. Conway, Petitioner rented a small office in
New York State for his convenience in spending the one week a month working from home or at
the office in New York. The office was paid for by Petitioner with Petitioner’s checks. Petitioner
states that the telephone in the New York office was listed in Petitioner’s name, but that resulted
from the fact that Petitioner paid the bill with Petitioner’s checks and that the telephone company
automatically listed the name.
Effective December, 2001, Petitioner’s water cooler and personal consumer filter businesses
were sold, and the Arizona office was closed. Effective with the sale of the business, and the
transfer of employees and assets, Petitioner moved its operations to New York and embarked on a
new business strategy, the design and manufacture of water purification systems. The employees
of Petitioner are now in New York, and the new product line is manufactured under contract by a
Long Island based manufacturing company.
Applicable Law and Regulations
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax as follows:
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

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Corporation Tax
April 4, 2003
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, except
corporations specified in subdivision four of this section, shall annually pay a
franchise tax, upon the basis of its entire net income base, or upon such other basis
[capital base, minimum taxable income bases or the fixed dollar minimum] as may
be applicable as hereinafter provided, for such fiscal or calendar year or part thereof,
on a report which shall be filed, except as hereinafter provided, on or before the
fifteenth day of March next succeeding the close of each such year, or, in the case
of a corporation which reports on the basis of a fiscal year, within two and one-half
months after the close of such fiscal year, and shall be paid as hereinafter provided.
Section 1-3.2(b) of the Business Corporation Franchise Tax Regulations (“Regulations”)
provides that with respect to a foreign corporation:
(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
(v) the location of the actual seat of management or control of the
corporation.
Section 1-3.2(c) of the Regulations provides that:
The 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

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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 Regulations provides that:
The 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 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.
Opinion
In this case, Petitioner rented office space in New York during taxable years 1999, 2000 and
2001. Pursuant to section 1-3.2(d) of the Regulations, the leasing of the office space in New York
was an activity that subjected Petitioner to tax under Article 9-A of the Tax Law. Further, the office
telephone was listed in Petitioner’s name, and the office space was used by Mr. Conway, its
President, CEO and Chairman of the Board, for approximately one week a month, or about 25
percent of his time. Accordingly, such office space was regularly used by Petitioner for its corporate
business and held out as a place of business of Petitioner as contemplated under section 1-3.2(e) of
the Regulations. Therefore, pursuant to section 1-3.2(e) of the Regulations, Petitioner maintained
an office in New York State during taxable years 1999, 2000 and 2001, and such activity subjected
Petitioner to tax under Article 9-A of the Tax Law. Finally, considering the totality of Petitioner’s
activities in New York during the taxable years at issue, Petitioner was doing business in New York
as contemplated under section 1-3.2(b) of the Regulations. Pursuant to section 209.1 of the Tax Law
and section 1-3.2 of the Regulations, Petitioner was doing business, leasing property and

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Corporation Tax
April 4, 2003
maintaining an office in New York State and was subject to franchise tax under Article 9-A of the
Tax Law for taxable years 1999, 2000 and 2001.

DATED: April 4, 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.