Is an out-of-state manufacturer subject to New York franchise tax because a director listed the company's phone number in a New York directory without the company's knowledge?

Plain-English summary

An Ohio company that designs and makes currency-changing and validation equipment had no New York physical presence. Its only New York link: a director and shareholder, Karen L. Sherwood, a New York resident, had listed the company's name in a local New York phone book since 1990 -- using her own home phone number and address -- without the company's knowledge. When the company learned of it, it had the listing removed. Sherwood was on the board but not an officer or employee, was not involved in operations, never solicited or took orders, and only attended board meetings in Ohio. All orders were taken at the Ohio headquarters; sales solicitation was by phone from outside New York.

The Department held the company is not subject to Article 9-A. A telephone listing can make a corporation taxable as maintaining an office under Regulations section 1-3.2(e) -- but here the listing was placed by a director without the company's knowledge or authorization and was removed once discovered. With no New York solicitation, no orders taken in New York, and no New York physical presence, the company is not doing business in New York and is not subject to the franchise tax.

What this means for you

An unauthorized listing is not "maintaining an office"

A New York telephone listing in the company's name can create taxable nexus as a maintained office -- but only if it reflects the company's activity. A listing placed by an individual without the company's knowledge or authorization, then removed when discovered, does not make the company maintain a New York office.

Director residence and board membership are not nexus

Having a director who is a New York resident -- one who is not an officer or employee, takes no orders, and is uninvolved in operations -- does not create franchise-tax nexus. Compare TSB-A-08(4)C, where a New York-resident non-employee director likewise did not create taxpayer status.

Fix stray indicia promptly

If you discover an unauthorized New York phone listing, business-card use, or similar indicium, removing it supports the position that you are not holding yourself out as maintaining a New York office. Keep evidence that the listing was neither authorized nor used to take orders.

Common questions

Q: Does a New York phone listing make an out-of-state company taxable?
A: It can, if it reflects the company maintaining an office. But an unauthorized listing placed without the company's knowledge and later removed does not, where there is no New York solicitation or presence.

Q: Does a New York-resident director create nexus?
A: No, not where the director is not an officer or employee, takes no orders, and is uninvolved in operations.

Q: What should a company do about a stray listing?
A: Remove it once discovered and document that it was unauthorized and not used to take orders -- as the company did here.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax)
- Business Corporation Franchise Tax Regulations section 1-3.2(e) (maintaining an office; telephone listing)
- Business Corporation Franchise Tax Regulations section 1-3.4(b)(9) (Public Law 86-272 exemption)
- TSB-A-04(15)C (Aug. 31, 2004)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a04_15c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(15)C
Corporation Tax
August 31, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C031002A

On October 2, 2003, a Petition for Advisory Opinion was received from Hamilton
Manufacturing Corp., 1026 Hamilton Drive, Holland, Ohio 43528. Petitioner, Hamilton
Manufacturing Corp., submitted additional information pertaining to the Petition on April 21, 2004.
The issue raised by Petitioner is whether it is subject to tax under Article 9-A of the Tax Law
based on the facts as presented below.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is incorporated in Ohio and has its corporate offices in Ohio. Petitioner is a federal
S corporation that has 20 shareholders. Karen L. Sherwood and her brother are the majority owners.
Ms. Sherwood is on Petitioner’s Board of Directors, but is not an officer or employee of Petitioner.
All Board meetings are held in Ohio. Ms. Sherwood is not actively involved in the operations of
Petitioner and does not have detailed knowledge about its products. Ms. Sherwood’s involvement
in Petitioner is limited to attendance of the Board meetings in Ohio.
Petitioner designs and manufactures currency changing and validation equipment, for various
applications, at its manufacturing facility in Ohio. Petitioner’s customers are located throughout the
United States. Petitioner’s only contacts with New York are described below.
Ms. Sherwood is a New York State resident and she had a telephone listing for Petitioner
included in a local New York telephone book since 1990, without the knowledge of Petitioner. The
telephone number and address in the listing are the same as for her personal phone and residence.
When Petitioner became aware of the telephone listing it requested that it be removed from the
telephone book, and the listing has subsequently been removed.
Ms. Sherwood has never solicited or taken orders for Petitioner’s products. All orders for
Petitioner’s products are taken at Petitioner’s Ohio headquarters. No sales activity is conducted in
person by an employee or agent of Petitioner in New York. Its sales solicitation is conducted by
telephone from outside of New York. Petitioner states that it does not have any physical presence
in New York.
Included in Petitioner’s Web site is a list of authorized service centers. This list includes
various independent repair organizations throughout the United States. These are all independent
organizations that have been designated as authorized to provide warranty and nonwarranty repairs
to equipment that Petitioner has sold. These repair organizations are fully independent
organizations, with no contractual obligations with Petitioner. They have simply been trained to
repair the machines, and are therefore, authorized to make warranty repairs and bill Petitioner for

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the service per the terms of the warranty. All training is provided at Petitioner’s facility in Ohio.
Petitioner’s employees do not come into New York to train personnel of the service centers.
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 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 of the Business Corporation Franchise Tax Regulations (“Regulations”), as
amended January 22, 2004, provides, in part:
(b) Foreign corporation – doing business. (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.

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Corporation Tax
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(c) Foreign corporation – employing capital. 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 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.
(d) Foreign corporation – owning or leasing property. 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.
(e) Foreign corporation – maintaining an office. 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 salesperson’s home, a hotel room, or a trailer used on a construction
job site may constitute an office.
Opinion
Pursuant to section 209.1 of the Tax Law and section 1-3.2(b), (c), (d) and (e) of the
Regulations, a corporation organized outside of New York State is subject to the 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.
In Gulf Homes, Inc., Adv Op Comm T&F, August 3, 1984, TSB-A-84(10)C, the petitioner
solicited business in New York for its construction business by advertising in New York
newspapers. The advertisements contained, among other things, the New York telephone number
of the Long Island home of one of the petitioner’s officers who was also an employee of the
corporation. The officer would arrange to meet with the people who responded to the ads at the
officer’s home or elsewhere in the New York metropolitan area. All contracts for the construction
of homes were approved, accepted, finalized and consummated in Florida. The opinion held that
the petitioner held the officer’s New York residence out as a place of business by including the
telephone number in the New York ads and by the officer actually using his residence for meetings
with prospective customers. Since the officer was using his home for the business purposes of the
petitioner, such usage constituted the maintenance of an office within the intent of section 209.1 of
the Tax Law.

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Corporation Tax
August 31, 2004
In Tower Cleaning Systems, Inc., Adv Op Comm T&F, May 31, 2002, TSB-A-02(6)C, the
petitioner was organized outside of New York State and provided janitorial service for its customers.
It did not have an office, employees, representatives or inventory in New York State, and hired
subcontractors in New York to conduct the janitorial services for the petitioner’s New York
customers. The opinion held that the hiring of subcontractors as independent contractors in
New York to provide the janitorial services for the petitioner’s New York customers did not
constitute doing business in New York by the petitioner, and did not cause the petitioner to be
subject to tax under Article 9-A of the Tax Law. (See Ernst and Whinney, Adv Op Comm T&F,
September 29, 1988, TSB-A-88(22)C.) However, if it was established that the subcontractors had
an agency relationship with the petitioner, the opinion further held that pursuant to section
1-3.2(b)(2) of the Regulations, the petitioner would be considered to be doing business in New York
State and it would be subject to tax under Article 9-A of the Tax Law. (See GEF Funding Corp.,
Adv Op Comm T&F, January 26, 1988, TSB-A-88(2)C.)
In this case, Petitioner states that it does not have physical presence in New York State. Its
solicitation of orders in New York is conducted by telephone from Ohio, and all orders for
Petitioner’s products are taken at its Ohio headquarters. One of Petitioner’s shareholders,
Ms. Sherwood, lives in New York State and has a telephone listing for Petitioner in her local
telephone book with her home address listed. However, unlike Gulf Homes, Inc., supra,
Ms. Sherwood is not an employee actively involved in the operations of the corporation. She does
not conduct Petitioner’s business from her home, and neither solicits or takes orders for Petitioner’s
products. Therefore, Petitioner is not deemed to be maintaining an office in New York State under
section 1-3.2(e) of the Regulations because of such telephone listing.
Petitioner does train various independent repair organizations in the repair of Petitioner’s
products. All training is conducted at Petitioner’s facility in Ohio. Once trained, the independent
organizations are designated as authorized to provide warranty and nonwarranty repairs to the
products that Petitioner has sold. Petitioner’s Web site lists the service centers authorized to repair
Petitioner’s products. However, these repair organizations are fully independent organizations, and
have no contractual obligations with Petitioner. When they make warranty repairs, they bill
Petitioner for the service per the terms of the warranty. Petitioner does not come into New York to
train the employees of the authorized service centers. It appears that the authorized service centers
are independent contractors, and following Tower Cleaning, supra, the activities of such authorized
service centers in New York State are not considered activities conducted by Petitioner. Petitioner
is not deemed to be doing business in New York under section 1-3.2(b)(2) of the Regulations as a
result of such independent contractor activities in New York.
Considering the totality of Petitioner’s activities in New York as presented by the facts,
Petitioner is not doing business, employing capital, owning or leasing property or maintaining an
office in New York State as contemplated under section 209.1 of the Tax Law and section 1-3.2 of
the Regulations. Accordingly, Petitioner is not subject to franchise tax under Article 9-A of the Tax
Law.

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However, if it is determined that there is an agency relationship between Petitioner and the
authorized service centers, then pursuant to section 1-3.2(b)(2) of the Regulations, and following
GEF Funding, supra, Petitioner would be considered to be doing business in New York. In that
case, Petitioner would be subject to the tax imposed under Article 9-A of the Tax Law. 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 applicability of
pertinent statutory and regulatory provisions to a “specified set of facts.” Tax Law,
§171.Twenty-fourth; 20 NYCRR 2376.1(a).

DATED: August 31, 2004

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.