Is an out-of-state professional employer organization subject to New York franchise tax because it processes payroll for two New York-resident drivers who work outside New York?

Plain-English summary

Humacare-Care Staff Inc., an Ohio professional employer organization (PEO), withholds New York income tax for two workers -- New York residents who are truck drivers for an Ohio trucking company and who do not work in New York. Humacare gets a small administration fee for processing their payroll and is authorized by agreement to direct and control the workers, though it does not run their daily activities. That payroll role is its only New York connection.

The Department held Humacare is not subject to Article 9-A. It is not doing business, employing capital, owning or leasing property, or maintaining an office in New York under section 209.1 and Regulations section 1-3.2(b). The drivers work in Ohio, not New York. And the result holds regardless of whether Humacare is the drivers' employer -- so the opinion did not need to decide the employer question. If Humacare were to undertake actual New York activities, it could become taxable.

What this means for you

Processing payroll for New York residents is not New York nexus

An out-of-state PEO that merely processes payroll (and withholds New York tax) for workers who live in New York but work elsewhere is not doing business in New York. The drivers' work location -- not their residence or the withholding -- drives the nexus analysis.

Employer status didn't need deciding

The Department reached the no-nexus result without resolving whether the PEO was the drivers' "employer." When the workers perform no services in New York, the PEO is not doing business there either way. Withholding New York tax for a resident does not, by itself, create franchise-tax nexus for the withholder.

The line is actual New York activity

If the PEO began doing business, employing capital, owning/leasing property, or maintaining an office in New York, it would become taxable. Administrative payroll for out-of-state work is not that.

Common questions

Q: Does processing payroll for New York-resident workers create franchise-tax nexus?
A: Not where the workers perform their services outside New York. The out-of-state PEO is not doing business in New York merely by processing their payroll and withholding tax.

Q: Did it matter whether the PEO was the drivers' employer?
A: No. Because the drivers worked in Ohio, the PEO was not doing business in New York regardless, so the employer question did not need to be decided.

Q: When would the PEO become taxable?
A: If it began actually doing business, employing capital, owning/leasing property, or maintaining an office in New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax)
- Article 9-A Regulations section 1-3.2(b) (doing business in New York)
- Humacare-Care Staff Inc., TSB-A-04(17)C (Dec. 13, 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_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(17)C
Corporation Tax
December 13, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C040406A

On April 6, 2004, a Petition for Advisory Opinion was received from Humacare-Care
Staff Inc., 9501 Union Cemetery Road, Loveland, Ohio 45140.
The issue raised by Petitioner, Humacare-Care Staff Inc., is whether it is subject to
franchise tax under Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a professional employer organization (PEO) based in Ohio. There are two
workers for whom it is withholding New York State income tax. The two workers are residents
of New York who are truck drivers for an Ohio based trucking company. These two workers do
not work in New York. Petitioner receives a small administration fee for processing the payroll
checks for these workers. Petitioner does not exercise control over the worker’s daily activities,
but it is authorized by agreement to direct and control the workers. This is the only connection
Petitioner has with New York State.
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”)
provides, in part:

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TSB-A-04(17)C
Corporation Tax
December 13, 2004

(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.
(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

TSB-A-04(17)C
Corporation Tax
December 13, 2004

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corporate business. A salesperson’s home, a hotel room, or a trailer used on a
construction job site may constitute an office.
Opinion
Petitioner is a PEO based in Ohio. The two people at issue, who are residents of
New York State, are truck drivers for an Ohio based trucking company and do not work in New
York.
Since Petitioner is not doing business, employing capital, owning or leasing property or
maintaining an office in New York pursuant to section 209.1 of the Tax Law and as described in
section 1-3.2(b) of the Regulations, Petitioner is not subject to tax under Article 9-A of the Tax
Law. Petitioner will not be subject to tax under Article 9-A of the Tax Law under these
circumstances regardless of whether it is considered to be the employer of the truck drivers.
Therefore, it is not necessary for this Advisory Opinion to address whether Petitioner is the
employer of the truck drivers.
However, Petitioner would be subject to franchise tax under Article 9-A of the Tax Law
pursuant to section 209.1 of the Tax Law if it is doing business, employing capital, or owning or
leasing property in New York in a corporate or organized capacity, or maintaining an office in
New York during a taxable year, as described in such section 209.l of the Tax Law and section
1-3.2(b) of the Regulations.

DATED: December 13, 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.