Is an out-of-state alarm-monitoring company doing business in New York when it uses third-party contractors to install and service equipment for its New York customers?

Plain-English summary

SafetyCare, Inc., a New Jersey corporation, sells and monitors personal emergency response and alarm systems from New Jersey. It has no New York office, employees, representatives, or inventory. A few New York customers buy through word of mouth. SafetyCare contracts with a third party to buy, install, and service the monitoring equipment in New York homes, invoices the customer for equipment, installation, and monitoring, and performs the monitoring itself from New Jersey over phone lines and radio.

The Department held that SafetyCare is not doing business in New York. Following Tower Cleaning Systems (a janitorial company that used New York subcontractors), the activities of independent contractors hired to install and service equipment are not attributed to SafetyCare under Regulations section 1-3.2(b)(2). SafetyCare does not employ capital, own or lease property, or maintain an office in New York, so it is not required to file Article 9-A franchise tax reports.

The Department added the standard caveat from GEF Funding: if it were established that the third parties have an agency relationship with SafetyCare (rather than being independent contractors), then SafetyCare would be doing business in New York and subject to Article 9-A. Whether an agency relationship exists is a factual matter not decided in an advisory opinion.

What this means for you

Independent contractors do not create nexus; agents do

An out-of-state company can use New York independent contractors to install or service its products without becoming subject to Article 9-A -- their activities are not attributed to the company. The dividing line is agency: if the New York third parties act as the company's agents, their activities are attributed and create doing-business nexus.

Structure and document the relationship

Because the agency question is factual, the contracts and the actual course of dealing matter. To stay outside New York tax, keep the installers/servicers as genuine independent contractors -- avoid the control, direction, and representation indicia that signal agency.

Monitoring from out of state is not a New York activity

Performing the core service (here, alarm monitoring) from outside New York over phone and radio is not a New York activity. Selling to New York customers and invoicing them, without in-state people or property, does not by itself create nexus.

Common questions

Q: Does hiring New York installers/servicers create franchise-tax nexus?
A: Not when they are genuine independent contractors. Their activities are not attributed to the out-of-state company under Regulations section 1-3.2(b)(2).

Q: When would the company be taxable?
A: If the third parties are its agents rather than independent contractors, the company is doing business in New York and subject to Article 9-A.

Q: Is the agency question decided in the advisory opinion?
A: No. Whether an agency relationship exists is a factual matter outside the scope of an advisory opinion.

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; activities of independent contractors vs. agents)
- Tower Cleaning Systems, Inc., TSB-A-02(6)C
- GEF Funding Corp., TSB-A-88(2)C
- SafetyCare, Inc., TSB-A-05(13)C (Oct. 24, 2005)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a05_13c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(13)C
Corporation Tax
October 24, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C050304A

On March 4, 2005, a Petition for Advisory Opinion was received from SafetyCare, Inc.,
15 Emerald Street, Hackensack, NJ 07601.
The issue raised by Petitioner, SafetyCare, Inc., is whether it is required to file franchise
tax reports under Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is incorporated in New Jersey and is located in Hackensack, New Jersey, where
it performs monitoring services of its personal emergency response and alarm systems. Most of
Petitioner=s customers are located in New Jersey, but some sales have been made to customers in
New York State. The New York State sales have occurred through word of mouth by friends and
family of Petitioner’s officers and employees.
Petitioner does not have an office, employees, representatives or inventory in New York
State.
Petitioner contracts with a third party to buy and install monitoring equipment in
New York homes. Petitioner pays the third party for the installation and the equipment.
Petitioner invoices the New York customer for the sale of the equipment, installation, and
monitoring services. All servicing of the equipment is performed by a third party. Petitioner
only performs the monitoring services from its New Jersey facility over telephone lines and radio
signals.
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

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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 (ARegulations”)
provides, in part:
(b) Foreign corporation B 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 B 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 B 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,

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consigning property to New York State may create taxable status if the consignor retains
title to the consigned property.
(e) Foreign corporation B 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 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, 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 Tower Cleaning, supra, the activities of third parties hired by Petitioner as
independent contractors in New York State to install and service the monitoring equipment 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 third
party activities in New York. Therefore, Petitioner is not required to annually file a franchise tax
report pursuant to 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 third parties, 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 and would be
required to annually file franchise tax reports 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 Aspecified set of facts.@ Tax
Law, '171.Twenty-fourth; 20 NYCRR 2376.1(a).

DATED: October 24, 2005

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.