Is a Texas parent that runs payroll for its New York operating subsidiary subject to New York Article 9-A franchise tax?

Plain-English summary

Utility Engineering Corp., a Texas corporation, bought a subsidiary licensed to do engineering in New York, renamed it Proto-Power New York (PPNY), which began doing business in New York in 2003. The parent processes PPNY's payroll under the parent's federal EIN and reports/pays New York withholding and unemployment taxes. The parent says it does no other New York business.

The question is whether running the subsidiary's payroll makes the parent subject to Article 9-A.

The Department held it turns on whose employees the workers are. Being the payroll-payer can make the parent the "employer" for federal withholding under Treasury Regulation section 31.3401(d)-1, but that label does not decide the New York doing-business test. If PPNY's workers serve only PPNY and are under PPNY's direction and control, they are not the parent's employees in New York for section 1-3.2(b)(2)(iv). In that case -- with no other New York activity -- the parent is not subject to Article 9-A and need not file.

But if those workers are the parent's employees in New York, the parent is doing business there and is subject to Article 9-A and must file an annual report. The opinion also notes the CT-245/maintenance-fee mechanics: an authorized foreign corporation disclaiming liability files Form CT-245 and pays the section 181.2 maintenance fee; an unauthorized one with New York employees files CT-245 but owes no maintenance fee.

What this means for you

Paying the payroll is not the same as employing the workers

Acting as the payroll-paying entity -- even under your own EIN, remitting New York withholding -- can make you the "employer" for federal withholding without making the workers your employees for New York franchise-tax nexus. The doing-business test looks at direction and control, not who cuts the checks.

Direction and control decide nexus

If the subsidiary's workers serve only the subsidiary and are controlled by it, they are the subsidiary's employees, and the parent's payroll role does not create parent-level Article 9-A nexus. Keep the control relationship clear in your intercompany arrangements.

Mind the CT-245 mechanics

A foreign corporation authorized to do business in New York that disclaims tax liability files Form CT-245 and pays the section 181.2 maintenance fee; one that is not authorized but has New York employees files CT-245 without the fee. Disclaiming tax is not the same as having no filing.

Common questions

Q: Does processing a New York subsidiary's payroll make the parent subject to Article 9-A?
A: Only if the subsidiary's workers are the parent's own employees in New York. If they serve only the subsidiary under its control, the parent is not doing business there.

Q: Doesn't paying the wages make the parent the employer?
A: It can for federal withholding under Treasury Regulation section 31.3401(d)-1, but that does not decide New York's doing-business test, which turns on direction and control.

Q: If the parent has no other New York activity, must it file?
A: No, not under Article 9-A, if the workers are the subsidiary's employees and the parent is not otherwise doing business in New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 181.2 (maintenance fee; Form CT-245 for foreign corporations disclaiming liability)
- Article 9-A Regulations section 1-3.2(b) (doing business; employees in New York)
- Treasury Regulation section 31.3401(d)-1 (who is the employer for federal withholding)
- Utility Engineering Corp., TSB-A-05(5)C (Mar. 10, 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_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(5)C
Corporation Tax
March 10, 2005

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

PETITION NO. C041020A

On October 20, 2004, a Petition for Advisory Opinion was received from Utility
Engineering Corp., 500 S. Taylor LB 239, Amarillo, Texas 79101-2446.
The issues raised by Petitioner, Utility Engineering Corp., are whether (1) it is subject to
franchise tax under Article 9-A of the Tax Law, and (2) it needs to register with the New York
State Department of State for authorization to do business in New York.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a Texas corporation and maintains that it does not conduct business in
New York. In January 2002, Petitioner purchased a subsidiary, Walter Kidde, which is licensed
to perform engineering services in New York. Subsequently, Petitioner changed Walter Kidde’s
name to Proto-Power New York (“PPNY”). PPNY commenced doing business in New York in
July 2003. PPNY’s payroll function is conducted at Petitioner’s level. Petitioner is responsible
for paying the workers and reporting and paying New York State withholding and
unemployment taxes under Petitioner’s federal employer identification number.
Applicable law and regulations
Section 181.2 of Article 9 of the Tax Law imposes an annual maintenance fee, and
provides, in part:
(a) Imposition. Every foreign corporation…which is authorized to do business in
this state pursuant to article thirteen or article fifteen-A of the business corporation law
shall pay an annual maintenance fee of three hundred dollars for each year or portion
thereof for which it is so authorized…
.
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(c) Credit for fee paid. There shall be allowed as a credit against the tax due
under this article…article nine-A or thirty-two of this chapter for any fiscal year, calendar
year, or taxable period or portion thereof, the amount of the fee paid for the same fiscal or
calendar year or portion of a year or the tax for such year or portion thereof, whichever is
less.
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

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TSB-A-05(5)C
Corporation Tax
March 10, 2005

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:
(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.

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TSB-A-05(5)C
Corporation Tax
March 10, 2005

(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.
Section 4-5.2(b) of the Regulations provides that:
Generally, the relationship of employer and employee exists when the taxpayer
has the right to control and direct the individual not only as to the result to be
accomplished by him but also as to the means by which such result is to be accomplished.
If the relationship of employer and employee exists, the designation or description of the
relationship, and the measure, method or designation of the compensation are immaterial.
For purposes of federal income tax withholding from wages, Treasury
Employment Tax Regulations section 31.3401(d)-1 describes an employer, and provides,
in part:
(a) The term “employer” means any person for whom an individual performs or
performed any service, of whatever nature, as the employee of such person.
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(f) If the person for whom the services are or were performed does not have legal
control of the payment of the wages for such services, the term “employer” means (except
for the purpose of the definition of“wages”) the person having such control....
Opinion
Petitioner states that it performs the payroll function for PPNY. Based on the facts
presented, it appears that for the purpose of federal income tax withholding under Treasury
Regulation section 31.3401(d)-1, Petitioner is the person having control of the payment of the
wages of PPNY’s employees and is treated as the employer of PPNY’s employees for this purpose.

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TSB-A-05(5)C
Corporation Tax
March 10, 2005

However, if PPNY’s employees perform services only for PPNY and are under the
direction and control of PPNY, such individuals are not employees, as described in section
4-5.2(b) of the Regulations, of Petitioner merely because Petitioner pays the individuals’ wages
and is treated as the employer for purposes of the federal income tax withholding provisions
under Treasury Regulation section 31.3401(d)-1. Under these circumstances, such individuals
working in New York State would not be employees of Petitioner located in New York State for
purposes of section 1-3.2(b)(2)(iv) of the Regulations.
If Petitioner does not have employees, officers or agents in New York, otherwise do
business in New York, employ capital in New York, own or lease property in New York or
maintain an office in New York, Petitioner does not meet the conditions under section 209.1 of
the Tax Law and section 1-3.2 of the Regulations to be subject to franchise tax under Article 9-A
of the Tax Law. If Petitioner is not subject to franchise tax under Article 9-A of the Tax Law,
Petitioner is not required to file a franchise tax report under such Article 9-A.
However, if the individuals employed by PPNY are employees of Petitioner under section
4-5.2(b) of the Regulations, Petitioner would have employees in New York State. Petitioner
would be doing business in New York State under section 1-3.2(b) of the Regulations and
would be subject to tax under Article 9-A of the Tax Law. If Petitioner is subject to tax under
Article 9-A of the Tax Law, Petitioner is required to file an annual franchise tax report under
such Article 9-A.
The determination of whether Petitioner is required to register with the New York State
Department of State as a corporation authorized to do business in New York is not within the
jurisdiction of the Tax Department.
Note that if Petitioner is authorized by the Secretary of State to do business in New York,
and Petitioner disclaims tax liability under Article 9-A of the Tax Law, Petitioner must file Form
CT-245, Maintenance Fee and Activities Return For a Foreign Corporation Disclaiming Tax
Liability, and pay the annual maintenance fee pursuant to section 181.2 of the Tax Law. Further,
if Petitioner is not authorized to do business in New York but has employees or officers in New
York State and is disclaiming tax liability under Article 9-A of the Tax Law, Petitioner must file
such Form CT-245 but is not required to pay the maintenance fee.

DATED: March 10, 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.