Is an out-of-state computer-hardware company that sells in New York only through one home-based sales representative exempt from New York franchise tax under Public Law 86-272?

Plain-English summary

A foreign corporation sells thin-client computers (network computers with no hard drive) to retailers and distributors, never to end consumers. Its only New York activity is one sales representative living near Setauket who solicits orders. The rep:

• works the northeastern U.S. territory, uses his own car and a company laptop;
• has no company-paid office -- he uses space at his home only for his own convenience, and the company does not hold the home out as its office (business cards/letterhead show the out-of-state address);
• sends all orders out of state for credit approval, processing, and shipping; samples ship from out of state.

The Department held the company is exempt from Article 9-A franchise tax under Public Law 86-272, which protects out-of-state sellers whose in-state activity is limited to soliciting orders for tangible personal property that are approved and filled from outside the state. The rep's duties fit within protected solicitation and entirely ancillary activities, and the home is not a "maintained office" under Regulations section 1-3.4(b)(9)(vi).

But because the company has a New York employee, it must still file Form CT-245 each year (to disclaim tax) and pay the section 181.2(a) maintenance fee if it is authorized to do business in New York under Business Corporation Law Article 13 or 15-A.

What this means for you

Out-of-state sellers using in-state sales reps

Public Law 86-272 protects you if your New York people do nothing beyond soliciting orders for tangible personal property -- and ancillary acts like using free samples, company cars, attending trade shows (14 days or fewer), and passing complaints to the home office. Orders must be approved and shipped from outside New York. Going beyond solicitation (installing, repairing, credit investigations, collecting accounts, taking inventory, technical advice after delivery) forfeits the protection.

Keep the home from becoming an "office"

A rep's home is not a taxable company office if it is used solely for the rep's convenience and the company does not hold it out to the public as its place of business. Watch the danger signs: a company-listed phone at the home, or the address on business cards/letterhead, can convert the residence into a maintained office and destroy the exemption.

Exempt does not mean no filing

Even when 86-272 shields you from the tax, having a New York employee triggers an annual CT-245 activities return and, if you are authorized to do business in New York, the $300 maintenance fee under section 181.2(a). Protection from tax is not protection from filing.

Common questions

Q: What does Public Law 86-272 protect?
A: An out-of-state corporation whose only New York activity is soliciting orders for tangible personal property -- where the orders are approved and shipped from outside New York -- is exempt from Article 9-A franchise tax.

Q: Does a sales rep's home office break the exemption?
A: Not if the home is used solely for the rep's convenience and the company does not hold it out as its office. A company-listed phone or the home address on letterhead can convert it into a taxable office.

Q: If exempt, does the company owe anything to New York?
A: It must still file Form CT-245 annually because it has a New York employee, and pay the section 181.2(a) maintenance fee if authorized to do business in New York.

Citations and references

Statutes, regulations, and authorities:
- Public Law 86-272 (15 USC sections 381-384) (interstate solicitation immunity)
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 181.2(a) (annual maintenance fee for authorized foreign corporations)
- Business Corporation Franchise Tax Regulations section 1-3.4(b)(9) (Public Law 86-272 exemption; ancillary activities; home not held out as an office)
- Daskzal Bolton LLP, TSB-A-05(7)C (Apr. 4, 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_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(7)C
Corporation Tax
April 4, 2005

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

PETITION NO. C041214A

On December 14, 2004, a Petition for Advisory Opinion was received from Daskzal
Bolton LLP, 2401 NW Boca Raton Boulevard, Boca Raton, Florida 33431.
The issues raised by Petitioner, Daskzal Bolton LLP, are:
1. Whether a corporation, as described below, is exempt from tax under Article 9-A of
the Tax Law pursuant to Public Law 86-272.
2. Whether the corporation is required to annually file an activities report and pay a
maintenance fee pursuant to section 181 of Article 9 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Company A is a foreign corporation which is a supplier of a full range of computer
hardware products known as thin clients. A thin client is a network computer without a hard disk
drive that is designed to operate in the server based computing environment and encompasses
Mainframe, UNIX, Linux and Microsoft technology. Company A’s products are manufactured
outside of the United States and are then sold to retailers and other distributors globally and
throughout the United States. Some of Company A’s customers are located in New York State.
Company A never directly sells its products to the ultimate consumer.
The activities of Company A within the boundaries of New York State are limited to
those conducted by only one employee. The employee is a sales representative responsible for
the solicitation of sales from within and without the state. The sales representative resides in or
around Setauket, New York. The sales representative’s sales territory consists of the northeastern United States. All product samples requested by the resellers and distributors are sent
directly from Company A’s out-of-state office directly to the reseller or distributor.
Company A does not own or lease any real or personal property in New York, nor does
Company A furnish a company vehicle to its sales representative. Rather, the employee utilizes
his own vehicle in the performance of his job duties and then receives expense reimbursements
as outlined below. The only personal property owned by Company A within New York is a
laptop computer needed by the sales representative in performing his everyday job. The sales
representative purchases office supplies (i.e., paper, pens, etc.) through a local office supply
store. Office supplies and other general expenses (i.e., travel expenses, gasoline, etc.) are
reimbursed to the sales representative through submission of monthly expense reports. Company
A does not provide any other remuneration to the sales representative with regard to his home
office expenses.

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The sales representative utilizes space at his home for his own convenience. Company A
does not hold out the employee’s home office space as corporate office space. Company A does
not represent itself as having a presence within New York State, either by the efforts of the
salesperson or through Company A’s own efforts. Any documentation (i.e., business cards,
letterhead, etc.) that is provided by the sales representative to customers references only
Company A’s out-of-state corporate office address and phone number. The sales representative
has a voice mailbox at the out-of-state corporate office he can access to retrieve voice mails.
Company A is properly complying with the payroll withholding and unemployment
compensation tax requirements of New York State.
The following is a listing of the job responsibilities of the sales representative:
·
·
·
·
·
·

Fulfilling assigned sales quotas for all company distributed products.
Visiting territorially designated customers for purposes of solicitation of sales orders.
Discussing all matters affecting assigned territory with a supervisor located outside of
New York State.
Implementing sales plan for designated territory in order to meet annual sales quotas.
Submitting customer purchase requests to Company A located outside of New York for
credit approval, order processing, shipping and billing.
Attending nationwide trade show conventions when directed by Company A. It should
be noted that the conventions are not held in New York State.

Applicable law and regulations
Section 181.2(a) of the Tax Law imposes an annual maintenance fee and provides, in
part:
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 ….
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….

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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.
(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.

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(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.
However, section 1-3.4(b)(9) of the Regulations provides for an exemption from taxation
under Article 9-A for corporations which are exempt pursuant to the provisions of Public Law
86-272 (15 USCA §§ 381-384) and provides, in part:
(i) A foreign corporation whose income is derived from interstate commerce is
not subject to tax under article 9-A of the Tax Law if the activities of the corporation in
New York State are limited to either, or both of the following:
(a) the solicitation of orders by employees or representatives in New York
State for sales of tangible personal property and the orders are sent outside
New York State for approval or rejection; and if approved, are filled by shipment
or delivery from a point outside New York State; and
(b) the solicitation of orders for sales of tangible personal property by
employees or representatives in New York State in the name of or for the benefit
of a prospective customer of such corporation if the customer’s orders to the
corporation are sent outside the State for approval or rejection; and, if approved,
are filled by shipment or delivery from a point outside New York State.
(ii) For purposes of this exemption, a corporation will not be considered to have
engaged in taxable activities in New York State during the taxable year merely by reason
of sales in New York State or the solicitation of orders for sales in New York State, of
tangible personal property on behalf of the corporation by one or more independent
contractors. A corporation will not be considered to have engaged in taxable activities in
New York State by reason of maintaining an office in New York State by one or more
independent contractors whose activities on behalf of the corporation in New York State
consist solely of making sales, or soliciting orders for sales, of tangible personal property.
*

*

*

(iv) In order to be exempt by virtue of Public Law 86-272, the activities in
New York State of employees or representatives must be limited to the solicitation of
orders. The solicitation of orders includes offering tangible personal property for sale or
pursuing offers for the purchase of tangible personal property and those ancillary
activities, other than maintaining an office, that serve no independent business function
apart from their connection to the solicitation of orders. Examples of activities performed

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by such employees or representatives in New York State that are entirely ancillary to the
solicitation of orders include:
(a) the use of free samples and other promotional materials in connection
with the solicitation of orders;
(b) passing product inquiries and complaints to the corporation’s home
office;
(c) using autos furnished by the corporation;
(d) advising customers on the display of the corporation’s products and
furnishing and setting up display racks;
(e) recruitment, training and evaluation of sales representatives;
(f) use of hotels and homes for sales-related meetings;

(g) intervention in credit disputes;
(h) use of space at the salesperson’s home solely for the salesperson’s
convenience...;
(i) participating in a trade show or shows, provided that participation is for
not more than 14 days, or part thereof, in the aggregate during the corporation’s
taxable year for Federal income tax purposes....
(v) Activities in New York State beyond the solicitation of orders will subject a
corporation to tax in New York State unless such activities are de minimis. Activities
will not be considered de minimis if such activities establish a nontrivial additional
connection with New York State. Solicitation activities do not include those activities
that the corporation would have reason to engage in apart from the solicitation of orders
but chooses to allocate to its New York State sales force. In determining whether a
corporation’s activities exceed the solicitation of orders, all of the corporation's activities
in New York State will be considered. Examples of activities which go beyond the
solicitation of orders include:
(a) making repairs to or installing the corporation’s products;
(b) making credit investigations;
(c) collecting delinquent accounts;

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(d) taking inventory of the corporation’s products for customers or
prospective customers;
(e) replacing the corporation’s stale or damaged products;
(f) giving technical advice on the use of the corporation’s products after
the products have been delivered to the customer.
(vi) Maintaining an office ... in New York State will make a corporation taxable…
A corporation will be considered to be maintaining an office in New York State if the
space is held out to the public as an office or place of business of the taxpayer. For
example, a salesperson uses his or her house for business. A telephone, listed in the
corporation’s name, is maintained at the salesperson’s house. The salesperson makes
telephone contacts from the house or receives calls and orders at the house. The
residence will be treated as an office of the corporation, and the corporation will be
taxable;
Opinion
Pursuant to section 1-3.4(b)(9) of the Regulations, a corporation is not subject to the
Article 9-A franchise tax in New York State if it is exempt pursuant to the provisions of Public
Law 86-272. To be exempt pursuant to Public Law 86-272, a corporation’s activities in
New York State must be either (a) limited to the solicitation of orders by employees or
representatives in New York State for sales of tangible personal property, or be entirely ancillary
to such solicitation of orders, or (b) if the activities exceed the solicitation of orders, the activities
must be considered to be de minimis. In addition, the orders must be sent outside New York
State for approval or rejection; and if approved, must be filled by shipment or delivery from a
point outside New York.
In this case, the sales representative’s job responsibilities as described above fit within
the scope of solicitation of orders pursuant to the provisions of Public Law 86-272. Company A
states that it does not conduct any other activities in New York State, and does not own or lease
any real property in New York. The only personal property of Company A in New York consists
of a laptop computer for the use of the sales representative in the performance of his job duties.
Orders for Company A’s products are approved outside New York, and products are shipped
from outside New York. Petitioner also states that Company A reimburses the sales
representative for office supplies and general expenses, but does not provide any other
remuneration to the sales representative with respect to his home office expenses. Company A
does not represent itself to the public as having an office at the sales representative’s home office
address. The sales representative’s business cards and letterhead use the out-of-state corporate
office address and phone number. The sales representative receives voice mail from the voice
mailbox at the out-of-state office. Therefore, it is determined that Company A does not maintain

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an office in New York at the sales representative’s residence pursuant to section 1-3.4(b)(9)(vi)
of the Regulations.
Since Company A does not maintain an office in New York State at the sales
representative’s residence pursuant to section 1-3.4(b)(9)(vi) of the Regulations, Company A’s
activities in New York appear to be limited to the solicitation of orders pursuant to the provisions
of Public Law 86-272, and pursuant to section 1-3.4(b)(9) of the Regulations, Company A is
exempt from the franchise tax imposed under Article 9-A of the Tax Law. However, since
Company A has an employee in New York, Company A is required to annually file an activities
report on Form CT-245, Maintenance Fee and Activities Return For a Foreign Corporation
Disclaiming Tax Liability. In addition, Company A is required to pay a maintenance fee pursuant
to section 181.2(a) of the Tax Law, if it is authorized to do business in New York pursuant to
Article 13 or Article 15-A of the Business Corporation Law.

DATED: April 4, 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.