Does an out-of-state company selling product service contracts through in-state retailers, web referrals, or direct mail have enough nexus with New York to have to collect sales tax?

Plain-English summary

Foley & Lardner asked, on behalf of an out-of-state client ("Company"), whether Company has enough connection to New York to be required to collect sales tax. Company has no offices, employees, or property in New York — its only contact is selling "service contracts" (agreements to repair or replace a product after the manufacturer's warranty expires) to New York customers, through three channels: (1) in-store, sold by third-party Retailers at the same time the Retailer sells the underlying product; (2) directly through Company's website, from referrals by unrelated internet brokers; and (3) via direct mail from an affiliated "Marketer" or an unrelated third party, who earns a commission. In every scenario, if a customer later needs a repair, a Retailer located in New York typically performs it as Company's "designated repair center," getting paid directly by Company (or the customer pays and gets reimbursed).

A state can only require an out-of-state seller to collect its sales tax if the seller has some physical presence in the state, satisfying the U.S. Constitution's Commerce Clause — but that presence "need not be substantial," just "demonstrably more than a slightest presence" (citing the New York Court of Appeals' Orvis decision), and can be satisfied through the conduct of a representative acting on the seller's behalf (the classic example being Scripto, Inc. v Carson). The Department found that in ALL THREE scenarios, regardless of how the service contract itself was sold, Retailers located in New York end up performing the actual repair or replacement work as Company's designated repair centers — acting as Company's representatives in the state. That in-state repair activity, performed on Company's behalf, is enough physical presence to create nexus. So Company must register as a New York sales tax vendor and collect tax on its service contract sales to New York customers under every one of the three sales channels described.

What this means for you

Out-of-state sellers of extended warranties or service contracts

If your product's warranty/service contract will be fulfilled by repair centers located in New York — even if you never sell the contract there yourself, and even if the contract is sold entirely online or by mail — those in-state repair centers acting on your behalf can create nexus requiring you to register and collect New York sales tax.

Companies using third-party retailers, marketers, or repair networks

The specific sales channel (retail point-of-sale, web referral, direct mail) doesn't matter if the same underlying fulfillment structure (an in-state representative performing services on your behalf) is present across all channels — the Department looked past the sales-channel distinctions to the common repair-network fact.

Accountants and tax professionals

This is a useful nexus-analysis template for any multistate business relying on independent repair/service networks: the key question is whether the in-state actor is functioning as your representative (however characterized contractually), not whether you have a lease, employees, or inventory in the state.

Common questions

Q: Does selling a service contract online, with zero physical presence, avoid New York nexus?
A: Not necessarily — if repairs under that contract are performed by an in-state repair center acting on the seller's behalf, that's enough physical presence for nexus, regardless of the sales channel.

Q: How much physical presence is required for nexus?
A: It doesn't need to be substantial — courts require only "demonstrably more than a slightest presence," which can be satisfied by an in-state representative's activities performed on the seller's behalf.

Q: Is the sale of a repair/service contract itself taxable in New York?
A: Yes — a maintenance or service contract for tangible personal property is a taxable transaction under section 1105(c)(3).

Q: Can another out-of-state seller rely on this Advisory Opinion?
A: No. It binds the Department only for the petitioner and facts described; another seller's repair-network structure needs to be evaluated on its own facts.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(5), (b)(8)(i) (sale; vendor)
• Tax Law § 1105(c)(3) (service contracts)
• 20 NYCRR 526.10 (vendor nexus factors)
• 20 NYCRR 527.5(c) (maintenance/service contracts)

Cases referenced:

• National Geographic Society v California Board of Equalization, 430 US 561 (1977)
• Quill Corp. v North Dakota, 504 US 298 (1992)
• Orvis Company, Inc. v Tax Appeals Tribunal, 86 NY2d 165
• Scripto, Inc. v Carson, 362 US 207 (1960)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a06_29s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-06(29)S
Sales Tax
November 30, 2006

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

PETITION NO. S060302A

On March 2, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Foley & Lardner LLP, 321 N. Clark St., Suite 2800, Chicago, Illinois
60610. Petitioner, Foley & Lardner LLP, furnished additional information with respect to the
Petition on March 16, 2006.
The issue raised by Petitioner is whether there is sufficient nexus between Petitioner’s
client (Company) and New York State to require Company to register as a vendor and collect
sales and use tax on sales to New York customers.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Company is a foreign corporation with no physical presence in or connection to
New York other than its sale of service contracts to New York customers. A service contract is
an agreement for a separate consideration between a service contract provider (“provider”) and a
customer wherein the provider agrees to repair (or in some cases replace) a product that has had
a mechanical or electrical failure after the manufacturer’s warranty has expired. Company
describes the following three scenarios for the sale of service contracts in New York.
Scenario One
Company’s service contracts are sold to customers through third-party retailers
(“Retailer”) at retail locations in New York at the time Retailer sells a specific product to a
customer. When the New York Retailer sells the product to a customer in New York, the
Retailer may offer to sell the customer Company’s service contract covering the product
purchased.
Scenario Two
Company’s service contracts are sold directly to New York customers via its Web site as
a result of referrals from unrelated parties (i.e., an Internet broker or retailer).
Scenario Three
Company’s service contracts are sold by an affiliate of Company (“Marketer”) or
unrelated third party via direct mail solicitations to New York customers. Marketer or the
unrelated third party receives commissions from Company for any sales made.
As provided for in Company’s service contracts and in accordance with agreements with
certain Retailers, a Retailer may be responsible for making repairs or replacements under the
service contracts. Also, pursuant to certain service contracts, a customer is required to contact

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Company either by phone or Internet to report a claim. After the claim is verified by Company
as allowable under the customer’s contract, the customer may have the item repaired by the
Retailer pursuant to the service contract. As a designated repair center, the Retailer will receive
direct payment from Company. If the customer’s contract provides for product replacement, the
Retailer may issue the customer a gift card for use in one of Retailer’s stores which may not be
in the state where the customer purchased the product. Under other service contracts, the
customer has no obligation to use a specific vendor for repair service. Under these contracts,
Company might not provide direct payment to the vendors. Rather, the customer may be
required to pay the vendor and submit the receipt to Company for reimbursement.
In all scenarios, Company’s sale of service contracts, through its Marketer, Retailers,
third parties, or the Internet, represents Company’s only contact with New York. Specifically,
Company does not:
•
•
•
•
•

Maintain a place of business within New York.
Receive or process requests in New York to enter into a service contract with Company.
Sell, own, lease, maintain, use, or have the right to use any tangible personal property in
New York.
Rent, lease, or offer for sale tangible personal property to New York customers in any
way.
Allow its trade name to be used within New York by a franchisee, licensee or any other
entity.

Applicable law and regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by subdivisions
(a), (b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
following terms shall mean:
*

*

*

(5) Sale, selling or purchase. Any transfer of title or possession or both, exchange
or barter, rental, lease or license to use or consume . . . conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration or
any agreement therefor.
*

*

(8) Vendor. (i) The term "vendor" includes:

*

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Sales Tax
November 30, 2006

(A) A person making sales of tangible personal property or services, the receipts
from which are taxed by this article;
*

*

*

(C) A person who solicits business either:
(I) by employees, independent contractors, agents or other representatives; or
(II) by distribution of catalogs or other advertising matter, without regard to
whether such distribution is the result of regular or systematic solicitation, if such person
has some additional connection with the state which satisfies the nexus requirement of
the United States constitution;
and by reason thereof makes sales to persons within the state of tangible personal
property or services, the use of which is taxed by this article;
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property . . . or maintaining, servicing or repairing
tangible personal property . . . not held for sale in the regular course of business . . .
whether or not any tangible personal property is transferred in conjunction therewith, . . .
*

*

*

Section 525.2(a)(3) of the Sales and Use Tax Regulations provides:

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Except as specifically provided otherwise, the sales tax is a "destination tax." The
point of delivery or point at which possession is transferred by the vendor to the
purchaser, or the purchaser's designee, controls both the tax incidence and the tax rate.
Section 526.10 of the Sales and Use Tax Regulations provides, in part:
Vendor. (a) Persons included.
(1) (i) A person making sales of tangible personal property the receipts from
which are subject to tax is a vendor.
*

*

*

(ii) A person making sales of services, the receipts from which are subject to tax,
is a vendor. This may include a person entering this State from outside the state to
perform services on property located in this State.
*

*

*

(2) (i) A person maintaining a place of business in the State making sales, whether
at such place of business or elsewhere, to persons within the State of tangible personal
property or services, the use of which is tax [sic], is a vendor.
*

*

*

(3) A person who solicits business by employees, independent contractors, agents
or other representatives and by reason thereof makes sales to persons within the State of
tangible personal property or services, the use of which is subject to tax, is a vendor.
*

*

*

(4)(i) A person who solicits business by the distribution of catalogs or other
advertising matter, without regard to whether such distribution is the result of regular or
systematic solicitation, if such person has some additional connection with the State
which satisfies the nexus requirement of the United States Constitution and by reason
thereof makes sales to persons within the State of tangible personal property or services
the use of which is subject to tax, is a vendor.
(ii) For purposes of subparagraph (i) of this paragraph, the additional connection
with the State a person may have in order to qualify as a vendor shall include, but not be
limited to:

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(a) the operation of a retail stores [sic] in the State;
(b) the presence of traveling sales representatives in the State;
(c) the presence of employees, independent contractors or agents in the State;
(d) the presence of service representatives in the State;
(e) the maintenance of a post office box in the State for receiving responses to
such person's solicitations; or
(f) the maintenance of an office in the State, even if such office performs no
activities related to the sales solicited by such person.
Section 527.5(c) of the Sales and Use Tax Regulations provides, in part:
Maintenance and service contracts. (1) The purchase of a maintenance or service
contract is a taxable transaction.
(2) The vendor making sales of such contracts may purchase for resale any
tangible personal property which is transferred to his customer in connection with the
services rendered.
(3) Any charge made for services rendered in addition to the purchase price of the
maintenance or service contract is taxable.
Opinion
Company is a foreign corporation with no physical presence in or connection to
New York State other than its sale of service contracts to New York customers. Petitioner
describes three scenarios for Company’s sale of service contracts in New York. While Petitioner
describes Company’s business activity as the “sale of a contract,” in essence Company is selling
repair services to tangible personal property. These services are to be performed at a future time
when the customer’s product no longer operates properly. Under the contract, Company offers
to repair or replace the product. Ultimately, all such services are delivered by Company to its
customers through other contractors who either repair or replace the property. The sale of a
maintenance or service contract for tangible personal property is a taxable transaction under
section 1105(c)(3) of the Tax Law. See section 527.5(c) of the Sales and Use Tax Regulations.
A state can require an out-of-state seller to collect the state’s sales or use tax only when
the seller has “sufficient nexus” with the taxing state, i.e., some physical presence as required by
the Commerce Clause of the United States Constitution. See National Geographic Society v

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California Board of Equalization, 430 US 561 (1977); Quill Corp. v North Dakota, 504 US 298
(1992). Petitioner asserts that Company has no physical locations or other presence in New York
State, other than its sale of service contracts to New York customers. However in Orvis
Company, Inc. v Tax Appeals Tribunal, 86 NY2d 165, 178, the court stated with respect to the
requirements for nexus, "While a physical presence of the vendor is required, it need not be
substantial. Rather, it must be demonstrably more than a ‘slightest presence’. . . And it may be
manifested by the presence in the taxing State of the vendor's property or the conduct of
economic activities in the taxing State performed by the vendor's personnel or on its behalf."
Nexus with New York State may be based on the presence of sales representatives in the State or
on the presence of employees, independent contractors, agents, or service representatives in the
State. See section 526.10(a)(4)(ii) of the Sales and Use Tax Regulations.
In Scenario 1, Company’s service contracts are sold to New York customers through
third-party Retailers at locations in New York State. When a New York Retailer sells a product
to a customer in New York, the Retailer may also sell Company’s service contract covering the
repair or replacement of the product purchased. In addition, the Retailer may be the entity which
does the repair or makes the replacement. The Retailer is considered a representative of
Company. See Scripto, Inc. v Carson, 362 U.S. 207 (1960).
Accordingly, Company, through the actions of the Retailers on Company’s behalf, is
considered to have sufficient nexus with New York State to require it to register for sales tax
purposes and to collect the sales or use tax on any sales of taxable service contracts it may make
in New York. See section 526.10(a)(4)(ii) of the Sales and Use Tax Regulations. Company
comes within the statutory definition of vendor under section 1101(b)(8)(i)(A) of the Tax Law
since it is making sales of services, the receipts from which are subject to sales tax. Therefore,
Company is required to collect and remit New York State and local sales tax at the time the
service contract is purchased.
In Scenarios 2 and 3, Company’s service contracts are sold directly to New York
customers via Company’s Web site as a result of referrals from unrelated parties (i.e., an Internet
broker or retailer) and from customer contacts as a result of direct mail solicitations by Marketer
or an unrelated third party. The Internet broker or retailer, if present in New York State, might
be considered as providing sufficient nexus to hold Company liable for the collection of tax.
Similarly, if Marketer or the unrelated third party has a presence in New York, then Company
might be considered to have sufficient nexus with New York. However, regardless of whether
the Internet broker or Marketer has a presence in New York, it appears that in all of these
scenarios Company will have Retailers acting as designated repair centers located in New York
to provide Company’s customers with repair services or replacement merchandise. These
service providers, whether acting as independent contractors, agents, or in another representative
capacity, are considered to be acting on behalf of Company in New York as provided in section
526.10(a)(4)(ii) of the Sales and Use Tax Regulations. They perform services promised by
Company to its customers on Company’s behalf. Accordingly, Company has sufficient nexus

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with New York to require it to register as a vendor for sales tax purposes and to collect sales tax
on any sales of taxable service contracts it makes in New York. See section 1101(b)(8)(i) of the
Tax Law.

DATED: November 30, 2006
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

NOTE:

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.