When an out-of-state company uses an unrelated fulfillment provider that leases a warehouse from the company's affiliate, is that warehouse the provider's 'premises' so the fulfillment-services exemption protects the company?

Plain-English summary

New York gives out-of-state sellers a safe harbor: a foreign corporation is not treated as doing business in New York merely because it uses the fulfillment services of an unrelated person and stores inventory on that person's premises in connection with those services (Tax Law § 209.2(f); "fulfillment services" defined in § 208.19 — order taking, customer responses, billing/collection, and shipping from the seller's inventory).

The twist here: the warehouse is owned by USCo, an affiliate of the out-of-state taxpayer, and USCo proposes to lease it at arm's length to an unrelated third party, 3PCo, which will then provide the fulfillment services to the taxpayer. The petitioner (KPMG, on behalf of an alien corporation) asked whether that warehouse is 3PCo's "premises" for the exemption, even though an affiliate owns the building.

Yes. For franchise-tax and property-factor purposes, property leased to a party for its use, possession, and control is treated as that lessee's property. So the warehouse leased to 3PCo is 3PCo's premises under §§ 209.2(f) and 208.19. Because 3PCo is unrelated to the taxpayer (not an "affiliated person" under the 5%-ownership test), the taxpayer's use of 3PCo's fulfillment services and storage of inventory there does not make the taxpayer subject to tax.

But the affiliated owner is still taxable. USCo owns property in New York. If USCo is a domestic corporation, it owes the franchise tax for the privilege of exercising its corporate franchise (the § 209.2 safe harbors apply only to foreign corporations). If USCo is a foreign corporation, it is taxable because it owns New York property and no exemption applies. (And a lessee that does count property includes leased property in its property factor at eight times the gross rent under 20 NYCRR § 4-3.2.)

What this means for you

Out-of-state sellers using third-party fulfillment in New York

The fulfillment-services safe harbor turns on the provider being unrelated to you and the inventory sitting on the provider's premises. This opinion confirms the safe harbor survives even when your affiliate owns the building, as long as the building is genuinely leased to and controlled by the unrelated provider. Structure the lease at arm's length and make sure control really passes to the provider.

Affiliates that own New York warehouses

Owning the building keeps you in the New York tax net even if your out-of-state affiliate is protected. A domestic corporate owner is taxable on the franchise privilege; a foreign corporate owner is taxable for owning New York property. Don't assume the structure shelters the owner just because it shelters the user.

Accountants and tax professionals

Two separate questions: (1) is the user protected under § 209.2(f)? Yes, because the leased warehouse is the unrelated provider's premises. (2) Is the owner taxable? Yes, because it owns New York property and the § 209.2 safe harbors are for foreign corporations only. For any party that does have nexus, value leased property in the property factor at 8x gross rent (20 NYCRR § 4-3.2).

Common questions

Q: Does an affiliate owning the warehouse break the fulfillment-services exemption?
A: No, as long as the warehouse is leased to and controlled by an unrelated fulfillment provider. The leased space is treated as the provider's premises, so the out-of-state user remains protected.

Q: Who is "affiliated" for this purpose?
A: Parties with more than a 5% direct or indirect ownership interest in each other (or held by a common owner). The fulfillment provider must be outside that threshold for the exemption to apply.

Q: Is the warehouse owner off the hook too?
A: No. The affiliated owner is itself subject to New York tax — a domestic corporation on the franchise privilege, a foreign corporation for owning New York property.

Citations and references

Statutes, regulations, and authorities:
- Tax Law § 209.2(f) (fulfillment-services safe harbor for foreign corporations)
- Tax Law § 208.19 (definition of fulfillment services)
- Tax Law § 209.1 (franchise tax imposition); § 209.2 (affiliated-person 5% test)
- 20 NYCRR § 4-3.1; § 4-3.2 (property factor; leased property valued at 8x gross rent)
- Peter Pan Bus Lines, Inc., DTA Nos. 819131, 819132; Matter of Allied Thermal Corp., TSB-H-83(3)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a07_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(5)C
Corporation Tax
November 13, 2007

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

PETITION NO. C070705A

On July 5, 2007, a Petition for Advisory Opinion was received from KPMG, LLP, 4100
Yonge Street, Suite 200, Toronto, Ontario M2P 2H3.
The issue raised by Petitioner, KPMG, LLP, is whether the term “premises” as used in
section 209.2(f) of Article 9-A of the Tax Law includes a warehouse leased to a fulfillment­
services provider as described below.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Taxpayer is an alien corporation (a corporation organized under the laws of a country
other than the United States), engaged in the manufacture, distribution, and sale of nutritional
supplements. Taxpayer sells its products worldwide but predominantly to retail stores located
throughout the United States.
USCo, a corporation affiliated with Taxpayer pursuant to section 209.2 of Article 9-A of
the Tax Law, owns a warehouse located in New York State. USCo is not a member of a U.S.
consolidated group that includes Taxpayer.
USCo proposes to lease the warehouse to an unrelated third party, 3PCo, pursuant to
arm's length lease terms. Taxpayer and other corporations affiliated with Taxpayer propose to
enter into an arm's length agreement with 3PCo whereby 3PCo will provide fulfillment services
in the warehouse to Taxpayer or its affiliates.
3PCo's fulfillment services will be limited to (1) acceptance of orders electronically or by
mail, telephone, telefax, or Internet; (2) responses to consumer correspondence or inquiries
electronically or by mail, telephone, telefax, or Internet; (3) billing and collection activities; and
(4) the shipment of orders from the inventory of products offered for sale by Taxpayer or its
affiliates.
Taxpayer or its affiliates will own the inventory stored in the warehouse leased by 3PCo.
Taxpayer or its affiliates will own no other property in New York State except the inventory
stored in the warehouse leased by 3PCo and the warehouse leased to 3PCo that is owned by
USCo. Taxpayer and its affiliates will have no other physical presence in New York State except
it may occasionally have employees or representatives in New York State to solicit sales of
tangible personal property.

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Applicable law and regulations
Section 208.19 of the Tax Law provides:
The term "fulfillment services" shall mean any of the following services
performed by an entity on its premises on behalf of a purchaser:
(a) the acceptance of orders electronically or by mail, telephone, telefax or
internet;
(b) responses to consumer correspondence or inquiries electronically or by mail,
telephone, telefax or internet;
(c) billing and collection activities; or
(d) the shipment of orders from an inventory of products offered for sale by the
purchaser.
Section 209 of the Tax Law contains the imposition of the franchise tax under Article
9-A of the Tax Law, and provides, in part:
1. 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,…
2. A foreign corporation shall not be deemed to be doing business, employing
capital, owning or leasing property, or maintaining an office in this state, for the purposes
of this article, by reason of (a) the maintenance of cash balances with banks or trust
companies in this state, or (b) the ownership of shares of stock or securities kept in this
state, if kept in a safe deposit box, safe, vault or other receptacle rented for the purpose,
or if pledged as collateral security, or if deposited with one or more banks or trust
companies, or brokers who are members of a recognized security exchange, in
safekeeping or custody accounts, or (c) the taking of any action by any such bank or trust
company or broker, which is incidental to the rendering of safekeeping or custodian
service to such corporation, or (d) the maintenance of an office in this state by one or
more officers or directors of the corporation who are not employees of the corporation if
the corporation otherwise is not doing business in this state, and does not employ capital
or own or lease property in this state, or (e) the keeping of books or records of a
corporation in this state if such books or records are not kept by employees of such

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corporation and such corporation does not otherwise do business, employ capital, own or
lease property or maintain an office in this state, or (f) the use of fulfillment services of a
person other than an affiliated person and the ownership of property stored on the
premises of such person in conjunction with such services, or (g) any combination of the
foregoing activities. For purposes of this subdivision, persons are affiliated persons with
respect to each other where one of such persons has an ownership interest of more than
five percent, whether direct or indirect, in the other, or where an ownership interest of
more than five percent, whether direct or indirect, is held in each of such persons by
another person or by a group of other persons which are affiliated persons with respect to
each other. The term “person” in the preceding sentence and in paragraph (f) of this
subdivision shall have the meaning ascribed thereto by subdivision (a) of section eleven
hundred one of this chapter.
Section 1-2.5(a) of the Business Corporation Franchise Tax Regulations (“Regulations”)
provides, in part:
*

*

*

(1) The term domestic corporation means a corporation incorporated by or under
the laws of the State or colony of New York State.
(2) The term foreign corporation means a corporation which is not a domestic
corporation.
Section 4-3.1(a) of the Regulations, with regard to the computation of the property factor
of the business allocation percentage, provides, in part:
The percentage of the taxpayer's real property and tangible personal property,
whether owned or rented to it, within New York State is determined by dividing the
average value of such property within New York State (without deduction of any
encumbrances) by the average value of all such property within and without New York
State (without deduction of any encumbrances)….
Section 4-3.2 of the Regulations provides, in part:
(a) In computing the property factor, real and tangible personal property rented to
the taxpayer must be included. In order to avoid unnecessary hardship on taxpayers and
for ease of administration, the value of real and tangible personal property, both within
and without New York State, which is rented to the taxpayer is determined by
multiplying the gross rents payable during the period covered by the report by eight.

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(b) The term gross rents as used in this section means the actual sum of money or
other consideration payable, directly or indirectly, by the taxpayer or for its benefit for
the use or possession of the property and includes:
(1) Any amount payable for the use or possession of real and tangible personal
property, or any part thereof, whether designated as a fixed sum of money or as a
percentage of sales, profits or otherwise.
Opinion
Under section 209.1 of Article 9-A of the Tax Law, the business corporation franchise tax
is imposed annually on a domestic or foreign corporation for the privilege of exercising its
corporate franchise, or of doing business, employing capital, or owning or leasing property in
New York State, or maintaining an office in New York. The exemptions under section 209.2 of
the Tax Law apply only to foreign corporations, not to domestic corporations.
Under section 209.2(f) of Article 9-A of the Tax Law, a foreign corporation will not be
deemed to be doing business, employing capital, owning or leasing property, or maintaining an
office in New York because it uses the fulfillment services of a person that is not an affiliated
person and it has inventory stored on that person’s premises in conjunction with the fulfillment
services.
For purposes of the imposition of the franchise tax under section 209.1 of Article 9-A of
the Tax Law and the computation of the property factor under section 4-3.1 and section 4-3.2 of
the Regulations, property leased to a taxpayer (the lessee) for its use or possession that is under
its control is treated as the taxpayer’s property. (See Peter Pan Bus Lines, Inc., Dec Tax App
Trib, July 28, 2005, DTA Nos. 819131 and 819132 with respect to the property factor; and
Matter of Allied Thermal Corporation, Dec St Tax Comm, February 1, 1983, TSB-H-83(3)C
with respect to imposition of the franchise tax.)
Accordingly, the warehouse leased from USCo to an unrelated third party, 3PCo,
pursuant to arm’s length lease terms is considered 3PCo’s premises for purposes of sections
209.2(f) and 208.19 of Article 9-A of the Tax Law.
It is noted that even though USCo leases the warehouse to 3PCo, it is the owner of the
warehouse. If USCo is a domestic corporation it is subject to the franchise tax imposed by
section 209.1 of Article 9-A of the Tax Law for the privilege of exercising its corporate franchise
since the exemptions under section 209.2 of the Tax Law apply only to foreign corporations. If

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USCo is a foreign corporation it is not exempt from tax, since it otherwise owns property located
in New York State and none of the exemptions from tax apply.

DATED: November 13, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.