New York Advisory Opinion TSB-A-10(2)C: Does an out-of-state RV maker (Jayco) owe Article 9-A franchise tax when it only solicits New York sales and uses independent dealers for warranty repairs?
Plain-English summary
Jayco Corporation, an Indiana holding company, asked whether it or its three subsidiaries had to file New York Article 9-A franchise tax reports. The manufacturing subsidiaries (Jayco, Inc. and Starcraft RV, Inc.) sell RVs and motorhomes through a nationwide network of unrelated dealers, some in New York. Their employees solicit orders in New York, but all orders are accepted and approved in Indiana, and all products ship from outside New York. Authorized dealers do warranty and non-warranty repairs under sales-and-service agreements that say the dealer is an "independent, authorized contractor."
The Department's analysis: under Public Law 86-272, a foreign corporation is exempt from Article 9-A if its only New York activity is solicitation of orders for tangible personal property, with approval and shipment from outside the state. The manufacturers met that test on the solicitation side. The remaining question was whether the dealer repair agreements made the manufacturers "doing business" in New York. Following prior opinions (Tower Cleaning, Hamilton Manufacturing), authorized service centers that are genuine independent contractors do not create nexus. But if an agency relationship actually exists between the manufacturer and the dealers, then under 20 NYCRR 1-3.2(b)(2) the manufacturer would be doing business in New York and taxable -- and whether agency exists is a factual question the Department cannot resolve in an advisory opinion. The parent holding company, with no New York activity, is not doing business. A freight-forwarding subsidiary (Jayco Enterprises) earns over 50% of revenue acting as a conduit, so it is not "principally engaged" in transportation and is not an Article 9 transportation corporation; whether it is doing business under Article 9-A could not be determined on the facts. Because the subsidiaries are qualified subchapter S subsidiaries, if any becomes taxable, the shareholders may make a New York S election under section 660(a).
What this means for you
Out-of-state manufacturers selling through New York dealers
Soliciting orders that are approved and shipped from outside New York keeps you inside PL 86-272 protection. Using independent dealers for warranty repairs is generally fine -- but the protection collapses if those dealers are really your agents. Keep dealer agreements (and actual practice) clearly at arm's length.
Accountants and tax professionals
The "independent contractor vs. agent" line is decisive and intensely factual; an advisory opinion won't settle it. Watch the principally-engaged test for transportation subsidiaries (Article 9 vs. 9-A) and the QSSS/New York S election consequences if any subsidiary is pulled into tax.
Common questions
Q: Does soliciting RV orders in New York create franchise-tax nexus?
A: Not by itself. If orders are approved outside New York and goods ship from outside New York, PL 86-272 protects the seller of tangible personal property.
Q: Do independent dealer warranty repairs create nexus?
A: Not if the dealers are genuine independent contractors. If they act as the manufacturer's agents, the manufacturer is doing business in New York and is taxable.
Citations and references
- Tax Law § 209.1 (imposition; doing business, employing capital, owning/leasing property, or maintaining an office)
- Public Law 86-272 (federal protection for solicitation of orders for tangible personal property)
- 20 NYCRR 1-3.2(b)(2) (agency relationship constitutes doing business)
- Tax Law §§ 183, 184 (transportation corporation franchise tax under Article 9)
- Tax Law § 660(a) (New York S election for QSSS shareholders)
- Tower Cleaning Systems, TSB-A-02(6)C; Hamilton Manufacturing, TSB-A-04(15)C; GEF Funding, TSB-A-88(2)C
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2010.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a10_2c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-10(2)C
Corporation Tax
March 9, 2010
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C080411A
On April 11, 2008, a Petition for Advisory Opinion was received from Jayco Corporation, 903 South
Main St., Middlebury, IN 46540.
The issue raised by Petitioner is whether it or any of its three subsidiaries is required to file franchise
tax reports under Article 9-A of the Tax Law. While three of the corporations are not subject to tax under
Article 9-A, one subsidiary, Jayco Enterprises, Inc., may be subject to tax under Article 9-A.
Facts
Petitioner is a holding company incorporated in Indiana and located in Middlebury, Indiana. For
federal income tax purposes, it is taxed as an S Corporation that owns three qualified subchapter S
subsidiaries: Jayco, Inc., Starcraft RV, Inc., and Jayco Enterprises Inc. Jayco, Inc. has manufacturing
operations in Indiana and Idaho and Starcraft RV, Inc. has manufacturing operations in Indiana only. Jayco
Enterprises Inc. is organized in Indiana.
Petitioner, as a parent company, does not engage in any significant operating activities, and has no
activities in New York. Petitioner does not have an office, employees, representatives, or inventory in
New York.
Jayco Inc. and Starcraft RV, Inc. are manufacturers of recreational vehicles and motorhomes that are
sold through a network of unrelated dealers throughout the United States. Some of the unrelated dealers are
located in New York. Employees of Jayco, Inc. and Starcraft RV, Inc. engage in solicitation of sales of
tangible personal property in New York, with all orders accepted and approved in Indiana. All products sold
and shipped by Jayco, Inc. and Starcraft RV, Inc. to dealers in New York are manufactured and shipped from
outside New York. Jayco Enterprises, Inc. provides transportation services and occasionally delivers Jayco,
Inc.’s and Starcraft RV Inc.’s products to dealers located in New York. It does not sell tangible personal
property in New York, nor does it provide back-hauling services in New York.
Approximately 35% of Jayco Enterprises’ revenue is from transportation services that it performs
using vehicles leased from independent owner operators. An additional 4% of its revenues are from
transportation services performed using its own trucks. The balance of its revenues is earned by providing
freight forwarding services for Petitioner. Jayco Enterprises does not issue bills of lading, enter into
transportation contracts in its own name, actually receive goods to be transported, or assume liability or
responsibility for loss or damage to goods, in connection with its freight forwarding services.
Jayco Inc. and Starcraft RV, Inc. each maintain a list of their authorized dealers located throughout
the United States that have been designated as authorized to provide warranty and non-warranty repairs to
the recreational vehicles. These dealers are independent organizations that have entered into sales and
service agreements with the companies. Jayco Inc. and Starcraft RV, Inc. will occasionally either request or
require that the dealer’s service and/parts department personnel attend training programs that they offer. All
training is provided at a facility in Indiana. The training allows the dealers to make repairs to the recreational
vehicles as provided by the terms of Jayco, Inc.’s and Starcraft RV Inc.’s Original Equipment
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Manufacturer’s Warranty. After the service work and repairs have been performed, Jayco, Inc. and Starcraft
RV, Inc. will reimburse the dealer directly for the services performed on Jayco, Inc.’s and Starcraft RV,
Inc.’s products.
The sales and service agreements between the dealers and Jayco Inc. and Starcraft RV, Inc. state that
the “Dealer agrees to perform such work as an independent, authorized contractor.” The agreements also
state, “[T]his Agreement does not make either party the agent or legal representative of the other for any
reasons, nor does it grant either party authority to assume or create any obligation in the name of the others.”
Analysis
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 Business Corporation Franchise 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. Pursuant
to sections 183 and 184 of the Tax Law, a transportation corporation organized outside of New York State is
subject to tax under Article 9 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. (It
should be noted that, for taxable years beginning on or after 1998, railroad and trucking corporations would
be subject to tax under Article 9-A rather than Article 9, unless they made an election pursuant to Tax Law
§183.10. See Railroad and Trucking Corporations Subject to Tax under Article 9, 9-A or 32 of the Tax Law,
Technical Services Bureau Memorandum, December 22, 1997, TSB-M-97(8)C.)
In this case, it appears that Petitioner and its subsidiaries Jayco, Inc and Starcraft RV, Inc. are not
employing capital in New York, do not own or lease property in New York, and do not maintain an office in
New York. Therefore, the pertinent question, in determining whether Petitioner and these subsidiaries are
subject to tax under Article 9-A of the Tax Law, is whether any of the entities is doing business in New York
State.
Petitioner (the parent corporation) represents that it does not engage in any significant operating
activities, and has no activities in New York. Thus, assuming this to be true, it is not doing business in
New York.
Regulation sections 1-3.2(a)(3) and 1-3.4(b)(9)(i)(a) state that, pursuant to Public Law 86-272, a
foreign corporation is exempt from taxation under Article 9-A of the Tax Law if the only activity of its
employees in New York is the solicitation of orders for sales of tangible personal property, which orders are
sent out of New York for approval and, if approved, orders are filled by shipment or delivery from a point
outside New York. Thus, the activities of Jayco, Inc’s and Starcraft RV, Inc’s employees in the State, as
described in this Opinion, will not cause the solicitation companies to be taxable under Article 9-A. The
only remaining question is whether these agreements between these companies and the authorized dealers to
perform service on their products constitutes “doing business” in New York.
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 concluded 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
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Op Comm T&F, September 29, 1988, TSB-A-88(22)C.) However, the opinion further held that, if it was
established that the subcontractors had an agency relationship with the petitioner, then 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 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 Hamilton Manufacturing Corp., Adv Op Comm T&F, August 31, 2004, TSB-A-04(15)C, the
petitioner manufactured currency changing and validation equipment at its manufacturing facility in Ohio.
The petitioner’s customers were located throughout the United States, including New York. Included in the
petitioner’s web site was a list of authorized service centers. This list included various independent repair
organizations throughout the United States. These were all independent organizations that had been
designated as authorized to provide warranty and non-warranty repairs to the equipment that the petitioner
sold. These repair organizations were fully independent, with no contractual obligations to the petitioner.
They had been trained to repair the machines, and were therefore authorized to make warranty repairs and
bill the petitioner for service per the terms of the warranty. All training was provided at the petitioner’s
facility in Ohio. The opinion concluded that the authorized service centers were independent contractors and
that the activities of the service centers were not considered activities that would subject the taxpayer to tax
under Article 9-A.
Following Tower Cleaning and Hamilton Manufacturing, supra, the activities of third parties who
enter into sales and service agreements with Jayco, Inc and Starcraft RV, Inc. appear to be independent
contractors in New York State whose repair and service activities would not be considered activities
conducted by Jayco, Inc. or Starcraft RV, Inc. The companies would not be deemed to be doing business in
New York under section 1-3.2(b)(2) of the Regulations as a result of the activities of independent third
parties in New York. Therefore, they would not be subject to tax under Article 9-A of the Tax Law.
However, if it is determined that there is an agency relationship between the companies and the third parties,
then pursuant to section 1-3.2(b)(2) of the Regulations, and following GEF Funding, supra, they would be
considered to be doing business in New York. In that case, they 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 that article.
While the sales and service agreements state that the dealers are not agents, 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 specified set of facts. Tax Law, §171(Twenty-fourth); 20 NYCRR 2376.1(a).
The final subsidiary to be considered is Jayco Enterprises, Inc. More than 50% of Jayco Enterprises’
revenues are earned from freight forwarding services. In performing these services, Jayco Enterprises
appears to be acting as a conduit between the provider of the goods and the carrier, rather than acting as a
carrier itself. Accordingly, Jayco Enterprises is not principally engaged in transportation business.
Therefore, it is not a transportation corporation subject to tax under Article 9 of the Tax Law. Jayco
Enterprises is a freight forwarding or logistics company that would be subject to tax under Article 9-A of the
Tax Law if it were doing business, employing capital, owning or leasing property in a corporate or organized
capacity, or maintaining an office in New York State. The only standard that appears relevant to this
company is the “doing business” standard. The determination of whether a company is “doing business”
is a factual matter that generally is not susceptible of determination within the scope of an advisory
opinion. (Tax Law, §171.(Twenty-fourth); 20 NYCRR 2376.1(a).) You have provided no information
on the amount of the company’s activities in New York other than your statement that the company
occasionally delivers in New York. Accordingly, we cannot express an opinion on whether Jayco
Enterprises is subject to tax in New York.
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Because Jayco, Inc., Starcraft RV, Inc., and Jayco Enterprises, Inc. are qualified subchapter S
subsidiaries (QSSS), if any of them is subject to tax in New York State, the shareholders of Petitioner would
be entitled to make a New York S election under section 660(a) of the Tax Law. If the election is made,
Petitioner and the QSSS would be taxed as a single New York S corporation and pay the applicable fixed
dollar minimum tax under Article 9-A (See Tax Law §§208.9(k)(1), (3), 210.1(d), 210.1(g)(1)). Petitioner’s
shareholders’ New York tax liability would be determined under section 660. If Petitioner’s shareholders do
not make the New York S election, the QSSS will be treated as a New York C corporation on a stand-alone
basis and pay the tax prescribed under Article 9-A for New York C corporations. (See Tax Law
§§208.9(k)(3)(B), 210.1)
DATED: March 9, 2010
NOTE:
/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
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.