New York Advisory Opinion TSB-A-11(10)C: Is an out-of-state seller of tangible gifts protected from corporate franchise tax by Public Law 86-272 when some orders are filled by unaffiliated New York third-party vendors?

Plain-English summary

The petitioner is a North Carolina company that sells gifts and awards (often personalized) to companies honoring their employees. It manufactures some items in North Carolina and buys others from third-party vendors, some of whom are in New York. It uses sales reps around the country, including in New York, to solicit sales. When a milestone occurs, the employee orders a gift; if the gift comes from a third-party vendor, the petitioner directs that vendor to ship it and never takes title. It asked whether Public Law 86-272 protects it from New York corporate franchise tax.

The Department said yes. A foreign corporation is subject to Article 9-A if it is doing business, employing capital, owning/leasing property, or maintaining an office in New York (Tax Law § 209.1). Here the petitioner has no New York capital, property, or office, so the question is whether it is doing business. Under Public Law 86-272 (15 U.S.C. 381-384) and 20 NYCRR § 1-3.2(a)(3), a foreign corporation is exempt if its only New York activity is soliciting orders for tangible personal property that are approved and filled from outside New York. The petitioner's use of New York third-party fulfillment vendors is covered by Tax Law § 209.2(f), which says using unaffiliated fulfillment services (including shipment of orders from inventory, per § 208.19) is not doing business. Because that activity isn't doing business, it doesn't disqualify the petitioner from 86-272 protection (citing Deloitte & Touche, TSB-A-98(26)C). So the petitioner is exempt from franchise tax, as long as it isn't affiliated with the New York vendors.

What this means for you

Out-of-state sellers of tangible goods

Public Law 86-272 still shields you when your only New York presence is order solicitation -- and routing some orders through unaffiliated New York fulfillment vendors you never take title to doesn't break the shield. The fulfillment-services exclusion and 86-272 work together here.

Accountants and tax professionals

Contrast this with consignment-and-delivery fact patterns (e.g., TSB-A-13(4)C) where in-state reps go beyond solicitation by selling and delivering from inventory the seller still owns -- that loses both protections. The decisive facts here: the seller never takes title to the third-party-shipped goods, and the vendors are unaffiliated.

Common questions

Q: Does using New York third-party vendors defeat Public Law 86-272?
A: No, if they are unaffiliated and merely provide fulfillment services (shipping orders); that's excluded from doing business under Tax Law § 209.2(f).

Q: What's the limit of 86-272 protection?
A: It covers mere solicitation of orders for tangible personal property approved and filled from outside New York; going beyond solicitation (like in-state selling and delivery) loses it.

Q: What if the seller were affiliated with the New York vendors?
A: The fulfillment-services exclusion applies only to unaffiliated persons, so affiliation could change the result.

Citations and references

• Tax Law § 209.1 (franchise tax; doing business); 20 NYCRR § 1-3.2(a)(3) (regulatory Public Law 86-272 exemption)
• Tax Law § 209.2(f) (unaffiliated fulfillment-services exclusion); Tax Law § 208.19 (definition of fulfillment services)
• Public Law 86-272 (15 U.S.C. 381-384) (protection limited to solicitation of orders for tangible personal property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a11_10c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-11(10)C
Corporation Tax
November 1, 2011

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C101019A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether its business activities in New York are
covered by Public Law 86-272 (15 USC § 381, et seq.) so that it is not subject to corporate
franchise tax in this State.
We conclude that because Petitioner’s business within New York is limited exclusively to
the sale of tangible personal property, and because Petitioner’s use of third-party fulfillment
services located in New York State falls under the exemption in Tax Law § 209.2 (f), the
Petitioner qualifies for the Public Law 86-272 exemption and therefore is not subject to
New York State corporate franchise tax under Article 9-A.
Facts
Petitioner sells gifts and awards to companies that wish to honor their employees. Many
of Petitioner’s products are personalized or customized in some way, such as casting, stamping,
or laser engraving. Petitioner has manufacturing facilities and inventory warehousing facilities
located in name of city redacted, North Carolina. Some of the gifts sold by Petitioner are
manufactured at its North Carolina factory. However, Petitioner also sells other gifts that it
acquires from third-party vendors. Some of these third-party vendors may be located in
New York State. The Petitioner uses sales representatives throughout the United States,
including some in New York State, to solicit sales.
Typically, a company will send a list of its employees to Petitioner along with a list of
dates or milestones on which it wishes a gift or packet to be sent to each employee. The
Petitioner tracks this information, and when an applicable milestone occurs, the Petitioner will
send a packet or gift to the company’s employee. If the company has chosen a packet instead of
a gift, the employee will receive a packet listing available gift options. Then, the employee can
select a gift and place an order by calling the Petitioner by phone, mailing the order to the
Petitioner, or logging on to the Petitioner’s website. The Petitioner then has the gift shipped to
the employee using the U.S. Mail or a common carrier. Gifts produced at the Petitioner’s
manufacturing facility are shipped by the Petitioner, but if the gift is produced by a third-party
vendor, Petitioner merely directs the third-party vendor to ship the gift to the employee. At no
time does Petitioner assume title to any gift shipped by such a vendor. Petitioner bills the
company for each item that is shipped; there is no additional charge for any other services
provided by Petitioner to a company.

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TSB-A-11(10)C
Corporation Tax
November 1, 2011

Analysis
Pursuant to Tax Law § 209.1 and section 1-3.2 of the Corporation Franchise Tax
Regulations (20 NYCRR § 1-3.2), 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.
In this case, it appears that Petitioner is not employing capital in New York, does not own
or lease property in New York, and does not maintain an office in New York. Therefore, the
pertinent question in determining whether Petitioner is subject to corporate franchise tax under
Article 9-A of the Tax Law is whether it is doing business in New York.
Section 1-3.2(a)(3) of the Regulations states 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, are filled by shipment or
delivery from a point outside New York.
According to Tax Law § 209.2 (f), “the use of fulfillment services of a person other than
an affiliated person1 and the ownership of property stored on the premises of such a person in
conjunction with such services” does not constitute doing business in New York State.
Fulfillment services include the shipment of orders from an inventory of products offered for sale
by a purchaser. Tax Law § 208.19.
Petitioner’s business, according to the facts presented in its petition, appears to be limited
to the sales of tangible personal property. Although some of Petitioner’s orders may be filled by
third-party vendors located within the state, this use of “fulfillment services” will fall under the
exemption in Tax Law § 209.2 (f) as long as Petitioner is not affiliated with any of the
third-party vendors. Because the use of fulfillment services is exempt from tax under Article
9-A, it does not disqualify Petitioner from the Public Law 86-272 exemption. See Deloitte &
Touche, Adv Op Comm T & F, December 2, 1998, TSB-A-98(26)C, in which a foreign
corporation’s use of public warehouses in New York State for the purpose of storing goods to be
sold to customers in New York and throughout the country was found to be use of a fulfillment
service, which allowed the corporation to be eligible for exemption under Public Law 86-272.

1

“Affiliated persons” in this case are those “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.” Tax Law § 209.2 (g).

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TSB-A-11(10)C
Corporation Tax
November 1, 2011

Therefore, according to the facts provided by Petitioner, Petitioner’s activities fall within
the scope of Public Law 86-272, and Petitioner is exempt from corporate franchise tax under
Article 9-A.

DATED: November 1, 2011

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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.