New York Advisory Opinion TSB-A-12(1)C / 12(2)S: Is a cash payment-processing service subject to sales tax, and does using it make merchants vendors or give them New York franchise-tax nexus?
Plain-English summary
The petitioner is a California payment company with no New York offices, employees, or property. Its service ('Service X') lets people -- especially the unbanked -- buy goods or services online or pay bills, then pay in cash at a local retail store. The petitioner contracts with merchants and with retail stores; the store accepts the customer's cash and, for a commission, passes it to the petitioner. The petitioner asked three things: is Service X subject to sales tax; does a merchant that receives payment through it become a sales-tax vendor; and does using it make a merchant 'doing business' in New York for corporate franchise tax?
The Department said no to all three. (1) Sales tax applies to retail sales of tangible property and to certain enumerated services (Tax Law § 1105(a), (c)); Service X is not among them, so it is not taxable and the petitioner need not register as a vendor (Tax Law § 1134). (2) A merchant becomes a vendor only if it qualifies under Tax Law § 1101(b)(8); subparagraph (v) excludes a person who buys, from an unaffiliated person, fulfillment services carried on in New York. 'Fulfillment service' is defined to include billing and collection activities (§ 1101(b)(18)), and the store's acceptance of payment is a collection activity -- so, assuming the parties are unaffiliated, the merchant isn't made a vendor. (3) For corporate franchise tax, Tax Law § 209.2(f) says using unaffiliated fulfillment services -- defined the same way for Article 9-A (§ 208.19), including billing and collection -- does not make a foreign corporation 'doing business' in New York. So a merchant's use of Service X doesn't create franchise-tax nexus, again assuming no affiliation.
What this means for you
Fintech and payment-service providers
A cash-collection or payment-processing service that isn't one of the Tax Law's listed taxable services isn't subject to sales tax, and -- critically -- it doesn't drag its merchant customers into New York vendor registration or franchise tax. The whole result hinges on the parties being unaffiliated.
Merchants and accountants
Receiving customer payments through an in-state collection agent is treated as buying an excluded fulfillment service (billing and collection), so it doesn't by itself create sales-tax vendor status or Article 9-A nexus. Confirm there's no more-than-5%/majority affiliation among the payment company, the merchant, and the retail store, because affiliation breaks both exclusions.
Common questions
Q: Is a cash payment-processing service subject to New York sales tax?
A: No. It is not one of the enumerated taxable services under Tax Law § 1105(c).
Q: Does a merchant that gets paid through the service become a sales-tax vendor?
A: No, if the parties are unaffiliated; the store's payment collection is an excluded fulfillment service (Tax Law § 1101(b)(8)(v), (b)(18)).
Q: Does using the service create New York franchise-tax nexus for the merchant?
A: No. Using unaffiliated fulfillment services (billing and collection) is not 'doing business' under Tax Law § 209.2(f).
Citations and references
- Tax Law § 1105(c) (enumerated taxable services); Tax Law § 1134 (vendor registration)
- Tax Law § 1101(b)(8)(v) (fulfillment-services exclusion from vendor status); Tax Law § 1101(b)(18) (fulfillment service includes billing and collection)
- Tax Law § 209.2(f) (unaffiliated fulfillment services are not doing business); Tax Law § 208.19 (definition of fulfillment services for Article 9-A)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2012.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a12_1c_2s.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-12(1)C
Corporation Tax
TSB-A-12(2)S
Sales Tax
February 9, 2012
(
)
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. Z110517B
The Department of Taxation and Finance received a Petition for Advisory Opinion from
Petitioner, name and address redacted. Petitioner asks whether its payment processing service is
subject to sales and use tax and whether performance of the service in New York would give
nexus to the merchants who receive payment from their customers through the service for
purposes of sales and use tax and corporation tax. We conclude that Petitioner’s service, as
described herein, is not subject to sales and use tax. We also conclude that merchants, by the
mere act of receiving payment from their customers through that service, do not qualify as
vendors required to collect sales and use tax and are not considered to be doing business for
purposes of Article 9-A of the Tax Law.
Facts
1. Background
Petitioner is a Delaware corporation headquartered in name of city redacted, California.
It has no offices, employees, real or personal property located in New York. Petitioner is a
provider of an innovative cash payment processing service, which shall be referred to as Service
X. This service, which launched in September 2010, enables businesses and consumers
(“Users”) to purchase goods and services online, from catalogs, or from direct response
companies, and to pay for those items at a local retail store using cash. In addition, the Service
will enable users to pay bills or loan balances to their creditors at a local retail store using cash.
Petitioner’s primary target users are the un-banked (i.e., persons without an account at a
bank, savings and loan, credit union or other financial institutions), the under-banked (i.e.,
persons that may have a checking or savings account but rely on alternative financial services
such as non-bank money orders, non-bank check-cashing services, payday loans, etc.), or those
individuals who simply prefer to pay for purchases with cash. By offering Service X, which is
described in detail below, Petitioner enhances purchasing power and allows participating
Merchants to reach new customers.
2. Service X
The basic structure of Service X is as follows: First, Petitioner enters into agreements
with participating merchants, billers, and creditors (“merchants”) that wish to allow their own
customers the option of paying for their obligations, goods and services through the use of
Service X. Second, Petitioner enters into agreements with participating retail stores
(“Retailers”), such as Convenience Store Chain X, that agree to accept payments from the
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merchants’ customers at their “brick and mortar” stores and, in exchange for a commission, to
pass those payments along to Petitioner.1 Third, Petitioner provides terms of use for Users who
may register with Petitioner at its website or through participating merchants. This requires the
user to provide a username, a password, and an email address. The email address may be
confirmed by Petitioner during registration.
If a User who has registered with Petitioner wants to make a purchase from a
participating merchant, at the “check-out” stage of the purchase process, the User is presented,
along with more traditional payment options (i.e., credit card, debit card, check by mail, PayPal),
with the option to pay via Service X. Once again, the advantage of Service X is simply this: It
enables an un-banked or under-banked User to make an online or telephone purchase from a
merchant without the necessity of having to have a credit card, a debit card, or a checking
account.2 Rather, the User can, after placing the order, then go to the nearest Convenience Store
X and make payment there.
Once a User elects to pay a merchant (“Merchant”) using Service X, the User has several
methods by which he or she may complete the transaction:
Service X Slip: If the User has access to a printer, the User may print a paper transaction
statement containing a unique transaction barcode, which is readable by the Retailer’s Point of
Sale (“P.O.S.”) system (a “Service X Slip”).
Service X Card: If the User does NOT have access to a printer, or simply prefers this
method, the User may provide Petitioner with her mobile telephone number in order to receive a
reply text message from Petitioner advising user how to go to the nearest Retailer (i.e.,
Convenience Store X) and to pick up, for free, a Service X Card previously provided to the
Retailer. On the back of the Service X Card is a PIN that the User must then transmit to
Petitioner by reply text message. Then, the User presents that Card along with cash payment to
the Retailer’s cashier. The cashier swipes the Service X Card, which is read by the Retailer’s
P.O.S. system.
Service X Mobile Image: Alternatively, the User may download a facsimile rendering of
the transaction statement containing a unique transaction barcode to his or her smart phone, the
image of which will be readable by the Retailer’s P.O.S. system (a “Service X Mobile Image”).
This functionality is expected to be operational at some point in the future.
1
Currently, Petitioner has associated with Convenience Store Chain X. In the future, Petitioner may use other
national or regional retail chains.
2
If a Consumer wished to pay by credit or debit card, the Consumer would present the card as an assurance of
payment and the Merchant would proceed to process the transaction. Service X is similar, except Petitioner does
not extend credit; rather it facilitates cash payments.
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February 9, 2012
Having elected to pay Merchant by Service X through a Service X Slip, Card, or Mobile
Image, the User has essentially “queued up” the transaction and must then proceed to a local
Retailer (i.e., Convenience Store Chain X) to remit payment. Put another way, Merchant has
essentially “suspended” the transaction until payment is received (analogous to an internet
merchant waiting for a credit card confirmation before fulfilling).
3. Payment At Convenience Store Chain X
At participating Convenience Store Chain X stores (and in the future at participating
locations of other retailers), some of which are located in New York State, the User presents the
Service X Slip, Card, or Mobile Image along with the cash payment to the Retailer’s cashier.
The cashier will then scan the unique transaction barcode or PIN. Upon scanning the
barcode/PIN, Petitioner is notified, via Petitioner’s proprietary processes through the internet (or
other form of connectivity), that the User has tendered the cash payment. Petitioner then seeks
authorization from the applicable Merchant, again via the internet. Upon reply from Petitioner,
the Retailer then accepts the User’s cash payment and provides the User with a receipt describing
the transaction and Merchant. Petitioner then confirms the receipt and Merchant will then
process the “suspended” transaction and proceed to ship/deliver the goods or services to the User
on the original terms established between Merchant and that User. The Retailer will remit the
cash payment to Petitioner, less a commission, typically within three business days.
At that time, upon receipt of the payment from the Retailer, Petitioner remits the payment
to Merchant, less a commission. While a transaction is pending, a User can track the status of
the transaction on Petitioner’s website. If the User fails to pay at the Retailer, or if Merchant
does not authorize payment, then the transaction is cancelled.
Analysis
Is Service X Subject to Sales and Use Tax?
No. The Tax Law imposes tax on the retail sale or use of tangible personal property,
including prewritten software, and certain enumerated services, including information services
(Tax Law § 1105[a], [c]). Service X, as described above, is not among the enumerated services
subject to tax. Accordingly, assuming the provision of Service X is Petitioner’s only activity in
the State, Petitioner does not have to register as a person required to collect sales and use tax
(Tax Law § 1134).
Do Merchants Qualify As Vendors As a Result of Using Service X to Receive Payments from
their Customers?
No. To be required to collect sales and use tax, a seller must qualify as a vendor, which
is defined in Tax Law § 1101(b)(8). Tax Law § 1101(b)(8)(v) excludes from the definition of a
vendor “a person who is not otherwise a vendor who purchases fulfillment services carried on in
New York by a person other than an affiliated person.” For purposes of that subparagraph,
“persons are affiliated persons with respect to each other where one of such persons has an
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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 § 1101(b)(18) defines “fulfillment service” to include “billing
and collection activities.” Convenience Store X’s acceptance of payment from persons using
Service X to make payments to Merchant is a collection activity. Accordingly, assuming that
Petitioner, Merchant, and Convenience Store X are not “affiliated persons” for purposes of
section 1101(b)(8)(v), then Convenience Store X’s acceptance of payment would not qualify
Petitioner or Merchant as vendors for purposes of sales tax.
Does Use of Service X to Accept Payment from Customers Constitute Doing Business for
Purposes of Article 9-A Corporation Tax?
No. Section 209.2(f) of the Tax Law provides that a foreign corporation shall not be
deemed to be doing business, employing capital, owning or leasing property, or maintaining an
office in New York State, for purposes of Article 9-A of the Tax Law, by reason of "the use of
fulfillment services of a person other than an affiliated person.” For purposes of section 209.2(f),
an affiliated person is an entity that either owns or controls a majority interest in the foreign
corporation, either directly or indirectly, or an entity the majority interest in which is owned and
controlled by the foreign corporation, either directly or indirectly. “Fulfillment services” has the
same definition for Article 9-A corporation tax purposes as it does for sales tax purposes,
including “billing and collection activities” (see Tax Law § 208.19). Accordingly, assuming that
Petitioner, Merchant and Convenience Store X are not “affiliated persons,” Merchant’s use of
Service X to accept payment from its customers does not constitute doing business in New York
for purposes of Article 9-A of the Tax Law.
DATED: February 9, 2012
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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.