Is a sweetened chocolate product taxable candy in NY, and does selling through in-state independent reps require registering as a vendor?

Plain-English summary

The petitioner is an out-of-state network-marketing (direct-selling) company that ships goods by common carrier to customers and independent sales representatives in New York. It says it has no physical presence, no paid employees in the State, and doesn't direct the reps or control resale. It sells a chocolate product marketed as promoting healthy weight -- no natural sugar, but sweetened with xylitol and containing cocoa, sweet-tasting, sold in wrapped pieces. It asked (1) whether it must register as a New York vendor and (2) whether the chocolate is taxable.

The Office of Counsel concluded:

• The chocolate is taxable candy/confectionery. The food exemption (1115(a)(1)) excludes "candy and confectionery," which the regulation defines broadly to include chocolate (plain or mixed) and any similar product regarded as candy/confectionery by its normal use, label, or advertising (20 NYCRR 528.2(a)(4)). The petitioner's sweetened chocolate in wrapped pieces qualifies and is taxable regardless of whether it contains natural sugar.
• Nexus depends on what the reps do. Merely having products resold in New York doesn't create nexus -- wholesale sales to New York retailers don't, by themselves, make the seller a vendor. But solicitation by in-state representatives can (Matter of Orvis). If the company's independent reps in New York solicit sales or recruit people to buy from or enter business relationships with the company, the company has nexus and must register for a Certificate of Authority (Tax Law 1134; 1101(b)(8)(i)(C)(I)).
• Registration consequences. A registered vendor must collect State and local tax on all its New York taxable sales -- not just those the reps solicited (1132(a)) -- and must file periodic returns even if it made no taxable sales (1136).
• Resale. All its New York sales are presumed taxable (1132(c)). A sale is exempt as a resale only if the buyer timely gives a proper resale certificate within 90 days (1101(b)(4)(i); 20 NYCRR 526.6(c)). If the company gets neither a resale certificate nor the tax, it's liable unless it can definitively prove the buyer actually resold everything -- and a large purchase volume alone is not proof (Savemart).

What this means for you

Direct-sales / MLM companies shipping into New York

Two traps here. First, candy is candy: a sweetened chocolate -- even sugar-free, even sold as a "healthy" weight product -- is taxable confectionery, not exempt food. Second, "we have no employees here" isn't the test for nexus: if your independent representatives in New York solicit orders or recruit downline, that activity creates nexus and forces you to register, collect on all your New York taxable sales, and file returns even in months with none. Don't rely on resale treatment without collecting resale certificates within 90 days -- big orders alone won't prove resale on audit.

Common questions

Q: Our chocolate is sugar-free and marketed for healthy weight -- is it still taxable?
A: Yes. Sweetened chocolate sold in pieces is taxable candy/confectionery regardless of whether it contains natural sugar.

Q: We have no employees or office in New York. Do we still have nexus?
A: Possibly. If your in-state independent reps solicit sales or recruit people to buy from or do business with you, that creates nexus even without employees or property.

Q: If we register, do we only collect tax on sales the reps solicited?
A: No. Once registered, you collect on all your New York taxable sales and file returns even when you have no taxable sales.

Q: A customer buys a lot -- can we treat it as a tax-free resale?
A: Only with a proper resale certificate within 90 days. A large purchase volume by itself isn't proof of resale.

Citations and references

• Tax Law section 1115(a)(1) (food exemption; candy/confectionery excluded)
• Tax Law section 1101(b)(8)(i)(C)(I) (vendor; solicitation by representatives)
• Tax Law section 1134 (registration; Certificate of Authority)
• Tax Law section 1132(a); section 1136 (collection; filing returns)
• Tax Law section 1101(b)(4)(i); section 1132(c) (resale; presumption of taxability)
• 20 NYCRR section 528.2(a)(4) (candy and confectionery)
• 20 NYCRR section 526.6(c) (purchases for resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2012.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a12_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-12(9)S
Sales Tax
May 3, 2012

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S100809A

The Department of Taxation and Finance received a Petition for Advisory Opinion
from name and address redacted. Petitioner asks whether it is required to register as a vendor
for purposes of New York sales tax. It also asks whether a chocolate product it sells is subject
to sales tax.
We conclude that the Petitioner’s application does not provide adequate information to
determine whether Petitioner has sufficient nexus with New York State to require it to register
with the Tax Department. Petitioner’s chocolate is a candy or confectionery product, which is
subject to sales or use tax when sold at retail.
Facts
Petitioner is a network marketing company. “Network marketing” is a direct selling
method in which independent persons serve as distributors of goods and services and are
encouraged to build and manage their own sales force by recruiting and training other
independent agents. In this method, commission is usually earned on the sales revenue of the
sales force directly or indirectly recruited by the person. Petitioner does not set prices at
which its product may be resold.
Petitioner claims that it has no physical presence in New York State. It does not have
any paid employees in the State. Petitioner ships goods by common carrier to customers and
independent sales representatives in New York State. Petitioner’s application states that the
independent sales representatives “don’t work” for Petitioner and are not directed by
Petitioner in any way. Some independent sales representatives resell products through stores,
but Petitioner does not control any final use of the products it sells.
Petitioner sells a chocolate product that is marketed as promoting healthy weight and
healthy lifestyle. While this chocolate product contains no natural sugar, it does contain
glycemic xylitol, which is an artificial sweetener. The product also contains cocoa. The
chocolate product has a sweet taste. The chocolate is sold in wrapped pieces.
Analysis
Section 1115(a)(1) exempts food and food products from sales tax. One of the
exclusions from this exemption is “candy and confectionery.” Section 528.2(a)(4) of the

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TSB-A-12(9)S
Sales Tax
May 3, 2012

Sales and Use Tax Regulations provides that “[c]andy and confectionery include, without
limitation, candy of all types; chocolate (plain or mixed with other products); glazed or sugarcoated fruits, nuts, peanuts, popcorn, or other products and any similar product regarded as
candy or confectionery based on its normal use or as indicated on the label or in advertising
thereof.” Petitioner’s product is sweetened chocolate sold in wrapped pieces. As such, it
qualifies as a candy or confectionery product subject to sales and use tax regardless of
whether it contains a natural sugar ingredient.
Petitioner’s application lacks the sufficient information to determine whether
Petitioner is required to register with the Tax Department for sales tax purposes. Its
application states that Petitioner has independent sales representatives in the State, but these
persons purchase Petitioner’s products for self-consumption or for resale.
A vendor does not have nexus with New York State merely because its products are
resold in the State. Stated differently, wholesale sales made to retailers in New York do not
per se create nexus for the wholesaler. However, the solicitation by sales representatives in
New York of wholesale sales in the State may create nexus. See Matter of Orvis, Tax
Appeals Tribunal, January 14, 1993, confirmed 86 NY2d 165 (1995).
Petitioner’s application suggests that its independent sales representatives operating
New York solicit or recruit persons in New York to make purchases from Petitioner either at
wholesale or retail and receive compensation for this activity. If Petitioner has independent
sales representatives in New York soliciting sales of goods to be purchased from Petitioner or
encouraging persons to enter other types of business relationships with Petitioner, it would
have nexus with New York State. Petitioner would be required to register under section 1134
of the Tax Law and obtain a Certificate of Authority from the Tax Department. See Tax Law
§ 1101(b)(8)(i)(C)(I).
If Petitioner is required to obtain a valid Certificate of Authority, it is also required to
collect and remit the applicable State and local sales and use taxes on all its New York taxable
sales, including sales that were not solicited directly or indirectly by its sales representatives.
See Tax Law § 1132(a). Further, Petitioner would be required to file periodic sales and use
tax returns regardless of whether it has made any taxable sales or incurred any liability for
compensating use tax. See Tax Law § 1136.
All of Petitioner’s New York sales of its chocolate product are presumed subject to
New York sales tax. See Tax Law § 1132(c). If a customer purchases products from
Petitioner exclusively for the purpose of reselling them, these purchases are for resale and are
exempt from sales and use tax. See Tax Law § 1101(b)(4)(i); 20 NYCRR § 526.6(c).
Petitioner is not required to collect sales and use tax on a sale of chocolate when it accepts in
good faith from the customer a properly completed resale certificate within 90 days of the
date of sale. See Tax Law § 1132(c). If Petitioner receives neither a resale certificate nor sales
tax from a customer, Petitioner would be liable for sales tax on the sale unless it can

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TSB-A-12(9)S
Sales Tax
May 3, 2012

definitively prove that the customer did in fact resell all the products it purchased. A large
volume of purchases by a customer is insufficient proof that the products are being resold.
See Savemart v State Tax Commission, 105 AD2d 1001, (3rd Dep’t, 1984).

DATED: May 3, 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.