New York Advisory Opinion TSB-A-13(4)C: Is an out-of-state company whose New York independent contractors hold consigned inventory and make sales and deliveries subject to franchise tax, or is it protected by the fulfillment-services exclusion or Public Law 86-272?

Plain-English summary

A Virginia corporation headquartered in Pennsylvania sold through about 16 New York independent contractors. The contractors stored the company's consigned inventory (the company kept title until sale) in their own facilities, made sales visits to New York customers, and delivered the products. The company had no New York offices or property of its own and asked whether it was exempt from franchise tax.

The Department said it was subject to tax for three reasons. First, owning or leasing property in New York includes consigning property to New York while retaining title (20 NYCRR 1-3.2(d)); the consigned inventory the company still owned gave it nexus under Tax Law § 209.1. Second, the fulfillment-services exclusion (Tax Law § 209.2(f), defined in § 208.19) did not apply: fulfillment services are limited to things like accepting orders and shipping from inventory, but here the contractors did more — they made sales visits and delivered products. Third, Public Law 86-272 (15 U.S.C. 381-384) protects only mere solicitation of orders for tangible goods; the contractors went beyond solicitation by delivering products from in-state consigned inventory. So the company was subject to New York corporate franchise tax.

What this means for you

Out-of-state sellers using in-state reps or consigned stock

Keeping title to consigned inventory in New York is itself a nexus-creating presence — you own property here. And the two common shields have hard limits: the fulfillment-services exclusion covers order-taking and shipping, not in-person selling and delivery; Public Law 86-272 covers solicitation, not delivery. In-state reps who sell and deliver push you past both.

Accountants and tax professionals

Distinguish consignment (title retained = property owned in New York) from a true sale to a distributor. Test the in-state activity against the narrow § 208.19 fulfillment definition and against Public Law 86-272's solicitation-only protection; delivery from in-state consigned inventory exceeds both. Contrast the limited-purpose, non-selling trips in TSB-A-13(6)C, which did not create nexus.

Common questions

Q: Does consigned inventory in New York create nexus?
A: Yes. Consigning property to New York while retaining title is owning property in New York under Tax Law § 209.1 and 20 NYCRR 1-3.2(d).

Q: Does the fulfillment-services exclusion protect this company?
A: No. Its contractors did more than accept or ship orders; they made sales visits and delivered products, beyond the § 208.19 definition.

Q: Does Public Law 86-272 protect it?
A: No. That protects mere solicitation of orders; delivering products from in-state consigned inventory exceeds solicitation.

Citations and references

• Tax Law § 209.1 (franchise tax; owning or leasing property in New York); 20 NYCRR 1-3.2(d) (consigned property with retained title = owning property)
• Tax Law § 209.2(f) (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); 20 NYCRR 1-3.4(b)(9)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a13_4c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-13(4)C
Corporation Tax
March 4, 2013

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

PETITION NO. Z120203B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether its activities may be exempted from
corporate franchise tax under the fulfillment clause and whether it should be paying franchise tax
to New York State.
We conclude that Petitioner is subject to corporate franchise tax in New York.
Facts
Petitioner is a Virginia corporation with headquarters in Pennsylvania. Petitioner files as
a foreign C Corporation for New York State. Petitioner utilizes a sales force of approximately
16 independent contractors located in New York State. Petitioner ships inventory via common
carrier from its manufacturing facility in Pennsylvania to the independent contractors in
New York who store Petitioner’s product in the contractors’ own storage facilities. The
independent contractors are fully responsible for the stock of consigned inventory, although the
Petitioner retains ownership of the goods until sold. The independent contractors make sales
visits and sell Petitioner’s products to New York customers (the end users) at the customers’
locations.
Once the independent contractors sell and deliver the products, they write up sales slips
(which indicate the product sold, purchase price, and customer information) and send them to
Petitioner. Petitioner then bills the customers and pays commissions to the independent
contractors. Petitioner carries the accounts receivable on all sales to the customers. Petitioner
must approve the customers’ credit before the independent contractors make sales since
Petitioner is selling on credit to the customers.
Petitioner has no “bricks & mortar” locations (i.e., physical sales locations) in New York
State, owns no facilities in New York and pays no rent for the storage of its goods in New York.
The average value of inventory on hand in New York State is approximately $200,000 for the
last three years. In addition to sales and deliveries made from the contractors’ locations in New
York State, there are also significant sales shipped directly from Pennsylvania to New York
customers, although Petitioner provided no facts on how these sales were solicited. Petitioner
has been filing New York franchise tax returns to date.

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TSB-A-13(4)C
Corporation Tax
March 4, 2013

Analysis
Under section 209.1 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, doing business, employing capital, owning or leasing property in New York State, or
maintaining an office in New York. Petitioner utilizes a sales force of approximately 16
independent contractors located in New York State to sell and deliver Petitioner’s products to
the customers. Petitioner consigns its inventory to the independent contractors, so they can
deliver the product after the sales are made. After the independent contractors make the sales
and deliver the products, they write up the sales slips which detail the products that were sold,
the purchase prices, and the customers’ information. Those receipts are forwarded to Petitioner.
Upon receiving the sales slips, Petitioner bills the customers from its corporate offices located
outside of New York State. Petitioner retains title to the products until they are sold to the
customers. As further detailed in 20 NYCRR section 1-3.2(d), owning or leasing property in
New York State includes consigning property to New York State if the consignor retains title to
the consigned property. Petitioner has nexus with New York under section 209.1 of the Tax Law
because it owns the products that it consigns to its independent contractors until they are sold to
the customer. These products are property owned by the Petitioner in New York State.
Under section 209.2(f) 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.
“Fulfillment services” is defined in section 208.19 of the Tax Law as 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. We conclude that the fulfillment services exemption does not apply to
Petitioner. The actions of the independent contractors here do not fall under the definition of
fulfillment services because the independent contractors do more than just accept or just ship
orders in New York State. The independent contractors located in New York State make sales
visits to customers and deliver Petitioner’s products to the customers from their consigned
inventories located within New York State.
Lastly, under 20 NYCRR section 1-3.4(b)(9), corporations that are not subject to tax are
those which are exempt pursuant to the provisions of Public Law 86-272 (15 U.S.C.A. §§
381-384) The regulation provides that, under Public Law 86-272, “a corporation will not be
considered to have engaged in taxable activities in New York State during the taxable year
merely by reason of sales in New York State or the solicitation of orders for sales in New York
State, of tangible personal property on behalf of the corporation by one or more independent
contractors.” Public Law 86-272 does not apply here because the independent contractors are
doing more than just soliciting orders for sales in New York State. The independent contractors

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TSB-A-13(4)C
Corporation Tax
March 4, 2013

deliver the products from their consigned inventories located within New York State to the
customers upon making the sales.
Accordingly, because Petitioner’s independent contractors make sales and deliver
Petitioner’s products in New York and Petitioner retains title to the products stored in New York
until the products are sold, Petitioner’s activities go beyond those allowed under Public Law
86-272 and the fulfillment services exemption. Therefore, Petitioner is subject to corporate
franchise tax in New York State.

DATED: March 4, 2013

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.