For a tax year that began before 1978, a New York corporation's out-of-state sales and design staff shared sub-let office space with an affiliated company, under a separate name and phone listing but reporting into the New York head office for order approval and shipment. Did that count as a 'regular place of business' outside New York, avoiding the old rule that taxed 100% of income to New York absent one?

Plain-English summary

Kason Industries, Inc., a New York manufacturer of commercial refrigeration hardware and store fixtures, asked about its tax year ended June 30, 1978 -- a year that began before January 1, 1978, meaning it was still governed by an older, now-repealed version of the business allocation percentage rule. Under former Tax Law § 210.3(a)(4), if a taxpayer did NOT have a "regular place of business" outside New York other than a mere statutory office, its business allocation percentage was 100% -- all its net income was allocated to (and taxed by) New York. That harsh rule was removed by Chapter 69 of the Laws of 1978 for years beginning on or after January 1, 1978, but Petitioner's year at issue started earlier and so was still subject to it.

During the year, refrigeration hardware was sold through a subsidiary, Kason Midwest Corp., located in Chicago; separately, Petitioner's own "Fixtureware Division" -- three employees (a regional manager, a salesman, and a designer/cost-estimator) -- handled the fixtureware product line from Chicago office space sub-let from that same subsidiary. The space had its own building directory listing and telephone listing, though letterhead still showed Petitioner's New York address (business cards for two of the three employees did show the Chicago address). The staff filed customer correspondence and invoices, wrote up orders for shipment from New York, and made calls to customers; the regional manager spent about half his time in the office approving orders (before forwarding them to New York for final approval and shipment) and reviewing job plans; the salesman spent 20-25% of his time in the office; and the designer worked almost entirely on-site producing layouts and cost estimates. Notably, Petitioner had not filed an Illinois tax return for the year.

The Franchise Tax Regulations then in effect defined "regular place of business" simply as "any bona fide office (other than a statutory office)... regularly used by the taxpayer in carrying on its business." The Department found Petitioner's Chicago arrangement met that definition: three dedicated employees regularly used the space to carry on real business functions (sales solicitation, order preparation, correspondence, design work, cost estimating), even though the space was sub-let rather than separately leased, some functions (final shipment, ultimate order approval) remained in New York, and Petitioner hadn't filed an Illinois return. The result: Petitioner avoided the pre-1978 rule's 100% New York allocation for that year.

What this means for you

Businesses reviewing older, pre-1978 New York tax years

If you're dealing with a legacy New York corporate tax year that began before January 1, 1978, remember the business allocation percentage rules were meaningfully different then -- the 100%-if-no-outside-office rule no longer exists for later years, so don't assume current-law allocation concepts apply retroactively to older open years or refund claims.

What makes an out-of-state office "regular" versus merely nominal

Sub-let space, shared with an affiliate, without a separate lease or even a fully separate street address on letterhead, can still count as a "regular place of business" -- what mattered here was that dedicated employees used the space consistently to perform real business functions (not simply as a mail drop or nominal presence), regardless of who technically held the lease.

Filing an out-of-state return isn't dispositive either way

The Department didn't treat Petitioner's failure to file an Illinois tax return as fatal to its "regular place of business" claim -- the New York regulatory test focused on the nature and regularity of the office's use, not on the taxpayer's out-of-state filing history.

Common questions

Q: Does this 100%-allocation rule still apply today?
A: No. Chapter 69 of the Laws of 1978 removed it for taxable periods beginning on or after January 1, 1978. This ruling addresses a legacy year governed by the older rule.

Q: Does sub-letting space from an affiliate, rather than leasing it directly, prevent it from being a "regular place of business"?
A: Not necessarily -- the Department looked at whether the space was a bona fide office regularly used by dedicated employees to carry on real business functions, not at the formal lease arrangement.

Q: Can another company with a similar shared-office arrangement in an old pre-1978 tax year rely on this Opinion?
A: No. It binds the Department only as to Kason Industries' own facts and can't be relied upon by other taxpayers, even those with a similar legacy-year fact pattern.

Citations and references

Statutes and regulations:

• Former Tax Law § 210.3(a)(4) (pre-1978 100% allocation rule)
• Chapter 69 of the Laws of 1978 (repeal, effective for years beginning on or after January 1, 1978)
• Former Franchise Tax Regulations definition of "regular place of business"

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a82_14c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82 (14) C
Corporation Tax
September 21, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810813A

On August 13, 1981, a Petition for Advisory Opinion was received from Kason Industries,
Inc., Colesville Road, Binghamton, New York 13902.
The issue raised is whether, for the year ended June 30, 1978, Petitioner's activities in Illinois
constituted the maintenance of a regular place of business without the State of New York, within the
meaning of section 210.3(a)(4) of the Tax Law, contained in Article 9-A thereof (Franchise Tax
Business Corporations).
Petitioner is a New York corporation engaged in the manufacture and sale of commercial
refrigeration hardware and store fixtures. During the taxable year ended June 30, 1978, the period
at issue herein, the commercial refrigeration hardware was sold and distributed by Kason Midwest
Corp, a subsidiary of Petitioner. Kason Midwest Corp. was located in Chicago, Illinois. The sale and
distribution of the fixtureware product line was handled by a division of Petitioner, the Fixtureware
Division. The Fixtureware Division consisted of three employees, for whom office space in Chicago
was sub-let from Kason Midwest Corp. Such office space was used exclusively by the three
aforementioned employees of Petitioner. Petitioner had a separate building directory listing and a
separate telephone listing. There was no advertising in Illinois by the Fixtureware Division as such.
Stationery used by Petitioner's employees in Chicago bore Petitioner's New York address. However,
the business cards used by two of the three employees (the regional manager and the salesman)
contained Petitioner's name along with the Chicago address. It is also to be noted that Petitioner has
not filed an Illinois tax return for the year in question.
Petitioner's three employees located in Chicago included a regional manager, a salesman, and
an individual who functioned as a designer/draftsperson and cost estimator. The activities carried on
at this location included the receipt of directives from the Vice President of Sales in Binghamton,
New York; the filing of copies of customer's invoices for material shipped; the filing of copies of
correspondence to and from customers and the home office; the writing and preparation of orders to
be forwarded to the home office for shipment to customers; and the receiving and initiating of calls
to customers to set up appointments and the like. The regional manager spent approximately 50%
of his time in the Chicago office, the remainder of his time being devoted to making sales calls. His
office activities included approving orders (which were then forwarded to New York for filling),
reviewing job plans and estimates, and corresponding with customers and the home office. The
salesman spent 20 to 25% of his time in the office, the remainder of his time being spent in the field
soliciting orders from customers. His activities in the office consisted of reviewing correspondence
and meeting with the regional manager and the designer/draftsperson. The work of the
designer/draftsperson and cost estimator was performed almost entirely in the office. Her function
consisted of meeting with the salesman or potential customers, sketching layouts for store fixtures
and displays relating to the merchandising of the product to be displayed, and assisting in the

ROBERT W. BOUCHARD, ACTING COMMISSIONER

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

FRANK J. PUCCIA, DIRECTOR

TP-8 (8/82)

-2­
TSB-A-82 (14) C
Corporation Tax
September 21, 1982

estimating of the prices for the fixtures. Final approval of the layouts and the prices was in the hands
of the Regional Sales Manager.
Section 210.3 of the Tax Law, contained in Article 9-A, provides for the computation of a
business allocation percentage used in allocating entire net income. Prior to 1978, section 210.3(a)(4)
provided that ". . .if the taxpayer does not have a regular place of business outside the state other
than a statutory office, the business allocation percentage shall be one hundred per cent. . ." This
limitation was removed by the enactment of Chapter 69 of the Laws of 1978, effective with respect
to taxable periods commencing on or after January 1, 1978. The year at issue herein commenced prior
to January 1, 1978, and is thus subject to the above quoted stricture. The Franchise Tax Regulations
in effect with respect to the period in question provided the following definition of the phrase "regular
place of business:"
A regular place of business is any bona fide office (other than a
statutory office), factory, warehouse or other space which is regularly
used by the taxpayer in carrying on its business.
Based on the facts presented by Petitioner, as set forth above, it is concluded that Petitioner's
activities at the Chicago location constituted the maintenance of a regular place of business.

DATED: September 20, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau