An out-of-state corporation's only other New York contacts are protected order-solicitation activity under the federal Interstate Income Act (P.L. 86-272). But a former employee has leased a hotel suite in New York City on an annual, renewable basis since 1972, under a formal apartment-style lease, reimbursed by the company, to guarantee accommodations for visiting executives. Does that annual hotel-suite lease go beyond P.L. 86-272's protection and create New York franchise tax nexus?

Plain-English summary

Timex Corporation, a Delaware corporation headquartered in Waterbury, Connecticut, otherwise limited its New York contacts to activity squarely protected by the federal Interstate Income Act, P.L. 86-272 (15 U.S.C. § 381): representatives outside New York solicited orders for sales of tangible personal property, with those orders approved or rejected and filled entirely from outside the state. Standing alone, that activity cannot be taxed by New York.

But since 1972, a former Timex employee has leased a suite at a New York City hotel on an ANNUAL, renewable basis, under a standard printed apartment-style lease -- with the pre-printed "residing at" language crossed out and replaced by "having offices at Timex Corporation, Waterbury, Connecticut," and the usual "immediate family" occupancy restriction broadened to "executives and guests of tenant." Timex fully reimburses the individual for the rent and related expenses. The purpose is to guarantee a standing hotel reservation so that transient accommodations are always available to senior executives and officers, both of Timex and of affiliated companies; brief business meetings (with bankers, lawyers, ad agency reps, and other consultants) have been held there. The suite isn't used to display goods, isn't held out as an office, and has no clerical staff, office furniture, or equipment -- and the hotel's own rules state the "premises shall not be used for business purposes."

The Department drew on Chawla v. Horch's factors for distinguishing an ordinary hotel-guest relationship from a true landlord-tenant relationship: length of occupancy, presence of a written lease, the nature of lease rights/duties, whether hotel services are still provided, and whether rent is paid short-term or long-term. Despite the availability of ordinary hotel services (like room service), the year-long term, formal written lease, and annual rent payment tipped the balance decisively toward a landlord-tenant relationship rather than the usual transient innkeeper-guest arrangement most business travelers experience. That makes the arrangement "leasing property in this state" under Tax Law § 209.1 -- and leasing property, unlike mere order solicitation, is NOT protected by P.L. 86-272. Since Timex's total New York activity therefore extended beyond the federal statute's protected zone (solicitation, and only solicitation), Timex became subject to New York's Article 9-A franchise tax.

What this means for you

Out-of-state companies relying on P.L. 86-272 protection

P.L. 86-272 protects ONLY solicitation of orders (and closely related activities) -- it provides no shelter for leasing real property in the state, even if the leased space is never used as a traditional office and even if it primarily benefits traveling executives rather than local sales staff. A single leased hotel suite, if structured formally and held long-term, can be enough by itself to destroy otherwise-protected nexus status. Contrast TSB-A-81(10)C (Noga Holding), where a foreign parent's minimal New York contacts -- an unpaid, powerless resident officer and books/records kept in-state by outsiders -- did NOT create nexus, because Tax Law § 209.2 specifically excuses exactly those two activities. Timex's hotel lease had no such statutory safe harbor to fall back on.

The difference between a hotel reservation and a lease is substantive, not just a matter of paperwork

The label on the arrangement matters less than its substance: annual (versus nightly) payment, a written lease (versus a reservation), broadened occupancy rights, and the intended DURATION of use all point toward "leasing," even where the space still receives ordinary hotel services and isn't used as a business office. If you want to avoid this outcome, structure standing travel accommodations as short-term reservations rather than long-term leases.

Common questions

Q: Does maintaining a standing hotel reservation for traveling executives automatically create nexus?
A: Not necessarily -- the key distinction is between a short-term/nightly reservation (protected, ordinary business travel) and a long-term, formally leased arrangement paid on an annual basis (not protected, treated as "leasing property").

Q: Does it matter that the suite was never used as an office?
A: No. The Department found "leasing property" nexus based on the LEASE arrangement itself (its length, formality, and payment structure), not on whether the space functioned as an office with staff or equipment.

Q: Can another out-of-state company with a similar long-term hotel arrangement rely on this Opinion?
A: No. It binds the Department only as to Timex's own facts and can't be relied upon by other taxpayers, though the Chawla v. Horch factors it applies are a general legal test for distinguishing a lease from a hotel stay.

Citations and references

Statutes, regulations, and cases:

• Tax Law § 209.1
• 20 NYCRR 1-3.2(a)(1), (d)
• P.L. 86-272, 15 U.S.C. § 381
• Chawla v. Horch, 70 Misc. 2d 290

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_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(5)C
Corporation Tax
March 31, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810618A

On June 18, 1981, a Petition for Advisory Opinion was received from Timex Corporation,
Waterbury, Connecticut 06720.
At issue is whether the rental of a hotel room by a former Timex employee for the
corporation's use, on an annual basis, constitutes activity beyond the activities protected by P.L. 86­
272 (15 USC § 381), so as to subject Petitioner, a foreign corporation, to the Franchise Tax on
Business Corporations imposed under Article 9-A of the Tax Law. It is concluded herein that such
activity constitutes the leasing of property within New York in a corporate or organized capacity,
within the meaning of section 209.1 of the Tax Law, so as to render Petitioner subject to tax.
Petitioner is a Delaware corporation, with headquarters at Waterbury, Connecticut. Petitioner
states that it does not do business, employ capital, own or lease real or tangible personal property or
maintain a business in New York except to the extent that either or both of the activities described
below might be considered as such. These two activities are described by Petitioner as follows:

1. Petitioner's representatives located outside of New York solicit orders within the State for
   sales of tangible personal property. These orders are approved or rejected outside of New York, and
   approval orders are filled from outside the State.
2. A former Timex employee has leased a suite at a hotel in New York City on an annual
   basis since 1972. Such individual is fully reimbursed by Timex for business expenses incurred at the
   suite, including the rent paid. The purpose of the rental is to provide a standing hotel reservation to
   ensure that transient accommodations will be available for senior executives and officers of the
   corporation, as well as for executives of affiliated companies. Brief business meetings, such as with
   bankers, lawyers, advertising agency representatives and other of Petitioner's business consultants,
   have been held in the suite.
   The suite is not used for the display of goods and is not held out as an office or place of
   business of Petitioner. No clerical or other personnel are stationed there, and no office equipment
   or office furniture is kept there. The hotel's rules and regulations stipulate that the "premises shall
   not be used for business purposes."
   The lease between the former employee and the hotel is a standard printed lease form. It has
   the printed words "residing at", used to indicate a lessee's home address, crossed out and the words,
   "having offices at Timex Corporation, Waterbury, Connecticut 06708", inserted in their place.
   Another standard lease provision has been altered so as to open the use of the suite to "executives
   and guests of tenant," in place of the standard lease language limiting the use of rental premises to
   that of the tenant's immediate family.
   JAMES H. TULLY., COMMISSIONER
   TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-82(5)C
Corporation Tax
March 31, 1982
Section 209.1 of the Tax Law, contained in Article 9-A thereof, imposes the Franchise Tax
on Business Corporations, as follows:
"For the privilege of exercising its corporate franchise, or of doing
business, or of employing capital, or of owning or leasing property in
this state in a corporate or organized capacity, or of maintaining an
office in this state, for all or any part of each of its fiscal or calendar
years, every domestic or foreign corporation, shall annually pay a
franchise tax . . . . "
Section 1-3.2(a)(1) of the Corporation Franchise Tax Regulations provides, in pertinent part,
that "The tax is imposed on every foreign corporation whose activities include one or more of the
following:
...
(iii) owning or leasing property in New York State in a corporate or organized capacity or
in a corporate form; . . . . " 20 NYCRR 1-3.2(a)(1)
Section 1-3.2(d) of such Regulations provides, in pertinent part, that, "The owning or leasing
of real or personal property within New York State constitutes an activity which subjects a foreign
corporation to tax. Property owned by or held for the taxpayer in New York State, whether or not
used in the taxpayer's business, is sufficient to make the corporation subject to tax." 20 NYCRR 1­
3.2(d).
Petitioner contends that its former employee's leasing of the suite so as to ensure hotel
accommodations in New York City for Timex executives and Timex business associates should not
be considered to constitute doing business in New York State within the meaning of section 209.1
of the Tax Law, and that no distinction should be drawn between the annual rental of a hotel room
for corporate executives and the rental for a traveling executive on a nightly or weekly reservation
basis.
The law distinguishes between a nightly or short term letting of a hotel room and a long term
occupancy of rented living quarters at a hotel. Among the factors to be considered in distinguishing
between the innkeeper-guest relationship and the landlord-tenant relationship are the length of the
period of occupancy, whether there is a written or oral lease, the nature of the rights and duties
provided for in the lease, whether hotel services are provided, whether the rent is paid on a short or
long term basis, as well as other indications as to the intended length of the occupancy. (See Chawla
v. Horch, 70 Misc 2d 290).
The facts presented by Petitioner indicate that the suite has been rented since 1972 on an
annual basis, the rental being paid yearly under a formal, written lease agreement typical of an
apartment-type lease. Although usual hotel services, such as room service, are available, the
preponderance of the relevant indicia compel the conclusion that the relationship created under the
lease is that of landlord and tenant, as distinguished from the usual innkeeper-guest relationship in

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TSB-A-82(5)C
Corporation Tax
March 31, 1982

which most business travelers finding temporary accommodations participate. The rental of property
under such circumstances constitutes "leasing property in this state," within the meaning of section
209.1 of the Tax Law.
The submitted facts show that the former employee was acting on behalf of Petitioner when
he leased the suite for the corporation's use. The corporation reimbursed him fully for the cost of the
leasehold. The above-noted language changes in the lease further demonstrate that the suite was
rented and held for Petitioner's use in its corporate capacity, with the hotel's knowledge, and not for
the former employee's personal use. Furthermore, Petitioner stated in its submitted facts that the suite
was rented for the purpose of serving as a "standing hotel reservation to insure that transient
accommodations will be available" to meet corporate needs. The activity of leasing a hotel room on
an annual basis in New York State renders Petitioner subject to New York's Franchise Tax on
Business Corporations, imposed under Article 9-A of the Tax Law, pursuant to section 209.1, which
imposes the tax on foreign corporations "owning or leasing property in this state in a corporate or
organized capacity, for all or any part of each of its fiscal or calendar years . . . . "
P.L. 86-272 (15 USC § 381) limits the power of a state to impose a net income tax on
"interstate income". Income derived from the interstate business activities of a corporation
incorporated outside a state may not be taxed by that state if the activities carried on with the state
are limited to:
"(1) the solicitation of orders by such person, or his representative,
in such State for sales of tangible personal property, which orders are
sent outside the State for approval or rejection, and, if approved, are
filled by shipment or delivery from a point outside the State; and
(2)
the solicitation of orders by such person, or his representative,
in such State in the name of or for the benefit of a prospective
customer of such person, if orders by such customer to such person
to enable such customer to fill orders resulting from such solicitation
are orders described in paragraph (1)."
While Petitioner's activities in soliciting, approving and filling orders, as described earlier,
are activities of a type described in the foregoing federal statutory provision, the leasing of property
within this state extends the sum of its activities in New York beyond the protected zone established
by P.L. 86-272. That statutory provision, therefore, constitutes no bar to the conclusion regarding
Petitioner's taxability arrived at herein.

DATED: March 31, 1982

s/GABRIEL DI CERBO
Deputy Director
Technical Services Bureau