A Canadian aluminum manufacturer wants to ship a metal-bearing byproduct to an unrelated New York processor, who will reclaim the aluminum for a fee and ship it straight back to Canada, disposing of the unusable waste. Does owning that material while it's being processed in New York, by itself, create New York franchise tax nexus?

Plain-English summary

Aluminum Company of Canada, Ltd. manufactures primary aluminum, a process that yields "dross" -- a byproduct containing aluminum, some of which can be economically reclaimed. Petitioner proposed shipping dross to an unrelated processor in New York, who would reclaim the aluminum for an agreed fee, dispose of the portion that couldn't be reclaimed as waste, and ship the reclaimed metal back to Petitioner. Title to both the dross and the resulting reclaimed metal would remain with Petitioner throughout -- the New York processor never owns the material, just performs a service on it.

Tax Law § 209.1 imposes the Article 9-A franchise tax on foreign corporations that, among other activities, own property within New York. But New York property ownership isn't always enough to trigger tax by itself. The Department pointed to two supporting examples: first, a foreign corporation isn't taxed merely for having samples or vehicles in New York used exclusively for solicitation, even under regular Public Law 86-272 principles (20 NYCRR 1-3.4(a)(9)); and more directly, the Department's own prior American Association of Advertising Agencies ruling held that a foreign corporation shipping raw materials or partially finished goods to an UNRELATED contractor in New York for processing or finishing isn't taxable solely for owning that property, as long as the contractor either returns the goods to the foreign corporation or ships them to another out-of-state contractor.

Applying that principle, the Department held that Petitioner's proposed toll-processing arrangement -- an unrelated New York processor, temporary ownership of in-state property limited to the processing period, and the material's return directly to the foreign corporation -- involves similarly minimal property ownership, and would not, by itself, subject Petitioner to Article 9-A tax.

What this means for you

Out-of-state manufacturers using New York toll processors

Sending raw materials or byproducts to an UNRELATED New York contractor for processing, with the finished product returned to you (or shipped to another out-of-state location), doesn't by itself create New York franchise tax nexus -- even though your material is physically present and owned by you while being processed there.

The "unrelated contractor" detail matters

This favorable result depends on the New York processor being unrelated to the foreign corporation and the arrangement being a straightforward fee-for-processing service -- a more integrated or controlled relationship with the in-state processor could raise different nexus questions not addressed by this Opinion.

Common questions

Q: If I own raw materials that are physically in New York for processing, does that alone make me taxable there?
A: Not by itself, if you use an unrelated processor and the finished product is returned to you or shipped elsewhere outside the state -- this kind of minimal, transient property ownership doesn't trigger Article 9-A tax on its own.

Q: Would the answer change if the New York processor were an affiliate rather than unrelated?
A: This Opinion's holding is expressly grounded in the processor being unrelated to Petitioner; a related-party processing arrangement presents a different fact pattern not addressed here.

Q: Can another manufacturer with a similar toll-processing arrangement rely on this Opinion?
A: No. It binds the Department only as to Alcan's own facts and can't be relied upon by other taxpayers, even those with similar toll-processing relationships.

Citations and references

Statutes, regulations, and rulings:

• Tax Law § 209.1
• 20 NYCRR 1-3.4(a)(9)
• American Association of Advertising Agencies, Inc., TSB-H-80(32)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a83_9c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(9)C
Corporation Tax
May 9, 1984

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C830603A

On June 3, 1983, a Petition for Advisory Opinion was received from Aluminum Company
of Canada, Ltd., Box 6090, Montreal, Quebec, Canada H3C 3H2.
At issue is whether Petitioner, a foreign corporation, would become subject to tax under
Article 9-A of the Tax Law if it were to ship certain materials to New York for processing, where
metals reclaimed from such materials were returned directly to the foreign corporation.
Petitioner is a manufacturer of primary aluminum. Petitioner's manufacturing process yields
a by-product commonly called dross, which contains aluminum. A portion of this aluminum can be
economically reclaimed from the dross. Petitioner proposes to ship such dross to a processor in New
York who will reclaim the aluminum for an agreed upon fee, and ship such reclaimed metal back
to Petitioner. The portion of the dross which cannot be reclaimed is a waste product and will be
disposed of by the processor. Title to the dross, and subsequently the reclaimed metal, will remain
with Petitioner. The processor is not related to Petitioner.
Section 209.1 of the Tax Law imposes a franchise tax on foreign (including alien)
corporations for the privilege of, among other things, owning property within this state. However,
there are situations where the ownership of property in New York is not sufficient in magnitude to
subject a foreign corporation to tax. For example, the Business Corporation Franchise Tax
Regulations provides that a foreign corporation whose income is derived from interstate commerce
is not subject to tax if its New York activities do not exceed those prescribed by Public Law 86-272,
even where the corporation has samples or automobiles in New York, used exclusively for
solicitation. 20 NYCRR 1-3.4(a)(9). Similarly, it has been held that a foreign corporation which
ships raw materials or partially finished goods to an unrelated contractor in this state, by whom the
goods are processed or finished, is not taxable solely because of the ownership of such property in
New York, assuming that the contractor returns the goods to the foreign corporation or ships them
to another contractor outside the state. American Association of Advertising Agencies, Inc., State
Tax Commission Advisory Opinion, TSB-H-80(32)C.
Accordingly, inasmuch as the ownership of property in New York in the manner described
herein is similarly minimal, it would not, by itself, subject Petitioner to the Franchise Tax on
Business Corporations imposed under Article 9-A of the Tax Law.

DATED: August 12, 1983

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

s/FRANK J. PUCCIA
Director
Technical Services Bureau

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR