Can New York require an out-of-state mail-order subsidiary with no in-state presence to collect sales tax, when its parent solicits New York customers and steers them to the subsidiary?

Plain-English summary

A CPA asked — as a hypothetical — whether an out-of-state Subsidiary must collect New York sales tax. The Subsidiary is a direct marketer with no New York property, offices, or solicitation; it sells only by mail/phone, delivering by common carrier or mail. But its wholly-owned Parent (a foreign corporation qualified in New York) sells discount "club" memberships, sends employees into New York to service and solicit, and mails brochures advertising its club-vendors' merchandise to New York members. The Subsidiary is one of those vendors, and its New York customers learn of it through the Parent's brochure.

The Department concluded the Subsidiary is deemed a New York vendor and must collect the tax. Two questions drove the result:

• Nexus (the constitutional question). New York can require an out-of-state seller to collect only with a "definite link, some minimum connection" under the Due Process and Commerce Clauses (National Geographic). Pure mail-order with out-of-state delivery normally isn't enough (National Bellas Hess; Miller Brothers), and a parent's in-state presence doesn't automatically bind a subsidiary. But courts disregard the separate-entity rule where a parent so dominates and controls a subsidiary that it is the parent's alter ego, or where the corporate form is used to evade tax. Here the Subsidiary's sales flow directly from the Parent's New York solicitation and brochures; if a single entity did both the soliciting and the selling, nexus would clearly exist. So creating the Subsidiary may not defeat nexus unless valid non-tax reasons for the reorganization are shown.
• Vendor status (the statutory question). § 1131 requires every "vendor" to collect, and § 1101(b)(8) defines a vendor to include a person who solicits business through agents or advertising and thereby makes New York sales (§ 1101(b)(8)(i)(C)). Under 20 NYCRR § 526.10(f), a person operating a club or merchandising plan and its supplier are co-vendors, jointly responsible. Because the Subsidiary's sales aren't separate from the Parent's promotion — the two complement each other to fit the vendor definition — the Subsidiary is a vendor and must collect.

What this means for you

Splitting selling and soliciting into separate corporations may not escape New York's collection duty. If an out-of-state seller makes New York sales that depend on a related, New York-active company's solicitation and advertising, New York may treat the two as one selling operation — through alter-ego/economic-reality analysis or the co-vendor rule for club/merchandising plans — and require the seller to register and collect.

A reorganization needs a real, non-tax reason. The Department signaled that carving out a "marketing" entity from a "selling" entity, by itself, won't defeat nexus; be able to show valid business reasons beyond separating those functions.

Important: the nexus law has changed. This 1988 opinion rests on the physical-presence framework of National Bellas Hess and National Geographic. The U.S. Supreme Court's later decisions have substantially changed when a state may require an out-of-state seller to collect tax. Don't apply this nexus analysis to a current situation without checking present law.

Common questions

Q: We're an out-of-state mail-order seller with no New York offices. Are we safe from collecting NY tax?
A: Not necessarily. On these 1988 facts, a mail-order subsidiary whose sales depended on a New York-active parent's solicitation was deemed a New York vendor. And separately, the constitutional nexus rules have since changed — verify current law.

Q: Our parent solicits in New York but doesn't make the sales. Does that matter for us?
A: It can. New York looked at economic reality: if the affiliated companies function together as one selling operation, the parent's New York solicitation can support treating the selling entity as a vendor.

Q: Does forming a separate marketing company solve the problem?
A: The Department said creating the subsidiary may not defeat nexus unless there are valid business reasons for the reorganization other than separating promotion from selling.

Q: Can we rely on this opinion today?
A: Be careful. The physical-presence nexus framework it applies has been superseded by later U.S. Supreme Court decisions; check the current rules.

Citations and references

Statute, regulation, and cases:

• Tax Law § 1131 — every vendor must collect the sales and use taxes imposed under Article 28
• Tax Law § 1101(b)(8) — defines "vendor" to include a person making taxable sales (A) and a person who solicits business through employees, independent contractors, agents, or advertising and thereby makes New York sales (C); § 1101(a) includes a corporation or combination of corporations as a "person"
• 20 NYCRR § 526.10(d)-(f) — what counts as soliciting business in New York; an out-of-state seller soliciting in New York must collect; a club/merchandising-plan operator and its supplier are co-vendors jointly responsible for a vendor's obligations
• National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753; Miller Brothers Co. v. Maryland, 347 U.S. 340 — mail-order/out-of-state delivery insufficient for nexus
• National Geographic Society v. California Bd. of Equalization, 430 U.S. 551; Nelson v. Sears, Roebuck & Co., 312 U.S. 359; Scripto, Inc. v. Carson, 362 U.S. 207; Franklin Mint Corp. v. Tully, 94 A.D.2d 877, aff'd 61 N.Y.2d 980; Aldens, Inc. v. Tully, 49 N.Y.2d 525 — nexus and parent/subsidiary alter-ego principles

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_20s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(20)S
Sales Tax
March 2, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S871027C

On October 27, 1987, a Petition for Advisory Opinion was received from Thomas B.
Bottiglieri c/o Grant Thornton, 605 Third Avenue, New York, New York 10158.
The issue raised is whether a corporation organized to do business in another state, which is
a wholly-owned subsidiary of a corporation qualified to do business in New York State, must collect
and remit New York State sales and use taxes on property delivered to destinations within New York
State.
Subsidiary, a direct marketer who has no property or other presence in New York and does
not solicit sales in the State in any manner, sells tangible personal property to individuals placing
telephone orders to out-of-state locations. Subsidiary's New York customers order merchandise
through a brochure produced by the parent corporation (Parent), receive the goods via commercial
carrier or U.S. mail and make payment directly to Subsidiary.
Parent, a foreign corporation qualified to do business in New York State, sells club
memberships, entitling members to purchase discounted merchandise, to individual customers and
members of unrelated organizations. Employees of Parent enter the State from time to time to service
and solicit memberships. Parent has enlisted a network of over 100 vendors that have agreed to sell
their merchandise at discount prices to club members. Subsidiary is one of these vendors.
Parent produces and mails brochures advertising the club vendor's merchandise to the
members. Parent will take telephone inquires from club members but will not accept orders; it will
merely refer the customer to the supplier. Subsidiary is one of the suppliers.
Resolving this issue requires two determinations: (1) whether sufficient nexus exists between
the subsidiary corporation (Subsidiary) and New York State to satisfy the Due Process and
Commerce Clauses of the United States Constitution and (2) if sufficient nexus is found, whether
Subsidiary meets the definition of "vendor" contained in Tax Law §1101(b)(8).
ISSUE 1 - Nexus
A state can require an out-of-state seller to collect the state's sales or use tax only when there
is a sufficient nexus between the seller and the taxing state, as required by the Commerce Clause of
the United States Constitution (Art. I, § 8, cl. 3) and the Due Process Clause of the Fourteenth
Amendment to the United States Constitution. National Geographic Society v. California Board of
Equalization, 430 US 551.

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

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

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The test to determine whether a particular state exaction violates the Commerce Clause by
invading the exclusive authority of Congress to regulate trade between the states, and the test to
determine whether a state has complied with the requirements of due process in this area, are similar.
National Bellas Hess, Inc. v. Department of Revenue, 386 US 753. "[T]he relevant constitutional test
to establish the requisite nexus for requiring an out-of-state seller to collect and pay the use tax is
not whether the duty to collect the use tax relates to the seller's activities carried on within the State,
but simply whether the facts demonstrate some definite link, some minimum connection, between
[the State and] the person it seeks to tax." National Geographic Society v. California Board of
Equalization, 430 US at 561.
Activities in a state that have been found to be constitutionally sufficient to establish nexus
to require an out-of-state corporation to collect state taxes include the operation of retail stores of
the corporation in the state, Nelson v. Sears, Roebuck and Co., 312 US 359; Nelson v. Montgomery
Ward, 312 US 373; the presence of traveling salesmen in the state, General Trading Co. v. Tax
Commission, 322 US 335; and the presence of independent contractors or agents of the corporation
in the state, Scripto, Inc. v. Carson, 362 US 207. In the most recent United States Supreme Court
opinion on the issue of nexus for use tax collection purposes, National Geographic Society v.
California Board of Equalization, supra, the corporation, National Geographic, operated two offices
in California. Although the activities in those offices were unrelated to the corporation's mail order
activities, the Court held that it was permissible to impose the administrative burden of collecting
use taxes on National Geographic. Since the two California offices, regardless of the nature of their
activities, had the advantage of the same services, e.g., fire and police protection, as they would have
had had their activities included assistance to the mail order operations that generated the use taxes,
there was a definite line between National Geographic and the State of California.
Activities in a state that have been held insufficient to establish the necessary nexus to
impose the duty to collect use taxes include mail order sales where delivery of the goods was made
from out-of-state by common carrier or United States mail, National Bellas Hess, Inc. v. Illinois,
supra, and over the counter sales made in a bordering state to state residents with only occasional
deliveries being made into that state, Miller Brothers Co. v. Maryland, 347 US 340. In both these
cases, the Court found that the requisite relationship between the state and the out-of-state seller was
lacking.
To determine whether there will be sufficient nexus for New York State to impose a
requirement to collect use taxes on Subsidiary, it is necessary first to determine whether there will
be some relationship or minimum connection between Subsidiary and New York State. Under the
facts presented here, Subsidiary will not operate directly in New York State, nor will it have any
offices in this state. Its sales will be made by mail with delivery by common carrier or mail. Under
the holdings of the National Bellas Hess and Miller Brothers cases cited above, on these facts alone
Subsidiary will not be required to collect tax. The question thus becomes whether the existence of
a parent doing business in New York State is sufficient to establish nexus for Subsidiary with New
York.

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As a general rule, corporations are treated as separate legal entities, Rapid Transit Subway
Const. Co. v. City of New York, 259 NY 472, and the presence of a parent corporation in one state
does not require a finding of presence in that state for its wholly-owned subsidiary. However, under
certain circumstances in order to prevent fraud or injustice, the corporate structure will be disre­
garded and the separate entity rule discarded. Astrocom Electronics, Inc. v. Lafayette Radio
Electronics Corp, 63 AD2d 765; Giblin v. Murphy, 97 AD2d 668; Berkey v. Third Ave. Railway
Co., 244 NY 84. In Nelson v. Sears, Roebuck and Co., supra, the Supreme Court held that the
departmentalization of the corporation's operations (i.e., the mail order and retail stores operations
were separately administered) did not preclude the finding of sufficient nexus. In New York, there
has been a "steady movement towards holding that in determining whether a corporation has engaged
in activities in the state it is immaterial whether these are conducted through a branch or through a
subsidiary corporation,'' Boryk v. de Haviland Aircraft Co., 341 F2d 666, 668. In certain cases, this
concept should be applied to corporate reorganizations. It would be unjust to permit a corporation
to use a corporate reorganization as a cloak for the evasion of its tax obligations.
The status of the subsidiary as a separate entity should be ignored in situations where the
parent so dominates and controls the affairs of the subsidiary that the subsidiary is an instrumentality
of the parent. Coastal States Trading, Inc. v. Zenith Nav. SA, 446 F. Supp. 330; Fiur Co. v. Ataka
& Co., 71 AD2d 370. In such situations, the subsidiary should be considered to be the alter ego of
the parent. See, Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., Inc., 30 NY2d
34.
Indicia such as common officers and directors, common offices and telephone numbers
between corporate entities are relevant but are not sufficient by themselves to show that one
corporation is the alter ego of another. Consideration must also be given to factors such as the degree
of overlap of personnel, the amount of business discretion displayed by the corporations, whether
the entities operate independently of each other, whether the parent corporation owns all or most of
the stock of the subsidiary and whether the parent corporation causes the incorporation of the
subsidiary. United States Barite Corp. v. M. V. Haris, 534 F. Supp. 328; Ioviero v. CIGA Hotels,
Inc., 101 AD2d 852; Lincoln Center v. State Commission, 113 Misc. 2d 329; Worldwide Carriers,
Ltd. v. Aris Steamship Co., 301 F Supp 64. Also significant is whether the corporations trade under
their own names and whether they hold themselves out to the public as separate and distinct
businesses. Mangan v. Terminal Transportation System, Inc., 247 AD 853; Matter of Sbarro
Holding, Inc., 111 Misc. 2d 910, aff'd 91 AD2d 613; Matter of Typhoon Industries, Inc., 6 BR 886;
see, also, Plainview Realty v. Board of Managers, 86 Misc. 2d 515; Henn and Alexander, Laws of
Corporations and Other Business Enterprises 3d Ed. (1983), pp. 354-356.
If the affairs of the subsidiary or affiliated corporation are so dominated and controlled by
its parent or affiliate that the dominated and controlled corporation is the alter ego of the other, then
the nexus of one with New York State for tax jurisdiction purposes will provide sufficient nexus
with New York State for the other. CIT Fin. Services Consumer Discount Co. v. Director, Div. of
Taxation, supra; Minnesota Tribune Co. v. Commissioner of Taxation, 37 NW2d

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737; Franklin Mint Corp. v. Tully, 94 AD2d 877, aff'd, 61NY2d 980. (Other cases supporting a
finding of nexus premised on a parent/subsidiary relationship include Aldens, Inc. v. Tully, 49 NY2d
525; Reader's Digest Association, Inc. v. Mahin, 44 Ill. 2d 354, 255 NE2d 458, appeal dismissed,
399 US 919; Appeal of Dresser Industries, Inc., California State Board of Equalization, CCH 400­

485. See Barber, "Piercing the Corporate Veil," 17 Willamette L. Rev. 371, 397.)
     In presenting the hypothetical issue, Petitioner asserts that Subsidiary operates independently
     from the Parent and that both entities hold themselves out as separate and distinct business
     enterprises. Petitioner emphasizes that Parent does not exert domination and control over Subsidiary,
     but fails to state for what purpose it caused the incorporation. However, the facts emerge that
     Subsidiary, a direct marketer, fills telephone orders from New York customers who became aware
     of its product through a brochure distributed by the Parent to New York club members.
     Thus, Subsidiary sells tangible personal property to New York destinations but disclaims
     nexus because it has no presence in the State, while the Parent, although it has employees entering
     the state for service and solicitation, appears to lack nexus for sales tax purposes because it makes
     no sales in the State. Were the soliciting and selling activities conducted by a single entity nexus
     would be established between it and New York State Tax Law § 1101(b)(8)(i)(C), infra. Allowing
     the separate entity rule here would obviously produce inequitable consequences.
     Accordingly, the creation of Subsidiary as a separate corporate entity may not preclude the
     finding of sufficient nexus unless valid reasons for corporate reorganization - other than the
     separation of promotion and marketing activities - can be demonstrated.
     ISSUE 2 - Status as a Vendor
     In addition to establishing the constitutionally required nexus with New York, in order to
     compel a corporation to collect New York State tax, it must also be determined that such corporation
     is subject to the provisions of the New York State Sales and Use Tax Law. Section 1131 of the Tax
     Law requires that every vendor of tangible personal property or services must collect the sales and
     use taxes imposed under Article 28. Tax Law § 1131(1).The term "vendor" is defined under
     section 1101(b)(8) to include among others
     (A) A person making sales of tangible personal property or services, the receipts from
     which are taxed by this article;
     *

*

*

(C) A person who solicits business either by employees, independent contractors, agents
or other representatives or by distribution of catalogs or other advertising matter and by
reason thereof makes sales to persons within the state of tangible personal property or
services, the use of which is taxed by this article; Tax Law, §1101(b)(8)(i)(A) and (C).

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The term person includes a corporation or combination of corporations. Tax Law § 1101 (a).
Pursuant to New York State Sales and Use Tax Regulations a person is deemed to be
soliciting business if he has employees, salesmen, independent contractors, promotion men,
missionary men, service representatives or agents soliciting potential customers in New York or if
he distributes catalogs or advertising material in any manner in the State. 20 NYCRR 526.10(d).
Every vendor has certain obligations with respect to registration, collection of tax from
customers, filing of returns and payment of tax. 20 NYCRR 526.10(b). A person outside of this State
making sales to persons within the State, who solicits the sales in New York is required to collect
the sales tax on tangible property delivered in New York. 20 NYCRR 526.10(e)(1).
Every person operating a club or similar merchandising plan, or operating as an independent
contractor representing a particular supplier selling tangible personal property is a vendor for sales
tax purposes and must collect tax on merchandise sold by him. The person supplying the
merchandise is also deemed to be a vendor; both the representative and his supplier are jointly
responsible for discharging the obligations of a vendor listed in subdivision (b) of Regulation Section
526.10. 20 NYCRR 526.10(f)(1) and (2).
If Parent and Subsidiary fall within the latter provisions, which clearly outline their status as
co-vendors under the Tax Law, corporate structure is immaterial.
However, the facts presented in the Petition do not reveal for what purpose subsidiary was
incorporated nor do they state whether Parent is registered as a vendor with the New York State
Sales Tax Bureau. Nevertheless, it is apparent that Subsidiary's sales are not separate and distinct
from Parent's promotional activities. In fact, the related corporations complement each other in
performing the function which define a vendor in Tax Law § 1101(b)(8)(i)(C), supra. As the result
of that connection, Subsidiary is deemed a vendor and required to collect sales tax on its sales to
New York customers.

DATED:

March 2, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.