A mail-order company distributes catalogs through an airline's on-board program (paying the airline a sales commission) and ships merchandise to New York customers who order from those catalogs — does the company owe New York franchise tax, and does it have to collect New York sales tax?

Subject

Whether Giftmaster Inc. is subject to franchise tax and must collect sales tax when it sells merchandise to New York residents via orders from airline passengers who order from in-flight catalogs, and if not required to collect sales tax, whether it may surrender its vendor registration.

Plain-English summary

Giftmaster produced a merchandise catalog for a commercial airline's in-flight shopping program. It shipped the catalogs out of state to the airline's distribution point, losing ownership/control at that point, and was paid a commission based on nationwide sales generated through the program (not tied specifically to New York). Passengers browsing the catalog on board — including planes that land in New York — could order merchandise, which Giftmaster then shipped directly to the customer, including customers in New York. Giftmaster had no employees, property, capital, or office in New York; its only physical connection was that some flights carrying its catalogs landed in the state. It asked whether it owed New York franchise tax and had to collect sales tax on these shipments — and if not, whether it could drop its sales tax registration.

The two taxes came out differently, because they use different legal tests. For franchise tax, federal Public Law 86-272 exempts an out-of-state seller whose only in-state activity is soliciting orders that get approved and shipped from outside the state — Giftmaster's catalog-based order solicitation and out-of-state shipment fit squarely within that shield, so it owed no Article 9-A franchise tax. For sales tax, the constitutional nexus test is different (and lower): any "definite link, some minimum connection" between the state and the seller is enough, and courts have found nexus from something as modest as independent contractors or traveling salesmen soliciting business in-state. The Department characterized the airline's in-flight catalog distribution as more than mere passive common-carrier transport — the airline and Giftmaster had a joint commission-based business arrangement, making the airline effectively an independent contractor soliciting business in New York on Giftmaster's behalf. Under the sales tax regulations, distributing catalogs "in any manner" in the state counts as soliciting business, and having an independent contractor solicit orders in-state (even without a fixed office) is enough to require sales tax collection. So Giftmaster remained a required vendor for sales tax despite being exempt from franchise tax, and could not surrender its registration.

What this means for you

Mail-order or catalog sellers using third-party distribution channels

PL 86-272's franchise-tax shield and sales tax nexus are governed by two different legal standards — being exempt from state corporate income/franchise tax under PL 86-272 does NOT mean you're also exempt from collecting sales tax. Sales tax nexus can be triggered by a much lower bar, including an independent contractor or partner distributing your catalogs or marketing materials in-state, even without any of your own employees or property there.

Businesses partnering with airlines, retailers, or other in-state intermediaries on a commission basis

A commission-based joint arrangement (rather than the intermediary acting purely as a neutral shipper/carrier) can itself create sales tax nexus, because the intermediary is functioning as your independent contractor soliciting business, not just delivering your product.

Accountants and tax professionals

Keep the two nexus tests separate in analysis: PL 86-272 (15 U.S.C. §§ 381-384) only protects against net-income-based taxes like Article 9-A franchise tax, and only for mere solicitation-and-ship activity — it has no bearing on sales/use tax collection obligations, which follow the looser "minimum connection" Commerce Clause/Due Process standard from cases like National Geographic Society v. California Board of Equalization and Scripto, Inc. v. Carson.

Common questions

Q: If I'm exempt from state franchise tax under PL 86-272, am I also exempt from collecting sales tax?
A: Not necessarily. PL 86-272 only shields net-income-based taxes; sales tax nexus uses a lower "minimum connection" standard, and having any in-state solicitation activity — even through an independent contractor or catalog distribution — can trigger a sales tax collection obligation.

Q: Does distributing catalogs through an airline's in-flight program create sales tax nexus?
A: Yes, under these facts — because the arrangement was commission-based (not the airline acting merely as neutral common carrier), the airline was treated as an independent contractor soliciting business in New York on the seller's behalf.

Q: Can a company required to collect sales tax surrender its vendor registration?
A: No — once nexus/vendor status is established, the company remains obligated to collect and remit sales tax and cannot simply deregister.

Q: Can another catalog or mail-order seller rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 209.1 (Article 9-A franchise tax)
• 20 NYCRR § 1-3.4(b)(9) (PL 86-272 solicitation-of-orders exemption)
• 15 U.S.C. §§ 381-384 (Public Law 86-272)
• Tax Law § 1131(1) (persons required to collect sales tax; every vendor)
• 20 NYCRR § 526.10(c) (maintaining a place of business)
• 20 NYCRR § 526.10(d) (soliciting business, including catalog distribution "in any manner")
• 20 NYCRR § 526.10(e) (interstate vendor sales tax collection requirement)
• Referenced case law: National Geographic Society v. California Board of Equalization, 430 US 551; National Bellas Hess, Inc. v. Department of Revenue, 386 US 753; Scripto, Inc. v. Carson, 362 US 207

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a88_50s_23c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (50)S
Sales Tax
TSB-A-88 (23)C
Corporation Tax
October 13, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z880209A

On February 9, 1988, a Petition for Advisory Opinion was received from Giftmaster Inc.,
3825 W. Green Tree Road, Milwaukee, Wisconsin 53209.
The issues raised are whether Petitioner is subject to franchise tax and whether Petitioner
must collect sales tax when Petitioner sells merchandise to New York residents via orders received
from airline passengers who order from catalogs on board commercial aircraft and if Petitioner is
not required to collect sales tax, may it surrender its registration.
Facts
Petitioner produces a catalog for a client, in this case a commercial airline. The catalog is
given to the airline and shipped via interstate commerce to a location outside New York State;
generally, to the airline's distribution point for their on-board program. At the point of shipment,
Petitioner loses ownership and control of the catalogs. The compensation to the airline for the
catalog on-board program is a commission based on total sales nationwide.
The catalogs are put on board a commercial aircraft and made available to its passengers. It
is presumed for purposes of this advisory opinion that some portion of the catalogs are made
available in this manner to passengers boarding aircraft in New York State. When a New York
resident orders merchandise and it is shipped into New York, Petitioner has been collecting and
paying tax on such shipments.
Petitioner states that it does not employ capital, own or lease property or maintain an office
in New York State. The only physical contact with New York is when the aircraft lands in New York
State.
Petitioner now believes it is not required to pay franchise taxes nor is it required to collect
sales taxes on the New York State shipments because it feels it does not meet the criteria for
taxation.
Franchise Tax
The business corporation franchise tax imposed by section 209.1 of Article 9- A of the Tax
Law is imposed on every foreign corporation, unless specifically exempt, for the privilege of doing
business, or of employing capital, or of owning or leasing property in New York State in a corporate
or organized capacity, or of maintaining an office in New York State.
Section 1-3.4(b)(9) of the Business Corporation Franchise Tax Regulations describes the
exemption from tax applicable under Public Law 86-272 (15 U.S.C.A. §§381-384) as follows:
TP-9 (9/88)

-2TSB-A-88 (50)S
Sales Tax
TSB-A-88 (23)C
Corporation Tax
October 13, 1988

(i)
A foreign corporation whose income is derived from interstate commerce is
not subject to tax under article 9-A if the activities of the corporation in New York
State are limited to either, or both of the following:
(A)
the solicitation of orders by employees or representatives in New York State
for sales of tangible personal property and the orders are sent outside New York State
for approval or rejection; and, if approved, are filled by shipment or delivery from a
point outside New York State, and
(B)
the solicitation of orders by employees or representatives in New York State
in the name of or for the benefit of a prospective customer of such corporation if the
customer's orders to the corporation are sent outside the state for approval or
rejection; and, if approved, are filled by shipment or delivery from a point outside
New York State.
(ii)
For purposes of this exemption, 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 ....
On the basis of the facts presented herein, it is determined that pursuant to Public Law 86-272
and section 1-3.4(b)(9) of the Business Corporation Franchise Tax Regulations, Petitioner is exempt
from the franchise tax imposed under Article 9-A of the Tax Law.
Sales Tax
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.
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

-3TSB-A-88 (50)S
Sales Tax
TSB-A-88 (23)C
Corporation Tax
October 13, 1988

[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 that state, Scripto, Inc. v. Carson, 362 US 207.
In this regard, it is noted that the airline with which Petitioner has contracted for the
distribution of catalogs is not distributing catalogs in New York State in its capacity as a common
carrier. Rather, the airline and Petitioner have entered into a joint endeavor whereby the airline will
share in the revenues of the endeavor on a commission basis.
Accordingly, it is concluded that Petitioner has sufficient connection with New York State
by virtue of the presence in the state of an independent contractor distributing Petitioner's catalogs.
STATUTORY PROVISIONS
Section 1131(1) of the Tax Law states, "'[p]ersons required to collect tax' ... shall include:
every vendor of tangible personal property ..."
Sales and Use Tax Regulations section 526.10(e) provides, in part:
(e)
Interstate vendors.
(1) A person outside of this State making sales to persons
within the State, who solicits the sales in New York, as defined in subdivision (d) of this
section, or who maintains a place of business as defined in subdivision (c) of this section, is
required to collect the sales tax on the tangible personal property delivered in New York or
the services performed in New York.
(2)
A person making sales to his customers within the State, who has solicited such sales
by the interstate distribution of catalogs or other advertising material by mail and who
delivers the merchandise through the mail or by common carrier, and who neither maintains
a place of business as defined in subsection (c) of this section, nor solicits business as
defined in subdivision (d) of this section, is not required to register as a vendor. However,
if such person registers voluntarily, he is under the same obligations as any other vendor. 20
NYCRR 526.10(e).
Subdivisions (c) and (d) of section 526.10 of the Sales and Use Tax Regulations defines the
terms "maintaining a place of business" and "soliciting business" as follows:

-4TSB-A-88 (50)S
Sales Tax
TSB-A-88 (23)C
Corporation Tax
October 13, 1988

(c) Maintaining a place of business. A vendor shall be considered to maintain a place of
business in this State if he, either directly or through a subsidiary, has a store, salesroom,
sample room, showroom, distribution center, warehouse, service center, factory, credit and
collection office, administrative office or research facility in the State. 20 NYCRR 526.10(c).
(d) Soliciting business. (1) 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 the State.
(2) A person is deemed to be soliciting business in New York if he distributes catalogs or
other advertising material, in any manner in the State.
(3) A person is deemed to be soliciting business if he places advertisements in New York
newspapers or over New York radio or television stations, and either requests that orders,
payments or inquiries be sent to a New York address or delivers orders to New York in
vehicles that he controls. 20 NYCRR 526.10(d).
Petitioner employs no capital, does not own or lease any property and does not maintain any
offices in New York. Hence, Petitioner does not maintain a place of business in New York within
the meaning of sales tax regulation section 526.10(c).
However, Petitioner is soliciting business in the state inasmuch as it has independent
contractors in the state soliciting business for Petitioner through the distribution within this state of
Petitioner's catalogs.
Accordingly, Petitioner qualifies as a vendor under regulation section 526.10 and is required
to collect sales tax on all sales delivered to addresses within New York State.

DATED: October 13, 1988

s/FRANK J. PUCCIA
Director
Technical Services

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