Does an out-of-state bank owe New York banking franchise tax just because it buys installment contracts secured by New York property and, if a borrower defaults, forecloses or sues through a New York attorney?

Subject

Whether a banking corporation is subject to Article 32 franchise tax because it purchases retail installment contracts secured by New York property and, on default, enforces them by foreclosure or other legal action.

Plain-English summary

The Tolland Bank, a Connecticut savings bank, bought retail installment contracts from an above-ground swimming pool dealer — the dealer financed customer purchases, and the contracts were assigned to the bank almost immediately after signing. The dealer wanted to expand into New York, which meant the bank would start buying contracts secured by pools installed at New York homes. All of the bank's purchasing activity would happen in Connecticut: no New York office, no New York employees, no New York property. The only New York contact would come up if a borrower defaulted — the bank would then hire a New York attorney to sue the borrower and/or foreclose on the security interest.

The Department ruled the bank was not doing business in New York and owed no Article 32 franchise tax. New York's regulations specifically say a corporation isn't "doing business" here just because it occasionally acquires a security interest in New York property, or occasionally takes title to New York property through foreclosure — as long as it isn't otherwise doing business here. The Department noted this holds "regardless of the frequency" of such transactions, so long as the corporation's only New York contact is buying, outside the state, contracts secured by New York property.

What this means for you

Out-of-state lenders and finance companies

Buying installment contracts, notes, or loans secured by New York collateral — done entirely from an out-of-state office — does not by itself create New York tax nexus, even if you occasionally have to foreclose or sue a defaulting New York borrower through local counsel. The line moves, however, if you add New York activity: an office, employees who negotiate deals in-state, or an agent regularly acting on your behalf here (see the contrasting Cuddy & Feder ruling cited in the opinion, where a company's officer regularly came to New York to negotiate mortgage purchases and was found to be doing business).

Accountants and tax professionals

The controlling regulation is 20 NYCRR § 16-2.7(e): occasional acquisition of a security interest, or occasional foreclosure title, doesn't create nexus on its own. Watch for facts that go beyond "occasional" — regular in-state negotiation activity or an agency relationship with someone conducting business in New York can flip the answer.

Common questions

Q: Does hiring a New York attorney to foreclose create nexus by itself?
A: No, under these facts. Using local counsel to enforce a security interest or sue a defaulting borrower, without any other New York presence, did not make the bank subject to Article 32 tax.

Q: Would this analysis change if the bank had a New York office or sales agents?
A: Yes. The ruling relies specifically on the bank having no New York office, property, or employees, and doing all its contract-purchasing in Connecticut.

Q: Can another out-of-state lender 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 § 1451 (Article 32 franchise tax on banking corporations)
• Tax Law § 1452(a)(2) (definition of "banking corporation")
• 20 NYCRR § 16-2.7(a)-(b) (definition and factors for "doing business")
• 20 NYCRR § 16-2.7(e) (safe harbor: occasional security interest or foreclosure title alone is not doing business)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(8)C
Corporation Tax
February 8, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C890816A

On August 16, 1989, a Petition for Advisory Opinion was received from The Tolland Bank,
Olde Tolland Common, P.O. Box 156, Tolland, Connecticut 06084.
The issue raised by Petitioner, The Tolland Bank, is whether a banking corporation is subject
to tax under Article 32 of the Tax Law because it purchases retail installment contracts secured by
property in New York and, in the event of default, such contracts are enforced by foreclosure or other
appropriate legal action.
Petitioner is a Connecticut chartered stock saving bank. Petitioner, at its offices in
Connecticut, purchases retail installment contracts from an above-ground swimming pool dealer who
enters into such contracts with consumers in several states. The dealer permits its customers to
finance their purchases of swimming pools by entering into retail installment contracts which are
initially payable to the dealer, but assigned to Petitioner virtually simultaneously upon execution
with the consumer. Petitioner has a hand in preparing the installment contract forms, but is
otherwise uninvolved with the sales of the swimming pools. The installment contracts provide for
a purchase money security interest in the swimming pool or, in very few instances, a second
mortgage on the consumer's home. The dealer wishes to expand its business activities into New
York and wishes Petitioner to purchase installment contracts entered into between New York
consumers and the swimming pool dealer.
All activity with respect to Petitioner's purchase of the installment contracts will occur in
Connecticut. No personnel of Petitioner will come to New York. Petitioner does not operate a New
York office, own or rent real or personal property in New York or maintain any employees in New
York. However, in the event of a default with respect to an installment contract secured by property
located in New York, Petitioner would ask an attorney located in New York to sue the defaulting
debtor here and/or enforce its security interest.
Section 1451 of the Tax Law imposes, annually, a franchise tax on banking corporations for
the privilege of doing business in New York State in a corporate or organized capacity.
Section 1452(a)(2) of the Tax Law provides that every corporation or association organized
under the laws of any other state or country which is doing a banking business, anywhere, is a
banking corporation.
Section 16-2.7 of the Franchise Tax on Banking Corporations Regulations (hereinafter
"Regulations") defines "doing business" as follows:
(a) The term "doing business" is used in a comprehensive sense and includes all activities
which occupy the time or labor of people for profit. Every corporation organized for profit and
carrying out any of the purposes of its organization is deemed to be doing business for purposes of
the tax.
TP-9 (9/88)

-2­
TSB-A-90(8)C
Corporation Tax
February 8, 1990

In determining whether a corporation is doing business, it is immaterial whether its activities actually
result in a profit or a loss.
(b) Whether a corporation is doing business in New York State is determined by the facts in
each case. Consideration is given to such factors as:
(1) the nature, continuity, frequency and regularity of the activities of the corporation
in New York State;
(2)

the purposes for which the corporation was organized;

(3)

the location of its offices and other places of business;

(4)

the employment in New York State of agents, officers and employees; and

(5)

the location of the actual seat of management or control of the corporation.
*

*

*

(e) A corporation will not be deemed to be doing business in New York State if its activities
in New York State are limited to such things as:
(1) occasionally acquiring a security interest in real or personal property located in
New York State without otherwise doing business;
(2) occasionally acquiring title to property located in New York State through the
foreclosure of a security interest without otherwise doing business ....
Section 16-2.7(e) of the Regulations provides that a corporation that occasionally acquires
a security interest in real or personal property located in New York State or occasionally acquires
title to property in New York State through foreclosure of a security interest but is not otherwise
doing business in New York State, will not be deemed to be doing business in New York State
because of such security interest or such foreclosure. For purposes of such section, the term
"occasionally" has not been defined. However, it was not intended that a corporation would be
deemed to be doing business in New York State when a corporation, that has no other contact with
New York State, merely acquires, outside New York State, security interests in property located in
New York State, regardless of the frequency of the transactions.
The rationale for such policy is consistent with Peat, Marwick, Mitchell & Co., Adv
Op St Tax Comm, April 16, 1987, TSB-A-87(8)C and in GEF Funding Corp. Adv Op Comm of
T&F, January 26, 1988, TSB-A-88(2)C, an interpretation of Article 9-A under similar circumstances.
In Peat, Marwick, it was held that, under Article 32 of the Tax Law, the activity of a national
banking association as a trustee for New York State industrial development bonds where all of the
services are provided outside New York State, except for the signing of the trust

-3­
TSB-A-90(8)C
Corporation Tax
February 8, 1990

agreement and the delivery of the securities to the underwriter in New York, was not sufficient to
constitute doing business in New York State.
For purposes of Article 9-A of the Tax Law, the definition of doing business contained in
section 1-3.2(b) of the Business Corporation Franchise Tax Regulations is identical to the definition
of doing business for purposes of section 16-2.7(a) of the Regulations. In GEF Funding Corp., it was
determined that for purposes of Article 9-A of the Tax Law, the activities of a corporation do not
constitute doing business in New York State where the corporation is engaging in mortgage loan
activities when the loans are secured by real property located in New York State but the acceptance
of application, processing, approval and servicing of the loans are conducted at the corporation's
office outside New York State. However, it was also determined in GEF Funding Corp., that a
corporation could be subject to tax if it is determined that an agency relationship exists between such
corporation and a person or entity conducting business in New York State.
It should be noted, that under Article 32 of the Tax Law where a corporation acquires security
interests in property located in New York State and such corporation conducts activities in New
York State, such corporation could be deemed to be doing business in New York State. For instance,
in Cuddy & Feder, Adv Op Comm T&F, June 1, 1988, TSB-A-88(13)C, it was determined that, for
purposes of Article 32 of the Tax Law, where a corporation's chief operating officer comes into New
York on a regular basis to negotiate mortgage loan purchases secured by New York residential
property, and the corporation's agent in New York, on a regular basis, negotiates mortgage loan
purchases for the corporation that are secured by New York residential property, the corporation was
deemed to be doing business in New York State.
Herein, Petitioner does not maintain an office in New York State, does not have any
personnel in New York State, and does not conduct any activities in New York State. Petitioner's
only contact with New York State is through the purchase, in Connecticut, of the retail installment
contracts that are secured by property located in New York State and through occasionally acquiring
title to property in New York State through foreclosure of such security interest.
Accordingly, while Petitioner is a banking corporation pursuant to section 1452(a)(2) of the
Tax Law, Petitioner is not doing business in New York State as contemplated by section 16-2.7 of
the Regulations. Therefore, Petitioner is not subject to the franchise tax under Article 32 of the Tax
Law.

DATED: February 8, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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