If a company has no office in New York but its employees occasionally spend a small amount of time there, does any of their compensation count in the numerator of the Article 9-A payroll factor?

Plain-English summary

Himont USA, Inc., incorporated and headquartered in Delaware, is an Article 9-A taxpayer with a small New York presence -- some inventory and modest sales, but no office or other business location in New York and no New York-resident employees. Its average New York sales factor for the relevant years was about 1.83% and its property factor about 0.17%. Himont treats the numerator of its payroll factor as zero, even though it estimates its employees spend roughly 30-35 man-days a year in New York (about .015% of total payroll). Himont asked whether, for taxable years ending after October 31, 1987, "compensation of employees within New York" under Regulations section 4-5.1(a) includes employees of a company with no New York office, and if so, whether some small amount of payroll would still need to be attributed to New York for that insubstantial time.

The answer: the payroll factor numerator stays at zero. Regulations section 4-5.1(d) defines "employees within New York State" not by where an employee's services are physically performed, but by whether the employee is regularly connected with or working out of an office or place of business of the taxpayer within New York State. Since none of Himont's employees are regularly connected with or working out of a New York office -- because Himont has none -- none of them count as "within New York State" for payroll-factor purposes, regardless of how much or little time they actually spend here. So the numerator is zero, and the follow-up question about attributing a small amount of payroll for insubstantial time in the state doesn't even arise.

What this means for you

Multi-state companies with no New York office

The payroll factor turns on whether an employee is tied to a New York office or place of business -- not on the raw number of days an employee happens to be physically present in the state. If you have no New York office, your payroll factor numerator can be zero even if employees occasionally travel here.

Companies weighing whether to establish a New York office

Opening even a small New York office changes this analysis -- once employees are "regularly connected with or working out of" that office, their full compensation (not just time physically spent in New York) is includible in the payroll numerator under the general rule, subject to a separate exception in 4-5.1(d) for employees attached to a New York office who perform most of their work elsewhere.

Accountants and tax professionals

This is a clean illustration that the payroll factor's "within New York" test is an office-attachment test, not a physical-presence test -- distinct from how the property and sales factors are computed, which do pick up New York-situated activity directly.

Common questions

Q: Does physical presence of an employee in New York add to the payroll factor?
A: Not by itself. What matters is whether the employee is regularly connected with or working out of a New York office or place of business -- physical presence without such an office connection doesn't count.

Q: Would the answer change if the company had even a small New York office?
A: Yes -- once employees are regularly connected with a New York office, the general rule includes their full compensation in the numerator (subject to a fact-specific exception in section 4-5.1(d) for employees attached to a New York office who work mostly elsewhere).

Q: Is there a minimum days-in-state threshold that triggers payroll-factor inclusion?
A: No such threshold appears in this rule -- the test is office attachment, not day-count, so even 30-35 days a year did not create a nonzero numerator here.

Citations and references

Statutes and regulations:

• Business Corporation Franchise Tax Regulations section 4-5.1(a) (payroll factor computation)
• Business Corporation Franchise Tax Regulations section 4-5.1(d) (definition of employees "within New York State")

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_20c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-91 (20) C
Corporation Tax
October 22, 1991

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION
ADVISORY OPINION

PETITION NO C910711B

On July 11, 1991, a Petition for Advisory Opinion was received from Himont USA, Inc.,
2801 Centerville Rd, P.O. Box 15439, Wilmington, Delaware 19850-5439.
The issues raised by Petitioner, Himont USA, Inc., are:
1)

Whether for taxable years ending after October 31, 1987, "compensation of
employees within New York" as used in section 4-5.1(a) of the Business Corporation
Franchise Tax Regulations (hereinafter "Article 9-A Regulations") includes
employees of a taxpayer that does not have an office or place of business within New
York.

2)

If the answer to question "1" is yes, whether New York State would require the
attribution of some amount, albeit small, of payroll to New York if such employees
spend only insubstantial amounts of time within New York.

Petitioner is incorporated and headquartered in the state of Delaware. Petitioner does not
have an office or other business location in New York State, nor are any of Petitioner's employees
residents of New York State. Petitioner has generally held a small amount of property (inventory)
in New York and it does have a small amount of sales destined for New York. As an example, the
average sales (single weighted) factor for taxable years ended 10/31/85, 10/31/86 and 10/31/87 was
1.8276% and the average property factor for those periods was .1742%.
Petitioner is a taxpayer under Article 9-A of the Tax Law and when computing its business
allocation percentage it includes amounts in the numerator of the property and receipts factors, but
treats the numerator of the payroll factor as zero. Petitioner estimates that the amount of time spent
by its employees "within New York" is only about 30 - 35 man days per year. This would represent
only about .015% of all of Petitioner's payroll.
Section 4-5.1 of the Article 9-A Regulations provides that:
(a) The percentage of the taxpayer's payroll allocated to New York State is
determined by dividing the wages, salaries and other personal service compensation
of the taxpayer's employees, except general executive officers, within New York
State during the period covered by the report, by the total amount of compensation
of all the taxpayer's employees, except general executive officers, during the period
covered by the report.
*
TP-9 (9/88)

*

*

-2­
TSB-A-91 (20) C
Corporation Tax
October 22, 1991

(d) Employees within New York State include all employees regularly connected with
or working out of an office or place of business of the taxpayer within New York State,
irrespective of where the services of such employees were performed. However, if the
taxpayer establishes to the satisfaction of the [Commissioner of Taxation and Finance] that
(1) a substantial part of its payroll was paid to employees attached to an office in New York
State who performed a substantial part of their services outside New York State and (2)
establishes that the computation of the payroll factor according to the general rule stated
above would not properly reflect the amount of the taxpayer's business done within New
York State by its employees, then the [Commissioner of Taxation and Finance] may permit
the payroll factor to be computed on the basis of the amount of compensation paid for
services performed within New York State.
Herein, none of Petitioner's employees are regularly connected with or working out
of an office or place of business of Petitioner within New York State. Petitioner does not
have an office or other business location in New York State and Petitioner's employees spend
an insubstantial amount of time in New York State.
Therefore, in accordance with Section 4-5.1 of the Article 9-A Regulations, for
taxable years ending after October 31, 1987, the numerator of Petitioner's payroll factor, for
purposes of the business allocation percentage, is zero for those taxable years where
Petitioner's circumstances are the same as the facts presented herein.

DATED: October 22, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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