Are payments by a corporation to independent sales corporations excluded from both the numerator and denominator of its Article 9-A payroll factor?

Plain-English summary

Generra Sportswear Company, Inc., an out-of-state apparel designer/distributor with New York nexus, asked whether, in computing its Article 9-A business allocation percentage, the payments it makes to independent sales corporations are treated as payments to independent contractors and therefore excluded from both the numerator and denominator of its payroll factor.

Generra markets through three independent corporate sales representatives. Each is a separate corporation qualified to do business in New York, employs its own salespeople (paid under its own salary agreements), and contracts with Generra under a "Regional Sales Representation Agreement." The agreements provide that the sales corporations are independent contractors, may not accept or modify orders (they forward orders to Generra), carry their own employment taxes and insurance, and that Generra has no right to control the manner or method of their work or the hiring/firing of their personnel.

The answer: The payroll factor (20 NYCRR 4-5.2) includes only compensation paid where an employer-employee relationship exists, which under the common-law control test turns on whether the taxpayer has the right to control and direct not just the result but the means of the work. New York applies the standard from Matter of Liberman v Gallman (41 NY2d 774) -- "in the absence of supervision and control of the sales routine, salesmen do not become employees" -- and El Greco Leather Products (TSB-A-83(2)C). Because Generra lacks the right to control the sales corporations' sales routine, methods, or staff, those reps are independent contractors, and the payments to them are excluded from both parts of the payroll factor.

Separately, a salaried executive of Generra (a less-than-5% shareholder) is relocating to New York. As Generra's own employee, that compensation is included in the payroll factor.

What this means for you

Independent sales reps are kept out of the payroll factor entirely

If your sales force is a separate company you do not control, the amounts you pay it are excluded from both the numerator and the denominator of the payroll factor -- they are not "wages" of your employees.

The test is the common-law right to control the means of the work

It is not enough to direct results or assign territories and accounts (as in Liberman). Without control over the sales routine and methods, the salespeople are not your employees.

Your own relocating employee still counts

A salaried executive who is genuinely your employee is included in the payroll factor when their compensation relates to New York work -- the independent-contractor exclusion does not reach them.

Common questions

Q: Do payments to an independent sales rep corporation go in the payroll factor?
A: No -- they are excluded from both the numerator and the denominator, because the rep's salespeople are not the taxpayer's employees.

Q: How is "employee" decided?
A: By the common-law right-to-control test in 20 NYCRR 4-5.2, as applied in Liberman v Gallman -- control over the means of the work, not just the result.

Q: What about the company's own executive who moves to New York?
A: That person is the company's employee, so their compensation is included in the payroll factor.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.3 (business allocation percentage)
- 20 NYCRR 4-5.2 (payroll factor; definition of employee)
- Matter of Liberman v Gallman, 41 NY2d 774
- Raynor v Tully, 60 AD2d 731
- El Greco Leather Products Co., TSB-A-83(2)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a92_11c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (11) C
Corporation Tax
June 19, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C920422B

On April 22, 1992, a Petition for Advisory Opinion was received from Generra Sportswear
Company, Inc. 278 Broad Street, Seattle, Washington 98121.
The issue raised by Petitioner, Generra Sportswear Company, Inc., is whether, for purposes
of computing the business allocation percentage under Article 9-A of the Tax Law, the payments
made by Petitioner to sales corporations are treated as payments to independent contractors and
excluded from both the numerator and denominator of Petitioner's payroll factor.
Petitioner is a corporation which designs and distributes wearing apparel. Petitioner is not
incorporated in New York, but for a number of years Petitioner has had nexus with New York and
has filed Article 9-A franchise tax reports.
Petitioner markets its products to customers in New York using three independent corporate
sales representatives (sales corporations) which employ individuals (salespersons) who live and work
in New York as well as surrounding states.
Each sales corporation has qualified to do business in New York. Each salesperson and each
employee of the sales corporations is paid by his/her sales corporation according to the salary
agreement made between such salesperson/employee and the respective sales corporation.
Petitioner paid for a certain percentage of tenant improvements made to two sales offices
maintained by the independent sales corporations in New York City. These improvements
constituted showroom space maintained by the sales corporations but used from time to time by
Petitioner for apparel shows in New York. Based upon these tenant improvement payments,
Petitioner has been filing and paying all appropriate New York State and New York City taxes.
Petitioner and each of the sales corporations enter into a "Regional Sales Representation
Agreement" for the services of the sales corporation. According to the agreement, the sales
corporation may negotiate returns and allowances, markdowns, and retail advertising subject to
Petitioner's approval, but the sales corporation may not accept or modify orders for goods and must
forward such orders to Petitioner. Each agreement is for a definite duration, usually for a period of
one year. The agreement may be extended only by mutual agreement of both parties. Either party
may terminate their agreement for any reason by providing the other party with written notice.
The agreements specifically disclose that the sales corporation will have the status of
independent contractor with respect to Petitioner, and that the sales corporation will be responsible
for payment of employment taxes, liability insurance, required licenses, and other items necessary
to discharge the duties under the agreement.
TP-9 (9/88)

-2­
TSB-A-92 (11) C
Corporation Tax
June 19, 1992

The agreements provide that Petitioner has no right of control over the manner or method in
which the sales corporation fulfills its responsibilities under the agreement and that the sales
corporation is free to perform its services for Petitioner in any manner it chooses so long as it holds
itself out consistent with the quality of Petitioner's image. Petitioner has no control over the hiring
or firing of the sales corporation's agents or employees. The salespersons, as employees of the sales
corporations, discharge the service obligations under the agreements.
A salaried executive employee of Petitioner who is a less than five percent shareholder is
moving to New York to provide better service to east coast customers and to be in closer contact
with Petitioner's east coast market. The salaried executive will hire an assistant and will share office
space with the sales corporations. Rent on the office space will be paid proportionally; Petitioner
will pay the rent on the portion used by the executive and the assistant, while the sales corporations
will pay rent for their portion of the .... office space used.
Section 4-5.2 of the Business Corporation Franchise Tax Regulations provides the definition
of employee:
(a) Employees whose wages, salaries and other personal service compensation
are included in the computation of the payroll factor of the business allocation
percentage include every individual, except a general executive officer, where the
relationship existing between the taxpayer and the individual is that of employer and
employee.
(b) Generally, the relationship of employer and employee exists when the
taxpayer has the right to control and direct the individual not only as to the result to
be accomplished by him but also as to the means by which such result is to be
accomplished. If the relationship of employer and employee exists, the designation
or description of the relationship, and the measure, method or designation of the
compensation are immaterial ....
This provision of the Business Corporation Franchise Tax Regulations merely restates
the common law rule for determining whether one individual is an employee (or "servant") of
another. Although there does not appear to be any judicial authority for the proper application of this
rule within the context of Article 9-A of the Tax Law, there is authority developed with respect to
such rule under former Article 23 of the Tax Law-Unincorporated Business Income Tax, and is
applicable herein. A leading case in this area is Matter of Liberman v Gallman, 41 NY 2d 774,
which upheld a State Tax Commission decision holding a particular salesman not to be an employee.
The court there stated that it "is the degree of control and direction exercised by the employer that
determines whether the taxpayer is an employee." Id., at 778. Further, speaking with specific
regard to the issue of salesmen as employees, the court said that "In the absence of supervision and
control of the sales routine, salesmen do not become employees." Id., at 779. The court found such
control and direction lacking with regard to the manner in which Liberman's customers were
approached and persuaded to make purchases, although Liberman did take direction in a number

-3­
TSB-A-92 (11) C
Corporation Tax
June 19, 1992

of other significant areas. For example, Liberman was directed to visit particular areas or customers;
was required to report frequently on his sales activities; was occasionally required to concentrate on
specific duties, to attend to specific accounts, to emphasize the sale of certain shoe styles and to
attend sales meetings and conventions; and was prohibited from taking time off without permission.
Nonetheless, the court held that the lack of control over Liberman's sales routine, coupled with the
fact that Liberman was responsible for office and clerical expenses and that there was no withholding
of income tax from his commissions, was sufficient to support the State Tax Commission's finding
to the effect that Liberman was not an employee. In accord is Raynor v Tully, 60 AD 2d 731, which
upheld a similar State Tax Commission decision, in large part based upon a determination to the
effect that the purported employer "did not exercise any real supervision over the petitioner's sales
methods and was more interested in the results obtained than the means used." Id., at 732.
In E1 Greco Leather Products Co., Inc., Adv Op St Tax Comm, June 1, 1983, TSB-A-83(2)C, it was
held that the salesmen at issue were not employees of the petitioner for purposes of the payroll
factor. Therein, the petitioner did not demonstrate the type of control and direction over its
salesmen's sales activities which would warrant a finding that the salesmen constitute its employees.
The petitioner did state that it "has the right to direct the activities of its salesmen." However, the
instances of the exercise of such right adduced by Petitioner did not relate to the area of sales
routines and the like, but to matters of the same type as those mentioned in Liberman, supra. The
petitioner presented neither contractual provisions indicating the requisite right of control, nor
demonstrated a course of conduct which would give rise to an inference of the existence of such
right.
Herein, based on the relationships as presented in the "Regional Sales Representation
Agreement", the employees of the sales corporations are not employees of Petitioner within the
definition of an employee contained in section 4-5.2 of the Business Corporation Franchise Tax
Regulations and thus Petitioner would exclude the payments to the sales corporations from the
computation of both the numerator and denominator of the payroll factor when computing its
business allocation percentage. KPMG Peat Marwick, Adv Op Comm T&F, January 31, 1992, TSBA-92(1)C.

-4­
TSB-A-92 (11) C
Corporation Tax
June 19, 1992

It should be noted that the determination of who is an employee for purposes of section 4-5.2
of the Business Corporation Franchise Tax Regulations is a factual matter and, as in E1 Greco
Leather Products, supra., the actual relationship between Petitioner and each sales corporation should
be analyzed regardless of language of contractual agreements.

DATED: June 19, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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