NY TSB-A-93(3)C Corporation Tax 1993-01-11

Is a foreign sales corporation organized in a U.S. possession subject to New York franchise tax, and is its exempt foreign trade income excluded for New York?

Short answer: A foreign sales corporation (FSC) organized in a U.S. possession (here, the Northern Mariana Islands) is a foreign -- but not an alien -- corporation for Article 9-A, because a U.S. possession is not a foreign country. It is a New York taxpayer only if it does business, employs capital, owns or leases property, or maintains an office in New York; otherwise it may be included in its parent's combined report only if the Commissioner determines a combined report is necessary (a factual matter under section 211.4). Critically, the FSC's federally exempt 'foreign trade income' is not a specific New York exemption: if the FSC is an Article 9-A taxpayer or is included in a combined report, that income excluded for federal purposes must be added back and is not excluded for New York.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

Atlantic Control Systems Inc. asked about a foreign sales corporation (FSC) organized in the Northern Mariana Islands for fiscal years 1988-1990: (1) is it subject to New York franchise tax; (2) is its federally exempt "foreign trade income" also exempt for New York; and (3) may or must it file a combined report with its New York parent.

It is a foreign, but not alien, corporation. A U.S. possession (like the Northern Mariana Islands) is not a foreign country for Article 9-A. So the FSC is a foreign corporation but not an alien corporation. It is a New York taxpayer only if it does business, employs capital, owns or leases property, or maintains an office in New York. If it is not a taxpayer, it is not required to be included in the parent's combined report unless the Commissioner determines inclusion is necessary (section 6-2.5; section 211.4). Whether a combined report is necessary is a question of fact that an advisory opinion cannot decide.

Foreign trade income is not exempt for New York. The FSC's exempt foreign trade income -- excluded from gross income for federal purposes -- is not a specific exemption or credit for New York. So if the FSC is an Article 9-A taxpayer or is included in a combined report, the foreign trade income excluded federally must be added back and is not excluded for New York franchise tax.

What this means for you

A U.S. possession is not a foreign country

An FSC organized in a U.S. possession is a foreign but not alien corporation, which affects whether and how it can be combined.

Federal foreign trade income exclusion does not carry to New York

The income an FSC excludes federally as foreign trade income is added back for New York if the FSC is a taxpayer or is in a combined report.

Combination is discretionary and factual

A non-taxable FSC is included in the parent's combined report only if the Commissioner finds it necessary -- a fact-specific determination.

Common questions

Q: Is our FSC organized in a U.S. possession an alien corporation?
A: No. A U.S. possession is not a foreign country, so the FSC is foreign but not alien for Article 9-A.

Q: Is the FSC's foreign trade income tax-free in New York like it is federally?
A: No. It is not a New York exemption; if the FSC is a taxpayer or in a combined report, that income is added back for New York.

Q: Must the FSC be combined with its New York parent?
A: Only if the Commissioner determines a combined report is necessary -- a question of fact, not resolved in an advisory opinion.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (franchise tax on every foreign corporation doing business in New York)
- Tax Law section 211.4 (combined reports)
- 20 NYCRR 6-2.5 (foreign corporation not taxable in New York included in a combined report only if needed)
- IRC sections 921-927 (foreign sales corporations; exempt foreign trade income)

Source

Original ruling text

New York State Department of Taxation and Finance
TSB-A-93 (3) C
Corporation Tax
January 11, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C920505C

On May 5, 1992, a Petition for Advisory Opinion was received from Atlantic Control
Systems Inc., 1333 60th Street, Brooklyn, New York 11219.
The issues raised by Petitioner, Atlantic Control Systems Inc., are:
1. Whether for fiscal years ended October 31, 1988, October 31, 1989 and October 31,
1990 a foreign sales corporation (hereinafter "FSC") organized in the North Mariana Islands is
subject to New York State franchise tax;
2. Whether the federally exempt "foreign trade income" is exempt for New York franchise
tax purposes and
3. Whether the FSC is permitted or required to file a combined report with its parent if the
FSC is 100 percent owned by a New York State corporation.
Section 209.1 of Article 9-A of the Tax Law imposes the business corporation franchise tax
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.
Accordingly, FSC is an Article 9-A taxpayer if it is doing business in New York, employing
capital in New York, owning or leasing property in New York or maintaining an office in New York.
Otherwise, it is not a taxpayer but may be included in a combined report under certain circumstances.
Section 211.4 of the Tax Law authorizes the Commissioner of Taxation and Finance
(hereinafter "Commissioner"), in his discretion, to require or permit a parent corporation and its
wholly-owned subsidiaries to file a franchise tax report on a combined basis. However, a combined
report including a corporation not a taxpayer (i.e., a foreign corporation not doing business in New
York) cannot be required unless the Commissioner deems such a report necessary, in order to
properly reflect the tax liability under Article 9-A because there are intercompany transactions or
some agreement, understanding, arrangement or transaction referred to in section 211.5 of the Tax
Law.
For the taxable years at issue section 6-2.5(b) of the Business Corporation Franchise Tax
Regulations (hereinafter "Regulations") provides that an alien corporation may not be included in
a combined report.
Section 1-2.3(a) of the Regulations states that:
[t]he term "corporation" means an entity created as such under the laws of the United
States, any state, territory or possession thereof, the District of Columbia, or any
foreign country ...
TP-9 (9/88)

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Corporation Tax
January 11, 1993

(1) The term "domestic corporation" means a corporation incorporated by or under
the laws of the State or colony of New York State.
(2) The term "foreign corporation" means a corporation which is not a domestic
corporation. (Emphasis added)
Accordingly, a possession of the United States is not a foreign country for Article 9-A
franchise tax purposes.
Section 3-8.3 of the Regulations defines an "alien corporation" as a corporation organized
under the laws of a country other than the United States.
Herein, FSC is organized in the North Mariana Islands which is a possession of the United
States. Therefore, FSC is a foreign corporation but is not an alien corporation.
Section 6-2.5 of the Regulations provides that a foreign corporation not subject to tax in New
York will not be required to be included in a combined report unless the Commissioner determines
that inclusion of the corporation is necessary to properly reflect the tax liability of one or more
taxpayers included in the group either because of substantial intercorporate transactions or because
of some agreement, understanding, arrangement or transaction whereby the activity, business,
income or capital of any taxpayer is improperly or inaccurately reflected.
Accordingly, for the taxable years at issue, the Commissioner, pursuant to section 211.4 of
the Tax Law and section 6-2.5 of the Regulations, is not precluded from requiring or permitting the
inclusion of FSC in a combined report of its parent under the circumstances described herein if the
Commissioner determines that inclusion is necessary to properly reflect the tax liability of its parent.
Whether the inclusion of a corporation in a combined report is necessary is a question of fact
not susceptible of determination in an Advisory Opinion. An Advisory Opinion merely sets forth
the applicability of pertinent statutory and regulatory provisions to a "specified set of facts" Tax Law,
§ 171, subd. twenty-fourth; 20 NYCRR 2376.1(a). Therefore, a determination cannot be made in
an Advisory Opinion as to whether a combined report shall be permitted or required.
Section 3-2.2 of the Regulations, as amended on December 9, 1992, provides that:
[t]he exempt foreign trade income of a FSC, which is excluded from gross income
for Federal income tax purposes pursuant to section 921 of the Internal Revenue
Code, is not a specific exemption or credit for purposes of this subdivision. A "FSC"
is a corporation which meets the definition of the term "FSC" contained in section
922 of the Internal Revenue Code and which has made an election to be treated as a

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Corporation Tax
January 11, 1993

FSC under section 922(a)(2) of the Internal Revenue Code or an election to be treated
as a small FSC under section 922(b)(1) of the Internal Revenue Code.
Accordingly, if FSC is an Article 9-A taxpayer or is included in a combined report, the
exempt foreign trade income that is excluded for federal income tax purposes is not required to be
added to federal taxable income when computing entire net income.

DATED: January 11, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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