Is a freight forwarder subject to the Article 9 sections 183 and 184 transportation-corporation taxes or to Article 9-A, and how are its gross earnings allocated to New York?

Plain-English summary

S&S Westchester Shipping Co. and S&S Westchester Trading Co. are freight forwarders that arrange overseas shipment of vendors' merchandise. Their activities fall into three components: (1) as principal -- they charter vessels and arrange door-to-vessel-to-door delivery, never take title, but assume the risk of loss and profit on the spread between their fee and their costs; (2) as agent -- they simply connect a vendor with a transport entity for a commission, with no risk; (3) as principal again -- arranging delivery from vessel to customer, assuming risk of loss.

Two questions: (1) are they taxed under Article 9, sections 183 and 184 (transportation corporations) or under Article 9-A; and (2) how are their gross earnings allocated to New York?

They are sections 183/184 transportation corporations. A corporation is classified by the activity from which more than 50% of its receipts are derived. A freight forwarder acting as principal -- assuming control and risk of the transportation -- is a transportation corporation under sections 183 and 184 (People ex rel.). A forwarder acting merely as agent would be Article 9-A. Here, over two-thirds of S&S's activities are as principal, so they are principally transportation corporations taxed under sections 183 and 184.

Allocation:

• Section 184 (gross earnings), as principal where another carrier does the actual transport: Because the standard mileage ratio (section 184.4(a)) does not fit, the Commissioner prescribes under section 184.4(e) a formula: multiply the relevant gross receipts by the average of three factors -- a property factor (New York real and tangible property over everywhere), a wage factor (New York wages over everywhere, excluding executive officers), and a pick-ups-and-deliveries factor (New York pickups/deliveries over everywhere).
• Section 184, as agent: Receipts are allocated to New York if the services for which the commissions were paid were performed in New York; a lump sum is split by relative value or time spent in and out of New York.
• Other receipts (interest, dividends, capital gains) are allocated to the domiciliary office or to where the property is located.
• Section 183 (capital stock): Allocate the net value of the capital stock within and without New York.

What this means for you

Principal vs. agent determines the tax article

A freight forwarder that assumes control and risk as principal is a section 183/184 transportation corporation; one that only brokers shipments as agent for a commission is an Article 9-A business corporation. The mix is judged by where more than 50% of receipts come from.

Section 184.4(e) supplies a special three-factor allocation

When a forwarder-principal's actual hauling is done by other carriers, gross earnings are allocated by averaging property, wage, and pick-ups-and-deliveries factors -- not by the standard mileage ratio.

Agent commissions and other income have their own sourcing

Agent commissions go to New York if the services were performed in New York (lump sums split by value or time); investment income goes to the domiciliary office.

Common questions

Q: Is my freight-forwarding company taxed under sections 183/184 or Article 9-A?
A: If you act principally as a principal (assuming control and risk), you are a section 183/184 transportation corporation. If you act principally as an agent for commissions, you are taxed under Article 9-A.

Q: How do I allocate gross earnings if other carriers do the actual transport?
A: Under section 184.4(e), by the average of a property factor, a wage factor, and a pick-ups-and-deliveries factor.

Q: How are agent commissions allocated?
A: To New York if the services were performed in New York; a lump sum is split by relative value or time spent in and outside New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 183 (franchise tax on transportation corporations measured by capital stock)
- Tax Law section 184 (additional franchise tax on a transportation corporation's gross earnings)
- Tax Law section 184.4(a) (mileage-ratio allocation of gross earnings)
- Tax Law section 184.4(e) (Commissioner may prescribe a fair allocation method)
- People ex rel. (a freight forwarder may be a transportation corporation under sections 183 and 184)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a94_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (12) C
Corporation Tax
July 22, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C940426B

On April 26, 1994, a Petition for Advisory Opinion was received from S&S Westchester
Shipping Co., Ltd., and S&S Westchester Trading Co., Ltd., P.O. Box 419, Bedford, New York
10506.
The issues raised by Petitioners, S&S Westchester Shipping Co., Ltd. and S&S Westchester
Trading Co., Ltd., are (1) whether Petitioners are subject to franchise tax under sections 183 and
184 of Article 9 of the Tax Law, or whether they are subject to franchise tax under Article 9-A of
the Tax Law; and (2) if Petitioners are subject to tax under sections 183 and 184 of Article 9 of the
Tax Law what allocation method is used under each section of the Tax Law.
Petitioners activities consist of three separate components. In the first component, Petitioners
enter into agreements with vendors seeking to ship merchandise to customers overseas. Petitioners
arrange for the transportation of such merchandise by chartering the appropriate vessel to transport
the merchandise overseas. Petitioners also arrange (either by agreement with the vessel owner or
with a separate transportation entity) for the merchandise to be delivered from the vendor's premises
to the vessel at the point of embarkment, and from the vessel to the premises of the customer once
the vessel reaches its point of destination.
In the first component, Petitioners never obtain title to or take possession of the merchandise.
Petitioners do not own any of the vehicles or vessels used, or utilize Petitioners own employees, in
transporting the merchandise from the vendor to the customer. Pursuant to its agreement with the
vendor, Petitioners assume the risk of loss of the vendor's merchandise at all times. Petitioners must
look to the vessel owner or other transportation entity for potential loss indemnification. The profit
derived by Petitioners is the difference between the fees charged by Petitioners to the vendors and
the costs incurred by Petitioners in arranging for the delivery of the merchandise.
In the second component, Petitioners act strictly in the capacity of an agent in arranging for
the shipment of vendors' merchandise to customers overseas. In this regard, a vendor may contact
Petitioners seeking information on how to best ship merchandise to the customer. Petitioner then
places the vendor in contact with the appropriate entity that can transport the vendor's merchandise.
Petitioners receive a commission from the vendor as compensation for this service. Petitioners do
not obtain title to or take possession of the merchandise, nor do Petitioners assume the risk of loss
of the merchandise.

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TP-9 (9/88)

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In the third component, Petitioners enter into agreements with vessel owners who are
shipping merchandise from vendors to customers overseas. Once a vessel has reached its point of
destination, Petitioners arrange for the merchandise to be delivered from the vessel to the premises
of the customer or to the point of delivery/discharge (i.e., shipping port) by engaging a separate
transportation entity.
In the third component, Petitioners never obtain title to or take possession of the merchandise
being transported. Petitioners do not own any of the vehicles used, or utilize Petitioners own
employees, in transporting the merchandise from the vessel to the premises of the customer or point
of delivery/discharge. Pursuant to its agreement with the vessel owner, Petitioners assume the risk
of loss of the vendor's merchandise during the delivery from the vessel to the premises of the
customer or point of delivery/discharge. Petitioners must look to the engaged transportation entity
for potential loss indemnification. The profit derived by Petitioners is the difference between the
fees charged by Petitioners to the vessel ownersand the costs incurred by Petitioners in arranging for
the delivery of the merchandise.
The first and second components described above together comprise approximately one-third
of Petitioners' gross earnings. The third component described above comprises approximately two­
thirds of Petitioners' gross earnings. Petitioners maintain one office, located in New York State, to
conduct Petitioners' activities.
Section 209.4 of the Tax Law states that "[c]orporations liable to tax under sections one
hundred eighty-three to one hundred eighty-six, inclusive ... shall not be subject to tax under this
article."
Sections 183 and 184 of the Tax Law impose franchise taxes on transportation corporations
"formed for or principally engaged in the conduct of ... trucking
To determine the classification and proper taxability of a corporation under either Article 9
or Article 9-A of the Tax Law, an examination of the nature of the corporation's activities is
necessary, regardless of the purposes for which the corporation was organized. See Matter of
McAllister Bros., Inc. v Bates, 272 App Div 511, 517 (3d Dept. 1947). Ordinarily, a corporation is
deemed to be principally engaged in the activity from which more than 50 percent of its receipts are
derived. See, e.g. Joseph Bucciero Contracting Inc., Adv Op St Tax Comm, July 23, 1981, TSB-A­
81(5)C.
A freight forwarder may, depending upon the nature of its activities, be considered a
"transportation corporation" for purposes of section 183 and 184 of the Tax Law. In People ex rel
N.Y. & A.L. Co. v Cantor, 239 NY 64, a corporation engaged in a general lighterage and forwarding
business without engaging in the transportation of freight as a common carrier was classified as a
transportation corporation within the meaning and intent of section 184 of the Tax Law. The Court
thus construed the statute to include as a transportation corporation taxable under sections 183 and

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184 of the Tax Law not only a corporation owning and managing the means of transportation but
also a corporation which provides services directly connected with such transportation.

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The relationship between the freight forwarder and the shipper must be examined in
determining whether a forwarder is subject to sections 183 and 184 of the Tax Law as a
"transportation corporation" or subject to Article 9-A of the Tax Law as a general business
corporation.
A freight forwarder acting as principal in the transportation of property assumes control of
and full responsibility for the property being shipped. The forwarder issues the bill of lading and
pays all transportation charges made by the carriers. Its activities are similar to those of a common
carrier except that it does not own the means used to transport the property. This type of freight
forwarder is a transportation corporation subject to tax under sections 183 and 184 of the Tax Law.
Preferred Air Freight, Inc., Adv Op St Tax Comm, October 8, 1985, TSB-A-85(19)C.
Conversely, a freight forwarder acting as an agent of the shipper assumes no responsibility
for the property being shipped. The shipper issues the bill of lading and pays the transportation
charges made by the carriers. The forwarder is paid only to perform the service of arranging for the
transportation of the property. A forwarder acting as an agent is subject to tax under Article 9-A of
the Tax Law. Preferred Air Freight, Inc., supra.
Herein, the activities of Petitioners described in the first and third components constitute
those of a freight forwarder acting as a principal. The activities described in the second component
are those of a freight forwarder acting as an agent. Therefore, since over two-thirds of Petitioners'
activities constitute those of a freight forwarder acting as a principal, Petitioners are principally
engaged in such activity and are subject to tax under sections 183 and 184 of the Tax Law.
Petitioners are not subject to tax under Article 9-A of the Tax Law.
The franchise tax imposed under section 183 of the Tax Law is based on the net value of
issued capital stock, less treasury stock, employed in New York State, and is the largest tax
computed by the following three methods of stock valuation: (1) the net value per share of stock
outstanding at the end of the year, but not less than five dollars per share; (2) the average selling
price at which stock is sold during the year multiplied by the number of shares of stock issued and
outstanding at the end of the reporting period; and (3) the difference between the corporation's assets
and liabilities at the end of the year (i.e., net worth). For general transportation corporations, the net
value of issued capital stock may be allocated within and without New York State by a percentage
computed by dividing gross assets employed in New York by gross assets everywhere. Cash and
U.S. obligations are excluded from both the numerator and the denominator.
The franchise tax imposed under section 184 of the Tax Law is based on the gross earnings
received from business conducted and property held in New York State during the year. “Gross
earnings” means all receipts arising from or growing out of the employment of capital, whether the
capital is employed in transportation or transmission or otherwise.

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Section 184.4(a) of the Tax Law provides that generally, a transportation corporation
determines its gross earnings from transportation services within New York State by multiplying its
gross earnings from transportation within and without New York State by a fraction, the numerator
of which is the taxpayer's mileage within New York State and the denominator of which is the
taxpayer's mileage within and without New York State during the period covered by the report.
However, section 184.4(e) of the Tax Law provides that where the Commissioner of Taxation and
Finance decides that with respect to a certain corporation the method prescribed above does not fairly
and equitably reflect gross earnings from all sources within New York State, the Commissioner shall
prescribe methods of allocation or apportionment which fairly and equitably reflect gross earnings
from all sources within New York State.
Pursuant to section 184.4(e) of the Tax Law, the following formula should be applied for
purposes of allocating the gross receipts from transportation services of a freight forwarder acting
as principal. Multiply the gross receipts from transportation services where the actual transportation
is performed by another carrier by the average of the following three factors:
1. Property Factor. This factor is the percentage that owned and rented real and tangible
personal property within New York State bears to owned and rented real and tangible
personal property everywhere. (The value of rented real and tangible personal property is
determined by multiplying the rental amount by 8.)
2. Wage Factor. This factor is the percentage that wages of employees for services
performed within New York State bears to wages of employees for services performed
everywhere. Wages of executive officers are excluded from this factor.
3. Pick-ups and Deliveries Factor. This factor is the percentage that pickups and deliveries
within New York State bears to pick-ups and deliveries everywhere. This factor includes
pickups and deliveries done by the taxpayer or agent of the taxpayer.
The gross receipts from services of a freight forwarder acting as agent should be allocated
to New York State if the services for which the commissions were paid were performed in New York
State. If a lump sum is received in payment of services performed within and without New York
State, the portion allocable to New York State should be determined by multiplying the sum received
by the ratio of the values of services performed or time spent within New York State over the total
value of the services performed or time spent performing the services within and without New York
State.
Gross receipts from other sources must also be allocated. For example, interest and
dividends received from investments in other corporations and/or interest-bearing cash accounts
should be allocated to the domiciliary office of the taxpayer where the item is held, managed and
controlled. Also, capital gains from the sale or exchange of securities where the situs is within New
York State is allocated to the domiciliary office of the taxpayer. Capital gains from the sale or

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exchange of property within New York State is allocated where the property is located or used.
Petitioners, should use the methods described herein, to allocate (1) the net value of
Petitioners' issued capital stock within and without New York State under section 183 of the Tax
Law and (2) Petitioners' gross receipts under section 184 of the Tax Law.

DATED: July 22, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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