Is an out-of-state wine wholesaler exempt from the New York Article 9-A franchise tax under Public Law 86-272 when its only New York presence is a home-based sales manager who solicits orders?

Plain-English summary

PWG Vintners USA, Inc., an out-of-state wine wholesaler, sells wine owned by its Australian affiliates to local distributors nationwide. Its only New York connection is a sales manager who works from her home, plus occasional visits by a Connecticut-based regional manager and, rarely, other executives. All wine is shipped by common carrier from outside New York, and all orders are sent to a California office for approval. PWG asked whether it is exempt from the Article 9-A franchise tax under Public Law 86-272.

Yes. PL 86-272 (15 USC sections 381-384), implemented at 20 NYCRR 1-3.4(b)(9), shields an out-of-state seller of tangible personal property from the franchise tax if its in-state activities are limited to soliciting orders that are sent outside New York for approval and filled from outside the state. Under Wisconsin Dept of Revenue v Wrigley (505 US 214), the line runs between activities entirely ancillary to solicitation and those a company would do anyway apart from soliciting orders.

The sales manager's activities here -- carrying sample wines, accompanying distributors' salespeople, setting up displays, using a company car, laptop and fax, and inspecting distributor inventory solely to prompt reorders (not to service the distributor's records) -- are all ancillary to solicitation. Her use of home space is solely for her own convenience and is not held out as a company office. So PWG's New York activities do not go beyond solicitation, and it is exempt under PL 86-272.

What this means for you

PL 86-272 protects pure order-solicitation for tangible goods

An out-of-state seller of tangible personal property owes no New York franchise tax if its New York people only solicit orders that are approved and filled from outside the state. Selling services, or selling from New York inventory, falls outside this protection.

Ancillary activities don't break the immunity; independent ones do

Free samples, company cars, display help, sales training, and a salesperson's home office used for convenience are all ancillary to solicitation. Inspecting a distributor's inventory only to spur reorders is ancillary too -- unlike taking inventory for the customer's benefit, repairs, credit investigations, or replacing stale stock, which exceed solicitation.

A home office held out as a business office can forfeit the exemption

Using home space solely for the salesperson's convenience is fine. But if the home is held out to the public as the company's office -- e.g., a company-listed phone where orders are taken -- the residence is treated as a New York office and the company becomes taxable.

Common questions

Q: What does Public Law 86-272 protect?
A: It bars a state from imposing a net income (franchise) tax on an out-of-state company whose in-state activities are limited to soliciting orders for tangible personal property that are approved and shipped from outside the state.

Q: Does a home-based sales rep create New York nexus?
A: Not by itself. A salesperson using home space solely for convenience is an ancillary activity. It becomes a taxable office only if the home is held out to the public as the company's place of business.

Q: Is inspecting a distributor's inventory a problem?
A: Not when the sole purpose is to prompt future orders and the distributor gets no independent benefit. Taking inventory for the customer, making repairs, or replacing stale or damaged stock would exceed solicitation and defeat the exemption.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A business corporation franchise tax)
- Public Law 86-272, 15 USC sections 381-384 (interstate solicitation immunity)
- 20 NYCRR 1-3.4(b)(9) (PL 86-272 exemption; ancillary vs. independent activities; office)
- Wisconsin Dept of Revenue v William Wrigley Jr. Co., 505 US 214 (1992) (solicitation bright-line test)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_14c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(14)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C970306A

On March 6, 1997, a Petition for Advisory Opinion was received from PWG
Vintners USA, Inc., c/o Southcorp USA, Inc., 100 Galleria Parkway, Suite 900,
Atlanta, Georgia 30339.
The issue raised by Petitioner, PWG Vintners USA, Inc., is whether it is
exempt from the franchise tax imposed by Article 9-A of the Tax Law as a
corporation protected under the provisions of Public Law 86-272 (15 USCA §§381­
384).
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a corporation organized outside New York State that is
principally engaged in the business of selling wines owned by its Australian
affiliates ("Southcorp Wines") to customers located throughout the United States.
All of Petitioner's sales are made on a wholesale basis to local distributors.
With respect to its New York activities, Petitioner supplies wine to four New
York wholesale distributors.
All wines sold by Petitioner to its New York
customers are shipped by common carrier from inventories maintained by Southcorp
Wines in Australia and California, or from inventory that Petitioner owns in New
Jersey.
To service the accounts of its New York customers, Petitioner retains an
area sales manager, who resides within New York State. It is the New York area
sales manager's responsibility to generate sales of Petitioner's products by
motivating and educating the sales staff of its customers with regard to
Petitioner's products, and communicating the objectives and priorities of
Petitioner to its customers to ensure that its customers' efforts are consistent
with Petitioner's goals.
The sales manager is also charged with the
responsibility of working with Petitioner's New York customers' sales force in
order to generate incremental sales and distribution of Petitioner's products.
To stimulate interest in Petitioner's products, the New York area sales
manager will perform certain activities to assist distributors in marketing
Petitioner's wines.
Specifically, the sales manager will accompany a
distributor's salesperson on visits to the distributor's direct customers.
During these visits the sales manager may assist in setting up a display,
answering questions about Petitioner's wines, or, in the case of restaurant
customers, conducting Petitioner wine demonstrations to the customer's waitstaff.
To perform these demonstrations, the sales manager maintains a nominal inventory
of Petitioner's wines to use as samples. These samples are never sold by the
sales manager; neither are they used to replace wines which may have previously
been sold by the distributor. The sales manager will also periodically meet with
a distributor's salespeople to educate them about Petitioner's products and
preferred methods for marketing them (i.e., promotions.)

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The New York area sales manager will periodically inspect a distributor's
inventory for purposes of verifying that the distributor is maintaining an
adequate supply of Petitioner's products in stock. This inventory inspection
also serves the purpose of confirming that distributors are keeping pace with
sales goals established by Petitioner. If damaged merchandise is identified by
the sales manager in the course of her inspections, it is likely the sales
manager will bring this to the attention of the distributor. The sales manager
will not, however, remove or replace the damaged merchandise.
To aid the New York area sales manager in accomplishing her duties,
Petitioner provides her with a laptop computer, a fax machine, a leased motor
vehicle, and a nominal inventory of sample products and point of sale advertising
materials. With the exception of these items, no other property is owned or
leased by Petitioner in New York.
The New York area sales manager's principal responsibility is to solicit
orders from customers for the wines sold by Petitioner.
Because the sales
manager is without authority to accept or reject customer order requests, orders
are forwarded directly by Petitioner's New York customers to a Petitioner office
located in California. Neither Southcorp Wines nor Petitioner maintains any
inventory in New York.
Southcorp Wines retains title to its wines until a
customer order has been shipped.
Once an order is shipped, title to the
Southcorp Wines wine vests momentarily with Petitioner and then immediately with
the purchasing distributor. The four distributors located in New York who make
purchases from Petitioner acquire title to the wines at the point of shipment in
California or New Jersey, and, in the case of shipments from Australia, outside
the territorial waters of the United States.
Neither the New York area sales manager nor Petitioner maintains an office
in New York; rather, the sales manager works solely out of her home. Petitioner
does not reimburse the sales manager for the business use of her home.
Petitioner does not list, or hold out to the public, the sales manager's home
telephone or address as a Petitioner business number or address. At various
times, however, the New York area sales manager has prepared stationery that
advises Petitioner's customers of her home telephone number and address. The
sales manager does not meet with customers at her home or in any similar way use
her home to complete her employment duties. As noted above, all orders are sent
directly to Petitioner's California office by its customers, consequently the New
York area sales manager never receives orders at her home. The New York area
sale manager's use of space at her home, and advice to Petitioner's four New York
customers that she may be contacted at such location, is solely for her own
convenience.
Petitioner's New York accounts are also routinely serviced by the company's
northeast area sales manager.
The northeast area sales manager resides in
Connecticut and performs many of his employment duties at a Petitioner office
maintained in that state. Periodically the northeast area sales manager will
travel into New York to perform duties identical to those of the New York area
sales manager. The northeast area sales manager is also without authority to
accept or reject the order requests of Petitioner's New York customers.

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Petitioner personnel other than the New York area and northeast area sales
managers have in the past come to New York for the purpose of briefly meeting
with Petitioner customers. These visits are infrequent, often no more than one
a year, and involve no one other than Petitioner's president, east region sales
manager, and marketing director. These sales-related visits serve no independent
business function apart from their connection to the solicitation of orders of
Petitioner's products. Such visits are prompted by the desire of each person to
obtain direct, first-hand information on Petitioner's current New York customers.
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax
on domestic or foreign corporations for the privilege of exercising a corporate
franchise, doing business, employing capital, owning or leasing property in a
corporate or organized capacity, or maintaining an office in New York State for
all or any part of each of its fiscal or calendar years.
However, section 1-3.4(b)(9) of the Business Corporation Franchise Tax
Regulations ("Article 9-A Regulations") provides for an exemption from taxation
under Article 9-A for corporations which are exempt pursuant to the provisions
of Public Law 86-272 (15 USCA §§ 381-384) and states as follows:
(i) A foreign corporation whose income is derived from interstate
commerce is not subject to tax under article 9-A of the Tax Law if
the activities of the corporation in New York State are limited to
either, or both of the following:
(a) the solicitation of orders by employees or representatives
in New York State for sales of tangible personal property and the
orders are sent outside New York State for approval or rejection;
and if approved, are filled by shipment or delivery from a point
outside New York State; and
(b) the solicitation of orders for sales of tangible personal
property by employees or representatives in New York State in the
name of or for the benefit of a prospective customer of such
corporation if the customer's orders to the corporation are sent
outside the State for approval or rejection; and, if approved, are
filled by shipment or delivery from a point outside New York State.
...
(iv) In order to be exempt by virtue of Public Law 86-272, the
activities in New York State of employees or representatives must be
limited to the solicitation of orders. The solicitation of orders
includes offering tangible personal property for sale or pursuing
offers for the purchase of tangible personal property and those
ancillary activities, other than maintaining an office, that serve
no independent business function apart form their connection to the
solicitation of orders. Examples of activities performed by such
employees or representatives in New York State that are entirely
ancillary to the solicitation of orders include:

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(a) the use of free samples and other promotional materials in
connection with the solicitation of orders;
(b) passing product
corporation's home office;

inquiries

and

complaints

to

the

(c) using autos furnished by the corporation;
(d) advising customers on the display of the corporation's
products and furnishing and setting up display racks;
recruitment,
( e)
representatives;

training

and

evaluation

of

sales

(f) use of hotels and homes for sales-related meetings;
(g) intervention in credit disputes;
(h) use of space at the salesperson's home solely for the
salesperson's convenience. (However, see subparagraph [vi] of this
paragraph as to loss of immunity for maintaining an office.)
(v) Activities in New York State beyond the solicitation of orders
will subject a corporation to tax in New York State unless such
activities are de minimis. Activities will not be considered de
minimis if such activities establish a nontrivial additional
connection with New York State.
Solicitation activities do not
include those activities that the corporation would have reason to
engage in apart from the solicitation of orders but chooses to
allocate to its New York sales force.
In determining whether a
corporation's activities exceed the solicitation of orders, all of
the corporation's activities in New York State will be considered.
Examples of activities which go beyond the solicitation of orders
include:
( a)
products;

making

repairs

to

or

installing

the

corporation's

(b) making credit investigations;
(c) collecting delinquent accounts;
(d) taking inventory of the
customers or prospective customers;

corporation's

products

for

(e) replacing the corporation's stale or damaged products;
(f) giving technical advice on the use of the corporation's
products after the products have been delivered to the customer.

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(vi) Maintaining an office, shop, warehouse or stock of goods in New
York State will make a corporation taxable. However, a corporation
will not be made taxable solely by maintaining a supply of goods in
New York State if such goods are used only as free samples in
connection with the solicitation of orders. A corporation will be
considered to be maintaining an office in New York State if the
space is held out to the public as an office or place of business of
the taxpayer. For example, a salesperson uses his or her house for
business.
A telephone, listed in the corporation's name, is
maintained at the salesperson's house.
The salesperson makes
telephone contacts from the house or receives calls and orders at
the house.
The residence will be treated as an office of the
corporation, and the corporation will be taxable;
Pursuant to section 1-3.4(b)(9) of the Article 9-A Regulations, a
corporation is not subject to tax in New York State if it is exempt pursuant to
the provisions of Public Law 86-272. To be exempt pursuant to Public Law 86-272,
a corporation's activities in New York State must be limited to the solicitation
of orders by employees or representatives in New York State for sales of tangible
personal property and the orders are sent outside New York State for approval or
rejection; and if approved, are filled by shipment or delivery from a point
outside New York State. Activities that exceed the solicitation of orders will
subject a corporation to tax in New York State, unless they are de minimis.
Activities are not de minimis if they establish a nontrivial additional
connection with New York.
The United States Supreme Court has established a standard for interpreting
the term "solicitation" in Wisconsin Dept of Revenue v William Wrigley Jr. Co.,
505 US 214 (1992). The Court established a "bright line" test to determine when
solicitation ends. That is, the "clear line ... between those activities that
are entirely ancillary to requests for purchases -- those that serve no
independent business function apart from their connection to the soliciting of
orders -- and those activities that the company would have reason to engage in
anyway but chooses to allocate to its in-state sales force."
In that case,
Wrigley had personnel in Wisconsin, but did not provide offices for them. The
representatives would store gum, furnish display racks and fill retailers' stock,
if necessary, from the stock of gum they carried in their cars (the retailer
would be billed for the gum) and replace stale gum without charge. The company
had no facilities, telephone listing or bank account in Wisconsin, but did print
and broadcast advertising in Wisconsin. Orders, credit and collection activities
were all handled by the Chicago office. The Court held that the activities of
replacing stale gum, filling stock from a salesman's supply, and storage of gum
were not ancillary to solicitation as they did not facilitate the process of
obtaining sales; and were not de minimis when taken together.
Therefore,
Wrigley's activities in Wisconsin were sufficient to support the imposition of
a franchise tax.
In this case, the New York area sales manager will periodically inspect a
distributor's inventory for purposes of verifying that the distributor is
maintaining an adequate supply of Petitioner's products in stock and confirming
that distributors are keeping pace with sales goals established by Petitioner.
Petitioner states that the sole purpose behind the New York area sales manager's

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inspection of a distributor's inventory is to provide the sales manager with a
basis to request future purchases. No benefit is afforded the distributor (i.e.,
to verify a customer's records). Making sure that one's products are available
serves no independent business function apart from the solicitation of orders.
Therefore, this activity is considered ancillary to soliciting an order pursuant
to Wrigley, supra, and is not "taking inventory of the corporation's products for
customers" as contemplated under section 1-3.4(b)(9)(v)( d)of the Article 9-A
Regulations.
In performing other activities in New York, the New York area sales manager
will accompany distributors' salespersons on customer visits, meet with
distributors' salespersons to discuss products and marketing techniques, use
space at the home of the New York area sales manager, use Petitioner's vehicle,
fax machine and laptop computer; and maintain an inventory of sample products and
point of sale advertising materials. All of these activities performed by the
New York area sales manager, as described by Petitioner, appear to be ancillary
to soliciting an order and do not appear to have an independent business function
that Petitioner would engage in whether or not it had an in-state sales force.
Accordingly, pursuant to Wrigley, supra, and section 1-3.4(b)(9)(iv) of the
Article 9-A Regulations, Petitioner's activities in New York State do not go
beyond the solicitation of orders.
Therefore, Petitioner is exempt from
franchise tax under Article 9-A of the Tax Law because its activities are
protected under the provisions of Public Law 86-272.

DATED:

June 26, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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