Does a manufacturer otherwise protected by Public Law 86-272 lose its exemption by conducting three small one-day product-fitting training seminars a year in New York?
Plain-English summary
A non-New York prosthetics manufacturer sells at wholesale to independent retailers and keeps its New York sales reps within mere solicitation (orders approved out of state). It also runs about three one-day seminars a year to train retailers on fitting its prosthetic devices, charging a nominal ($55-$60) fee that just covers costs. Price Waterhouse asked whether the seminars cost the company its Public Law 86-272 exemption from the Article 9-A franchise tax.
Training retailers on product use is technical advice after the products have been delivered, which under 20 NYCRR 1-3.4(b)(9)(v) exceeds solicitation. But activity beyond solicitation is still protected if it is de minimis -- not establishing a nontrivial additional connection with New York.
Here the three annual seminars generate only about $4,950-$5,400, far less than 1% of the company's New York receipts (which ran $700,000-$1.6 million). The Department concluded the seminars are de minimis, so the company remains exempt under Public Law 86-272.
What this means for you
Post-sale training is technical advice that exceeds mere solicitation
Teaching customers how to use or fit a product after delivery is not ancillary to soliciting orders -- it is an activity beyond solicitation that can, on its own, defeat Public Law 86-272 protection.
But a truly minor amount of such activity can still be de minimis
Activity beyond solicitation is protected if de minimis -- establishing only a trivial connection. Three one-day seminars producing under 1% of New York receipts qualified, so the exemption survived.
Scale matters: small and occasional stays de minimis; regular or large does not
The conclusion turned on the seminars being few, brief, and a negligible share of receipts. More frequent or substantial training could establish a nontrivial connection and create nexus.
Common questions
Q: Do customer-training seminars break Public Law 86-272 protection?
A: They exceed mere solicitation (they are post-delivery technical advice), but if the activity is de minimis -- minor and producing a negligible share of receipts -- the exemption is preserved.
Q: How small is "de minimis" here?
A: Three one-day seminars a year generating roughly $5,000, under 1% of the company's $700,000-$1.6 million in New York receipts, was de minimis.
Q: Could more seminars cost the exemption?
A: Yes. If the training became frequent or substantial enough to establish a nontrivial additional connection with New York, it would no longer be de minimis and the company could be taxable.
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, de minimis, and office rules)
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_7c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-97(7)C
Corporation Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C961113B
On November 13, 1996, a Petition for Advisory Opinion was received from
Price Waterhouse LLP, 50 Hurt Plaza Building, Suite 1700, Atlanta, Georgia 30303.
The issue raised by Petitioner, Price Waterhouse LLP, is whether a
corporation, whose sales representatives' activities in New York State do not
exceed the mere solicitation of orders, will lose its protection under Public Law
86-272 and become subject to franchise tax under Article 9-A of the Tax Law as
a result of conducting three one-day seminars in New York.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
The Company is a non-New York corporation engaged in the business of
manufacturing medical products, including prosthetic devices and related
accessories.
Products manufactured by the Company are sold at wholesale to
independent retailers located throughout the United States. The Company does not
sell directly to the ultimate consumer. During 1994 and 1995, approximately five
percent of the Company's sales were made to New York based retailers. None of
the Company's New York based customers are directly or indirectly affiliated with
the Company.
In order to generate interest in the Company's products, the Company
employs a limited number of sales representatives in New York to service accounts
in the State. The sales representatives' in-state activities are limited to
merely displaying and demonstrating the Company's products to potential and
existing customers, as well as answering any questions the customers may have
concerning product attributes. The sales representatives do not actually make
sales of products to customers; rather, any product orders must be sent directly
from the customer to the Company's out-of-state office for approval. Although
the sales representatives work out of their homes, their home addresses are not
publicly displayed as a Company address.
Apart from product samples, automobiles and home office supplies provided
to the sales representatives, the Company maintains no tangible property in New
York State.
Periodically, the Company will conduct a small one-day seminar for both
existing and prospective customers of the Company's prosthetic products. The
primary purpose of these seminars is to train retailers on the proper methods for
fitting the prosthetic devices sold by the Company.
Upon completion of the
course, the participant is presented with a certificate evidencing his/her status
as a "certified fitter." Attendance at these seminars is generally limited to
30 or fewer participants.
Training is provided by a Company employee who
specializes in putting on such seminars. In addition, sales representatives are
-2
TSB-A-97(7)C
Corporation Tax
generally present at these seminars for purposes of enhancing customer relations.
Seminars are generally conducted in private conference centers rented by the
Company. Prospective seminar participants are notified of the seminars through
direct mailing.
The purpose of the seminars is two-fold. First, by training retailers on
the proper methods for fitting prosthetic devices, the Company benefits through
the increased sales the retailers are expected to generate. It should be noted
that attendance at a training seminar similar to that put on by the Company is
not mandatory for prosthetic retailers; rather, it is merely a means of improving
the service provided by retailers to their customers.
There are no laws or
licensing requirements mandating that a retailer become a certified fitter.
Accordingly, receipt and display of the Company provided training certificate by
independent retailers serves only to increase customer confidence in the
retailer's service. It is hoped that this added customer confidence and enhanced
retailer service will indirectly generate increased sales for the Company.
The second purpose served by the seminars is to increase both product
awareness and goodwill for the Company. Although the training provided by the
Company will enhance participants' abilities to fit both Company manufactured and
competitor prosthetics, it is hoped that, by providing such seminars, retailer
loyalty to the Company will be enhanced. Additionally, because Company brochures
and other promotional materials are included in seminar manuals, and Company
products are used for purposes of training, it is anticipated that additional
retailer interest in Company products will be stimulated.
Seminar participants are required to pay a fee of approximately $55 - $60
in order to attend the seminar. This fee covers the cost of seminar facilities,
course materials (participants receive a training manual containing Company
brochures) and lunch.
The amount of the fee is viewed by the Company as
negligible and generally set at a level necessary to only cover costs. As a
result, profits generated by the seminars are either non-existent or negligible.
In fact, were it not for the belief by Company officials that payment of a fee
aids to "commit" a retailer to attend a seminar, fees would not even be charged.
It is anticipated that three seminars will be conducted on an annual basis
in New York State. Assuming the maximum 30 participants attend each seminar,
total New York seminar receipts of between $4,950 to $5,400 can be expected.
During 1994 and 1995, the New York sales for the Company were approximately
$700,000 and $1.6 million, respectively. Accordingly, based on 1994 and 1995
figures, seminar receipts would constitute considerably less than one percent of
total New York receipts.
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.
-3
TSB-A-97(7)C
Corporation Tax
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 from 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:
(a) the use of free samples and other promotional materials in
connection with the solicitation of orders;
(b) passing product inquiries
corporation's home office;
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
(f) use of hotels and homes for sales-related meetings;
sales
-4
TSB-A-97(7)C
Corporation Tax
(g) intervention in credit disputes;
(h) use of space at the salesperson's home solely for the
salesperson's convenience.
(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) making
products;
repairs
to
or
installing
the
corporation's
(b) making credit investigations;
(c) collecting deliquent accounts;
(d) taking inventory of the corporation's
customers or prospective customers;
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.
(vi) Maintaining an office ... in New York State will make a
corporation taxable...
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.
In this case, all of the Company's activities in New York State, except the
three one-day seminars, constitute the solicitation of orders or are entirely
ancillary to the solicitation of orders as described in section 1-3.4(b)(9)(iv)
of the Article 9-A Regulations. Under section 1-3.4(b)(9)(v) of the Article 9-A
Regulations, the conduct of seminars to train retailers on the proper methods for
-5
TSB-A-97(7)C
Corporation Tax
fitting the Company's prosthetic devices exceeds activities ancillary to the
solicitation of orders because the Company is "giving technical advice on the use
of the corporation's products after the products have been delivered to the
customer."
However, under the circumstances described in this opinion, the Company's
conduct of the three one-day seminars annually to train retailers on the proper
methods for fitting the Company’s prosthetic devices will constitute de minimis
activities as contemplated in section 1-3.4(b)(9)(v) of the Article 9-A
Regulations. Accordingly, the Company will be exempt from taxation under Article
9-A of the Tax Law pursuant to section 1.3-4(b)(9) of the Article 9-A
Regulations.
DATED:
March 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.