Does a manufacturer's backhauling -- using its delivery trucks to pick up products and unrelated goods in New York for return to its home state -- exceed Public Law 86-272 and create franchise-tax nexus?

Plain-English summary

An Indiana manufacturer solicits orders in New York (approved in Indiana) and delivers products by its own trucks. It also does backhauling: on the return trip it picks up (a) nonconforming products, trim, and scrap from its customers (post-delivery), and (b) unrelated goods from other parties for delivery back to Indiana, which produce about 4% of its New York revenue. KPMG asked whether the backhauling exceeds Public Law 86-272 and creates Article 9-A nexus.

Delivering products by the company's own trucks is within protected solicitation. The post-delivery backhauling of nonconforming product, trim, and scrap is like "replacing the corporation's stale or damaged products" and exceeds solicitation -- though, by itself, it might be de minimis (the facts were insufficient to decide).

But the unrelated backhauling -- hauling other parties' goods, earning 4% of the company's New York revenue -- is a separate, revenue-producing business that is not protected by Public Law 86-272. That activity means the company is doing business, employing capital, or owning/leasing property in New York, so it is subject to the Article 9-A franchise tax.

What this means for you

Delivering by your own trucks is fine; hauling things back may not be

Shipping products into New York by company truck is within protected solicitation. But using the trucks to pick up returns, scrap, or other goods is a post-delivery or independent activity that can exceed Public Law 86-272's protection.

Revenue-producing activity unrelated to selling your goods isn't protected

Backhauling third parties' goods for a fee is a separate business. Because it is not ancillary to soliciting orders for the company's own products, Public Law 86-272 does not shield it, and 4% of New York revenue is not de minimis.

One unprotected, nontrivial activity is enough to create nexus

Even if the post-delivery backhauling might be de minimis on its own, the unrelated backhauling establishes a nontrivial connection and makes the company taxable under Article 9-A.

Common questions

Q: Does using your own trucks to deliver into New York create nexus?
A: No. Delivery of the company's products by its own vehicles is within protected solicitation under Public Law 86-272.

Q: Is picking up returns and scrap a problem?
A: Post-delivery backhauling of nonconforming product, trim, and scrap exceeds solicitation (like replacing stale or damaged goods), but on its own it might be de minimis.

Q: Why is this company taxable?
A: Because it also backhauls unrelated goods for a fee -- about 4% of its New York revenue -- which Public Law 86-272 does not protect, so the company is doing business and subject to the Article 9-A franchise tax.

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_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(8)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C961113C

On November 13, 1996, a Petition for Advisory Opinion was received from
KPMG Peat Marwick LLP, 2400 First Indiana Plaza, 135 North Pennsylvania Street,
Indianapolis, Indiana 46204.
The issue raised by Petitioner, KPMG Peat Marwick LLP, is whether a
corporation's backhauling activity exceeds Public Law 86-272 protection thereby
creating nexus for New York State franchise tax purposes under Article 9-A of the
Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
The Manufacturing Company is a corporation organized under the laws of the
State of Indiana.
Manufacturing Company maintains its commercial domicile,
headquarters and only production facility in Indiana.
Manufacturing Company's products are sold throughout the country.
Manufacturing Company employs a sales staff to solicit orders from customers in
various states, including New York. Orders are subject to approval at company
headquarters in Indiana. After an order is approved, the Manufacturing Company
delivers the products to its New York customers via its own commercial vehicles.
These commercial vehicles make routine trips to New York.
On occasion, the
Manufacturing Company ships its products to its New York customers via common
carrier.
Manufacturing Company uses its own commercial vehicles to pick up products
in New York that do not meet customer specifications ("backhauling"). These
materials are returned to Indiana. The customer either receives a replacement
product or gets a credit for the cost of the product. Manufacturing Company also
transports the trim and scrap of its New York customers back to Indiana, for
which the customers receive a credit against the price of future purchases.
Petitioner states that approximately four percent of Manufacturing
Company's total revenues earned in New York State are received from backhauling
activities where it picks up goods (other than delivered products) from its
customers or goods from other entities and delivers the goods to a location in
Indiana (not necessarily to the Manufacturing Company's facility).
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.
Section 1-3.4(b)(9) of the Corporation Tax Franchise Tax Regulations
("Article 9-A Regulations") provides for an exemption from taxation under Article

-2­
TSB-A-97(8)C
Corporation Tax

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

-3­
TSB-A-97(8)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 delinquent 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.
In this case, the Manufacturing Company employs a sales staff to solicit
orders from customers in New York State. The orders are subject to approval at
company headquarters in Indiana. The Manufacturing Company delivers the products
from its facility in Indiana to its New York customers via its own commercial
vehicles. Pursuant to section 1-3.4(b)(9)(i)(a) of the Article 9-A Regulations,
these activities would not make the Manufacturing Company subject to tax under
Article 9-A of the Tax Law.
However, in addition to these activities, the Manufacturing Company also
does backhauling. That is, the Manufacturing Company uses its vehicles, that
delivered its products to customers in New York, to pick up products in New York
that do not meet customer specifications and return them to its facility in
Indiana. The Manufacturing Company also picks up trim and scrap from its New
York customers and transports it back to Indiana and gives the customers credits
against the price of their future purchases. These activities are similar to the
post delivery examples contained in section 1-3.4(b)(9)(v) of the Article 9-A
Regulations, particularly, "replacing the corporation's stale or damaged
products".
These post delivery backhauling activities in New York by the

-4­
TSB-A-97(8)C
Corporation Tax

Manufacturing Company are activities that go beyond the solicitation of orders
as contemplated by Public Law 86-272, and will subject the Manufacturing Company
to franchise tax under Article 9-A unless they are deemed to be de minimis.
The post delivery backhauling activity, by itself, may be considered to be
de minimis and might not establish more than a nontrivial additional connection
with New York State as contemplated in section 1-3.4(b)(9)(v) of the Article 9-A
Regulations. The facts in this case are insufficient to determine whether the
Manufacturing Company's post delivery backhauling activity is de minimis.
However, the Manufacturing Company also engages in backhauling activities
unrelated to the delivery of the Manufacturing Company's products.
These
backhauling activities, which produce four percent of the Manufacturing Company's
total revenues earned in New York State, are not protected by Public Law 86-272.
Therefore, the Manufacturing Company is doing business, employing capital, or
owning or leasing property in a corporate or organized capacity in New York State
pursuant to section 209.1 of the Tax Law, and is subject to tax under Article 9-A
of the Tax Law.

DATED:

March 27, 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.