After a mail-order retailer closes its New York stores, does holding over the now-vacant leased store space until the leases can be terminated keep it taxable, or is that property de minimis under Public Law 86-272?

Plain-English summary

DJ&J Software, doing business as Egghead Computer, a retailer of tangible personal property, closed all of its New York retail stores. It continues to sell into New York by mail order -- soliciting through catalogs and its web page, accepting and approving all orders at its out-of-state headquarters, and shipping by common carrier (or delivering software electronically). It had already sold off its direct-sales division, so it has no New York salespeople. The wrinkle: until it can settle with its landlords, it still leases the now-vacant store space (the longest lease runs to July 31, 1999), and it will not sublease.

Public Law 86-272 shields a foreign corporation whose only New York activity is soliciting orders for tangible personal property that are approved and shipped from outside the state. Egghead's remaining mail-order activity fits that protection. But owning or leasing property in New York ordinarily exceeds mere solicitation and creates taxable status (20 NYCRR 1-3.2(d)).

The Department applied a de minimis analysis. Because Egghead is actively negotiating to terminate the leases, will not sublease the vacant space, and the leases run only until mid-1999, the Department took the position that the leftover leased property is de minimis -- it does not establish a nontrivial additional connection with New York (compare Cargill, where occasional title to commodities was minimal). So Egghead is exempt from Article 9-A under Public Law 86-272. Its Article 9-A tax year ended on the day it closed its last New York store, and it must file a report for that taxable year.

What this means for you

Mail-order solicitation is protected

Soliciting orders by catalog or website, with approval and shipment from out of state, is the core activity Public Law 86-272 protects.

Vacant leased space can be de minimis

Normally leasing New York property defeats the exemption, but holding over vacant space only until leases can be terminated -- with no subleasing and a near-term end date -- may be treated as de minimis.

File a final report at closure

The taxable year ends when the last store closes; the corporation must file a report for that short year even though it becomes exempt.

Common questions

Q: Doesn't any New York lease make a corporation taxable?
A: Generally yes, but the Department treated this leftover, vacant, soon-to-end space as de minimis given the active termination efforts and no subleasing.

Q: When did Egghead's Article 9-A year end?
A: On the day it closed its last New York store; it must file a report for that taxable year.

Q: Could mail-order volume alone create nexus?
A: Not under Public Law 86-272, so long as orders are approved and filled from outside New York and activity stays limited to solicitation.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax on foreign corporations)
- Public Law 86-272 (15 USC sections 381-384)
- 20 NYCRR 1-3.4(b)(9) (Public Law 86-272 exemption)
- 20 NYCRR 1-3.2(d) (owning or leasing property creates taxable status)
- American Association of Advertising Agencies, Inc., TSB-H-80(32)C (Nov. 7, 1980)
- Aluminum Company of Canada, Ltd., TSB-A-83(9)C (Aug. 12, 1983)
- Cargill Financial Services Corporation, TSB-A-90(20)C (Sept. 26, 1990)
- DJ&J Software, DBA Egghead Computer, TSB-A-98(17)C (Sept. 16, 1998)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a98_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(17)C
Corporation Tax
September 16, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C980223A

On February 23, 1998, a Petition for Advisory Opinion was received from
DJ&J Software, DBA Egghead Computer, 22705 East Mission, Liberty Lake, Washington
99019.
The issue raised by Petitioner, DJ&J Software, DBA Egghead Computer, is
whether, under the circumstances presented, it is subject to franchise tax under
Article 9-A of the Tax Law and has reporting obligations after it closes its
retail stores in New York State.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a retailer of tangible personal property.
In the past,
Petitioner has generated sales through a variety of different business
activities. Petitioner has operated retail stores and sales offices located
throughout the United States and Canada, including New York. Petitioner has also
employed direct salespeople who solicited sales from corporate, government and
educational organizations. These salespeople were based throughout the country
and made sales calls to companies in New York. In addition, Petitioner sells its
products via mail order and solicits mail order sales primarily through catalogs
and other promotional materials which are sent directly to consumers. Mail order
sales are also accepted through Petitioner's Internet Web page. All items sold
through the mail order division are delivered to customers by common carrier.
All orders are accepted at its corporate headquarters, located in another state,
and are delivered from inventory stored in a warehouse also in another state.
Petitioner is currently registered with New York State for corporate franchise
tax purposes.
Petitioner has recently announced plans to close numerous retail stores
located throughout the country. Petitioner indicated that it would close all the
retail stores that it operates in New York before the end of its fiscal year
ending March 31, 1998. Petitioner indicates that it has, in fact, closed these
stores. The stores have varying lease termination dates, the longest running
lease ends July 31, 1999. Petitioner is currently negotiating with the landlords
of the stores scheduled for closing to reach mutually acceptable settlements with
respect to the lease termination.
If a settlement agreement is reached,
Petitioner plans to immediately pay the landlord the agreed upon amount to
terminate the lease. Petitioner will not sublease the unoccupied stores if it
is unable to reach a settlement agreement with the landlord.
Prior to the closure of it retail stores, Petitioner sold its direct sales
division effective May 13, 1996. As a result, Petitioner no longer operates
sales offices (other than its corporate headquarters in another state) or employs
direct salespeople and has not employed direct salespeople or independent sales
representatives since May of 1996. Since that time Petitioner has not had a
physical presence in New York other than the retail stores.

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Corporation Tax
September 16, 1998

Petitioner will continue to operate its mail order business and anticipates
that sales into New York may exceed $100,000 on an annual basis. However, these
mail order sales will be solicited only through catalogs, similar promotional
mailings or via Petitioner's Web page. All mail order sales will be delivered
via common carrier or electronically via the Internet.
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.

However, section 1-3.4(b)(9) of the 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;

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Corporation Tax
September 16, 1998

(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;
(e )
recruitment,
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.
(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.
(vi) Maintaining an office, shop, warehouse or stock of goods 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

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the taxpayer.
business....

For example, a salesperson uses his or her house for

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 leasing of retail space in New York is an activity that exceeds the
solicitation of orders. Section 1-3.2(d) of the Article 9-A Regulations provides
that:
[t]he owning or leasing of real or personal property within New York
State constitutes an activity which subjects a foreign corporation
to tax.
Property owned by or held for the taxpayer in New York
State, whether or not used in the taxpayer’s business, is sufficient
to make the corporation subject to tax. Property held, stored or
warehoused in New York State creates taxable status. Property held
as a nominee for the benefit of others creates taxable status....
However, there are situations where the ownership of property in New York
is not sufficient in magnitude to subject a foreign corporation to tax. It has
been held that a foreign corporation which ships raw materials or partially
finished goods to an unrelated contractor in this state, by whom the goods are
processed or finished, is not taxable solely because of the ownership of such
property in New York, assuming that the contractor returns the goods to the
foreign corporation or ships them to another contractor outside the state.
American Association of Advertising Agencies, Inc., Adv Op St Tax Comm, November
7, 1980, TSB-H-80(32)C.
Also, a foreign corporation manufacturing aluminum, is not subject to tax
because it only has minimal ownership of property in New York when it ships its
by-product, dross, to a processor in New York who reclaims some aluminum from the
dross and then ships the reclaimed metal back to the foreign corporation and
disposes of the waste product. Aluminum Company of Canada, Ltd., Adv Op St Tax
Comm, August 12, 1983, TSB-A-83(9)C.
In Cargill Financial Services Corporation, Adv Op Comm T & F, September 26,
1990, TSB-A-90(20)C, the petitioner was engaged in the business of trading in
stocks, bonds, currencies, commodities and other financial instruments on various
exchanges in New York City.
The transactions were executed by independent
brokers. The opinion held that such activity by itself was not sufficient to
deem the petitioner to be doing business in New York State.
The petitioner
proposed to also trade in commodity futures contracts in precious metals on the

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Corporation Tax
September 16, 1998

floor of Commodity Exchange, Inc. in New York City.
Because of market
conditions, it may be prudent for the petitioner to occasionally take title to
the precious metal for a short period of time. The physical commodities would
be held in warehouses or vaults in New York City. The opinion also held that the
when the petitioner occasionally takes title to the precious metal for short
periods of time, such ownership of property in New York State is minimal, and if
the petitioner is not otherwise doing business in New York, the petitioner would
not be taxable under Article 9-A of the Tax Law.
However, the actual
determination of whether the petitioner was subject to tax was a factual matter
dependent on the totality of the corporation’s circumstances and not susceptible
of determination in an Advisory Opinion.
In this case, after Petitioner closed all of its retail stores in New York
State, Petitioner continues to operate its mail order business. These mail order
sales will be solicited only through catalogs, similar promotional mailings or
via Petitioner's web page. All mail order sales will be approved outside New
York State and will be delivered via common carrier or electronically via the
Internet. However, until Petitioner reaches agreements with its landlords to
terminate its leases for the space occupied by the closed retail stores,
Petitioner will continue to have unoccupied leased real or personal property in
New York. Petitioner states that it will not sublease the unoccupied leased
property in New York.
Pursuant to Public Law 86-272, after Petitioner closed its stores in New
York State, Petitioner's mail order business will constitute the solicitation of
orders for sales of tangible personal property, but the leasing of retail space
in New York State, even when unoccupied, is an activity that exceeds the
solicitation of orders. However, in this case, Petitioner will continue to lease
the unoccupied retail space in New York only until it can terminate its leases
with its landlords. Petitioner is currently negotiating with its landlords to
reach termination settlements with them, and will not sublease the unoccupied
property.
The longest lease ends July 31, 1999.
Under these particular
circumstances, it is the Department's position that the leased real or tangible
property in New York is de minimis and is not sufficient to subject Petitioner
to tax pursuant to section 1-3.2(d) of the Article 9-A Regulations. Therefore,
pursuant to section 1-3.4(b)(9) of the Article 9-A Regulations and Public Law 86­
272, after Petitioner closed its retail stores in New York State, Petitioner is
exempt from franchise tax under Article 9-A of the Tax Law. Petitioner's tax
year under Article 9-A ended on the day it closed its last store in New York, and
it must file a report for such taxable year.

DATED:

NOTE:

September 16, 1998

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

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