Do a public warehouse's added services -- contract negotiation, site visits, and quality-control inspections -- change its status as a fulfillment-services provider, and do out-of-state customers get New York nexus by using it?

Plain-English summary

Distribution Unlimited, Inc., a New York public-warehousing company, stores manufacturers' and distributors' inventory and ships it on the owners' instructions, all by common carrier, with no affiliation between the warehouse and its customers. New York law (effective September 1, 1997) created a fulfillment-services safe harbor: a foreign corporation is not doing business in New York under Article 9-A (section 209.2(f)), and an out-of-state seller is not a vendor for sales tax (section 1101(b)(8)(v)), merely because it uses an unaffiliated entity's fulfillment services and stores property on that entity's premises. "Fulfillment services" include accepting orders, responding to inquiries, billing and collection, and shipping orders from the purchaser's inventory (sections 208.19 and 1101(b)(18)).

Distribution Unlimited had already received an opinion that its activities qualified (TSB-A-98(2)C / 98(6)S). It came back to confirm that some additional steps -- on-site contract evaluation and price negotiation, a product start-up review, and the purchaser's periodic visits to verify inventory, review quality control, and witness proper disposal of perishable or damaged goods -- did not change the answer.

The Department confirmed: those added steps do not change the conclusions. The activities still qualify as fulfillment services, the safe harbors still apply, and the warehouse's out-of-state customers are not deemed to be doing business or to be vendors in New York solely by purchasing the services and storing inventory there. (The opinion notes that Chapter 75 of the Laws of 1998 later amended the definition of "affiliated person" to add sibling entities and a 5% ownership test.)

What this means for you

Routine oversight does not break the safe harbor

A customer negotiating the contract, evaluating the site, and periodically inspecting its stored inventory and quality control is still just using fulfillment services.

Storing inventory at an unaffiliated fulfillment provider is protected

Owning inventory on the premises of an unaffiliated fulfillment-services provider does not, by itself, create Article 9-A nexus or vendor status.

Affiliation is the key limit

The protection applies only to unaffiliated providers; the 1998 amendment broadened "affiliated person" to include sibling entities and a 5% ownership threshold.

Common questions

Q: Do customer site visits create nexus?
A: Not here. Periodic visits to verify inventory, review quality control, and witness disposal are within the fulfillment-services safe harbor.

Q: Does storing inventory in New York make an out-of-state seller a vendor?
A: No, when the storage is in conjunction with an unaffiliated provider's fulfillment services under section 1101(b)(8)(v).

Q: What if the warehouse were affiliated with the customer?
A: Then the safe harbor would not apply; affiliation (including sibling entities and a 5% interest after the 1998 amendment) defeats the protection.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.19 (definition of fulfillment services for Article 9-A)
- Tax Law section 209.2(f) (use of unaffiliated fulfillment services does not create Article 9-A nexus)
- Tax Law section 1101(b)(18) (definition of fulfillment services for sales tax)
- Tax Law section 1101(b)(8)(v) (purchaser of fulfillment services is not a vendor)
- Chapter 75 of the Laws of 1998 (amended definition of affiliated person)
- Distribution Unlimited, Inc., TSB-A-98(2)C / TSB-A-98(6)S (Feb. 19, 1998)
- Distribution Unlimited, Inc., TSB-A-98(18)C / TSB-A-98(68)S (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/multitax/a98_18c_68s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(18)C
Corporation Tax
TSB-A-98(68)S
Sales Tax
September 16, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z980901C

On September 1, 1998, a Petition for Advisory Opinion was received from
Distribution Unlimited, Inc., P.O. Box 98, Guilderland Center, New York 12085.

The issues raised by Petitioner, Distribution Unlimited, Inc., for
transactions occurring after September 1, 1997, are:
1. Whether Petitioner’s services qualify as fulfillment services for
purposes of Article 9-A of the Tax Law (the Business Corporation
Franchise Tax) pursuant to section 208.19 of the Tax Law, effective
September 1, 1997.
2. Whether, under section 209.2 of the Tax Law, effective September
1, 1997, a foreign corporation that is not deemed to be doing
business, employing capital, owning or leasing property or
maintaining an office in New York State for purposes of Article 9-A
of the Tax Law, will be deemed to be doing business, employing
capital, owning or leasing property or maintaining an office in New
York State by reason of purchasing Petitioner’s services and having
inventory stored on Petitioner’s premises.
3. Whether Petitioner’s services qualify as fulfillment services for
purposes of the Sales and Use Taxes pursuant to section 1101(b)(18)
of the Tax Law, effective September 1, 1997.
4. Whether, under section 1101(b)(8)(v) of the Tax Law, effective
September 1, 1997, an out-of-state entity that is not otherwise a
vendor for purposes of the Sales and Use Taxes will become a vendor
by reason of purchasing Petitioner’s services and having inventory
stored on Petitioner’s premises.
5. Whether Petitioner’s out-of-state customers that otherwise do not
have nexus with New York state, will be deemed to have nexus with
New York State for Article 9-A and Sales and Use Taxes purposes
solely by reason of purchasing Petitioner’s services and having
inventory stored on Petitioner’s premises.
Petitioner submits the following facts as the basis for this Advisory
Opinion.

Petitioner, a New York State corporation, provides public warehousing in
Albany and Schenectady Counties.
Manufacturers and wholesale distributors
(Purchasers) contract with Petitioner to store their inventory in Petitioner’s
facilities. Petitioner accepts product either by rail or truck (normally common

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Corporation Tax
TSB-A-98(68)S
Sales Tax
September 16, 1998

carrier basis). Inventory is held in Petitioner’s facilities until the Purchaser
directs/orders (electronically or by mail, telephone, telefax) Petitioner to
select its product for shipment to its customers. Petitioner ships the product
selected by common carrier.
Petitioner is totally independent and conforms to the rules under the
Uniform Commercial Code for public warehousing. There is no affiliation between
any of the Purchasers and Petitioner.
Petitioner was previously issued an advisory opinion regarding its
activities as a fulfillment services provider (Distribution Unlimited, Inc., Adv
Op T&F, February 19, 1998, TSB-A-98(2)C, TSB-A-98(6)S). The facts submitted for
the present advisory opinion include those activities previously addressed, as
described above, and additional activities conducted in connection with the use
of Petitioner's fulfillment services.
Specifically, certain steps must be
accomplished in order to ensure economic viability, of both Petitioner and
Purchaser, in Petitioner's performance as a fulfillment services provider. The
steps are:
Step 1: Contract Negotiations
a.

Purchaser meets Petitioner for on site evaluation of storage and
handling services.

b.

Price is negotiated.

Step 2: Contract Signed
Step 3: Commencement of Product Start-up Phase of Fulfillment Services
a.

Purchaser reviews on-site services to ensure that both storage and
handling services are consistent with its initial evaluation and/or
its standards.

b.

Purchaser may consult Petitioner to ensure that standards are met.

Step 4: Continuity of Operation Phase
a.

Purchaser periodically visits site for:
(1) physical inventory verification,
(2) quality control review, and
(3) witnessing that Petitioner properly disposes of Purchaser’s
products (e.g., perishable or damaged items) when necessary.

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TSB-A-98(18)C
Corporation Tax
TSB-A-98(68)S
Sales Tax
September 16, 1998

Applicable Law
Section 208.19 of the Tax Law, effective September 1, 1997, provides:
The term "fulfillment services" shall mean any of the following
services performed by an entity on its premises on behalf of a
purchaser:
(a) the acceptance of orders electronically or by mail, telephone,
telefax or internet;
(b) responses to consumer correspondence or inquiries electronically
or by mail, telephone, telefax or internet;
(c) billing and collection activities; or
(d) the shipment of orders from an inventory of products offered for
sale by the purchaser.
Section 209.2(f) of the Tax Law, effective September 1, 1997, provides that
a foreign corporation shall not be deemed to be doing business, employing
capital, owning or leasing property, or maintaining an office in New York State,
for purposes of Article 9-A of the Tax Law, by reason of "the use of fulfillment
services of an entity other than an affiliated entity and the ownership of
property stored on the premises of such entity in conjunction with such
services". For purposes of such section 209.2(f), an affiliated entity is an
entity that either owns or controls a majority interest in the foreign
corporation, either directly or indirectly, or an entity the majority interest
in which is owned and controlled by the foreign corporation, either directly or
indirectly.
Section 1101(b)(8)(v) of the Tax Law, effective September 1, 1997,
provides:
Notwithstanding any other provision of law, the term vendor shall
not include:
(A) a person who is not otherwise a vendor who purchases fulfillment
services carried on in New York by a person other than an affiliated
person; or
(B) a person who is not otherwise a vendor who owns tangible
personal property located on the premises of an unaffiliated person
performing fulfillment services for such person.
An affiliated person means any person who owns or controls a
majority interest in the purchaser, either directly or indirectly,
or a person the majority interest in which is owned and controlled
by the purchaser, either directly or indirectly.

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TSB-A-98(18)C
Corporation Tax
TSB-A-98(68)S
Sales Tax
September 16, 1998

Section 1101(b)(18) of the Tax Law, effective September 1, 1997, provides:
Fulfillment services. Any of the following services performed by an
entity on its premises on behalf of a purchaser:
(i) the acceptance of orders electronically or by mail, telephone,
telefax or internet;
(ii) responses to consumer correspondence and inquiries
electronically or by mail, telephone, telefax or internet;
(iii) billing and collection activities; or
(iv) the shipment of orders from an inventory of products offered for sale
by the purchaser.
Note that, with respect to fulfillment services, the definition of an
"affiliated person" was amended by Chapter 75 of the Laws of 1998, enacted on
June 2, 1998, effective on September 1, 1998 for purposes of Article 28 of the
Tax Law, and applicable to taxable years beginning on or after August 1, 1998 for
purposes of Article 9-A of the Tax Law. The amendments modify the definition of
"affiliated person" by including "sibling entities" (brother/sister), and by
utilizing a five percent ownership test, rather than a majority interest test.
Conclusions
The additional activities described in Steps 1 through 4 above, do not
change the answers provided in Petitioner's previously issued advisory opinion.
Accordingly, the following conclusions are reached.
Issue 1. Petitioner’s activities, as described above including Steps 1
through 4, qualify as fulfillment services pursuant to section 208.19 of the Tax
Law, effective September 1, 1997.
Issue 2. Pursuant to section 209.2(f) of the Tax Law, effective September
1, 1997, a foreign corporation that is not otherwise deemed to be doing business,
employing capital, owning or leasing property or maintaining an office in New
York State, will not be deemed to be doing business, employing capital, owning
or leasing property or maintaining an office in New York State by reason of
purchasing Petitioner’s fulfillment services, performing Steps 1 through 4 in New
York, as described above, and having its inventory stored on Petitioner’s
premises.
Issue 3. Petitioner’s activities, as described above including Steps 1
through 4, qualify as fulfillment services pursuant to section 1101(b)(18) of the
Tax Law, effective September 1, 1997.
Issue 4. Pursuant to section 1101(b)(8)(v) of the Tax Law, effective
September 1, 1997, an out-of-state entity that is not otherwise a vendor under

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TSB-A-98(18)C
Corporation Tax
TSB-A-98(68)S
Sales Tax
September 16, 1998

any other provision of the Tax Law, will not become a vendor for purposes of
Sales and Use Taxes by reason of purchasing Petitioner’s fulfillment services,
performing Steps 1 through 4 in New York, as described above, and having its
inventory stored on Petitioner’s premises.
Issue 5. Petitioner’s out-of-state customers that otherwise do not have
nexus with New York State, will not be deemed to have nexus with New York State
for Article 9-A of the Tax Law and Sales and Use Taxes purposes solely by reason
of purchasing Petitioner’s fulfillment services, performing Steps 1 through 4 in
New York, as described above, and having its inventory stored on Petitioner’s
premises in connection with the rendition of such service, effective September
1, 1997.

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.