Is rent paid to store inventory in a warehouse, where the space is controlled by the warehouse operator, included in the property factor of the Article 9-A business allocation percentage?

Plain-English summary

Am Jet Aerospace Inc buys and sells spare jet-engine parts, with a New York sales office and inventory stored at an unaffiliated warehouse (ASA Apple Incorporated) in Carteret, New Jersey. Although it has fixed, discrete space whose cost grows with the inventory stored, one warehouse employee handles all of its receiving and shipping, and the space is under the warehouse operator's control. The company asked whether the rent it pays for that warehouse space is included in the property factor of its Article 9-A business allocation percentage.

The Department held it is not:

• Only "gross rents" for property the taxpayer rents are included in the property factor (20 NYCRR 4-3.2).
• Here the charge is computed by cubic feet used for a designated space, and the space is under the control of the warehouse operator, not the company.
• So the payment is not "gross rents" for rented property; it is a charge for storage and handling services, and it is not included in the property factor.

What this means for you

Paying for warehouse storage is not always renting property

When the charge is for storage and handling -- priced by volume used and with the space under the operator's control -- it is not "gross rents" for rented property and does not enter the property factor.

Control of the space is the key

Because the warehouse operator, not the customer, controls the space, the customer is buying a service, not renting real property.

This affects your New York allocation

Excluding such storage charges from the property factor changes how income is allocated to New York under the business allocation percentage.

Common questions

Q: Is warehouse storage rent included in the property factor?
A: No, where the charge is for storage and handling, priced by volume, and the space is controlled by the warehouse operator -- it is not gross rents.

Q: Why does control matter?
A: If the operator controls the space, the customer is paying for a service rather than renting property, so there are no gross rents to include.

Q: What rule governs?
A: 20 NYCRR 4-3.2 -- only gross rents for rented property are included in the property factor.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.3 (business allocation percentage; property factor)
- 20 NYCRR 4-3.2 (gross rents in the property factor)
- Am Jet Aerospace Inc, TSB-A-98(22)C (Nov. 5, 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_22c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(22)C
Corporation Tax
November 5, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C980805B

On August 5, 1998, a Petition for Advisory Opinion was received from Am Jet
Aerospace Inc, 37 W 39th Street, New York, New York 10018.
The issue raised by Petitioner, Am Jet Aerospace Inc, is whether rent paid
for warehousing inventory is included in the property factor of Petitioner's
business allocation percentage under Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner buys and sells spare parts for jet engines. It has a sales
office in New York. When merchandise is purchased, it is stored at ASA Apple
Incorporated, a warehouse located at Unit 3, Carteret Condominium Warehouse in
Carteret, New Jersey.
Petitioner states that it has fixed and discrete space at the warehouse.
As Petitioner buys more inventory to expand its business, the amount of space
(and the overall storage charges) increase.
There is one ASA Apple Incorporated employee at the warehouse who handles
all of Petitioner's transactions, receiving and shipping goods.
All of the
transactions at the warehouse are arranged with this person. He is the only
person at the warehouse who services Petitioner's transactions. When items are
received at the warehouse, he logs them in. When items are sold, he arranges for
shipping. Petitioner has used this person for 15 years and several years ago,
when he left the employ of its former warehouse, it went with him to his new
warehouse. He is integral to the business.
The reason the storage space charge is computed by cubic feet used, and is
not a fixed amount, is because inventory is expanding and hence the space used
is expanding. This method gives Petitioner the ability to expand its business.
Petitioner has submitted a warehousing agreement that Petitioner and
American Jet engine Co Inc (collectively "AmJet") entered into with Apple Freight
Systems of America, Inc, and Apple Leasing Corporation (collectively "Apple")
executed February 21, 1992, binding the parties through December 31, 1993. The
warehousing agreement was assigned to and assumed by ASA, Apple's successor, on
or about February 25, 1993, and has been extended through March 31, 1998. The
only modifications to the Agreement are with respect to the rates charged. The
warehousing agreement provides, in pertinent part, as follows:
2. Warehousing Space. Apple shall provide to Amjet during the term
hereof such storage space as Amjet may now or hereafter require,
including space for future inventory, in adequate warehousing
facilities at the cost set forth herein. The costs and charges set
forth herein shall determine the fees charged Amjet by Apple for the
period governed by this Agreement ....
Such space must be
sufficient to allow Apple to select and handle each lot stored by
Amjet in a timely and efficient manner.

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Corporation Tax
November 5, 1998

3. Billing.
   Apple shall provide Amjet with monthly warehouse
   activity reports, detailing lots, a description of the make up of
   each lot, and location by lot of the goods stored by Apple. Said
   monthly reports shall reflect charges for the cubic footage utilized
   by Amjet, and must set forth, in cubic feet, the actual footage for
   each lot by unit for each billing period....
4. Warehousing Location. Except as provided in Paragraph 5, all
   warehousing space and service provided to Amjet hereunder shall be
   at the warehousing facility currently used by Amjet and located at
   Unit 3, Carteret Condominium Warehouse, 100 Middlesex Avenue,
   Carteret, New Jersey 07008. Apple warrants and represents that it
   has the lawful right to occupy such space and to conduct a
   warehousing business in the facility set forth herein.
5. Change in Warehousing Location. If Apple should move its main
   warehouse facility operation from its present site to another
   location within 35 miles of New York City (sites beyond 35 miles
   from New York City must be consented to by Amjet) the space and
   services provided to Amjet may be moved to the new main warehouse
   facility provided such facility is at least the equivalent of the
   facility currently provided in terms of access, security, structure,
   safety, and such other factors as are reasonably material.
6. Change of Warehouse Facilities/Moving. If the storage of Amjet's
   goods is to be moved from the existing facility in accordance with
   the terms of this Agreement, Apple shall take such steps and perform
   such services as necessary to accomplish the movement of Amjet's
   goods at Apple's expense.
   Amjet may, at its option, supervise
   Apple's performance in accomplishing the movement of Amjet's goods
   or hire such outside independent contractors, at Apple's expense, as
   Amjet feels necessary to accomplish the movement of Amjet's goods.
   Any move performed by Apple, its agents or employees shall be
   performed so as to keep all components of each lot of the goods
   stored in the warehouse together, both during transit, and in
   storage, and, shall enable Amjet to identify the location in storage
   of each lot in the new facility.
7. Acknowledgments. (a) Apple is aware of the nature of Amjet's
   goods held in the facility. Such goods constitute various numbers
   and types of aircraft parts, which are mainly packaged in cartons or
   wood cases. Apple acknowledges that maintenance of the composition
   and integrity of each lot and all its components is of the utmost
   importance to Amjet and is of the essence of this agreement because,
   should any component of a lot be misplaced, or separated from the
   lot to which it belongs or improperly or mistakenly substituted for
   a different or inappropriate component, the entire aircraft part
   may be rendered useless or inoperative, and therefore valueless.
   Accordingly, the movement of each lot and the location listing of
   any lot in a manner which fails to retain together all component
   parts of such lot, or which fails to record each lot's location in
   storage will result in confusion of the component parts of a lot or
   lots rendering the good unsalable. Apple will be required to keep
   a locator system upon which each lot can be located by Amjet.

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TSB-A-98(22)C
Corporation Tax
November 5, 1998

(b) All of Amjet's goods now in storage or hereafter delivered for
storage shall be stored on racks which shall be provided by Apple at
no cost to Amjet.
8. Storage Space Charge. During the term of this Agreement, Amjet
shall continue to lease cubic footage, calculated according to the
unit make-up of individual lots, as required for the storage of its
goods at the rate ... per cubic foot per month.
9. Handling and Other Charges. During the term of this Agreement,
handling charges shall be as follows:
Handling (In and Out)(New Lots)
...
Pick/Pack Labor
...
Labor
...
Bills of Lading
...
Minimum (receipt)
...
Clerical Labor
...
Material used for packaging partial lots for shipment will be
supplied by Amjet.
11. Condition of Premises and Security. Apple agrees to maintain the
warehousing facilities, quality of service available, level of
security and means of ingress and egress at or better than such
quality or condition as exists at the time of entry into this
Agreement.
12. Risks of, or Damage to Stored Goods.
In the event any
occurrence or incident takes place at the warehouse facility, such
as but not limited to fire, water leakage or seepage, or breaking
and entry, which causes damage to the stored goods or which may
potentially cause such damage, Apple shall notify Amjet forthwith in
order to allow Amjet the earliest possible opportunity to inspect
its goods and to take steps to prevent damage or further damage.
Apple shall nevertheless be responsible for any damages to Amjet's
goods caused as a result of such incident or occurrence.
13. Assignability. The nature of the services to be provided by
Apple pursuant to the terms of this Agreement render this Agreement
personal in nature and this Agreement may not be assigned or
transferred by Apple directly or indirectly to parties other than
100 percent owned subsidiary of Apple or to the equitable owners of
Apple. A greater than 40 percent change in the equitable ownership
of Apple shall constitute an assignment forbidden by the terms of
this Agreement unless consented to in advance in writing by Amjet.
Apple shall remain liable under the terms of this Agreement for any
breach of this Agreement.

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TSB-A-98(22)C
Corporation Tax
November 5, 1998

Discussion
Section 4-3.2(a) of the Article 9-A Regulations provides that in computing
the property factor of the business allocation percentage, real property rented
to the taxpayer must be included.
Section 4-3.2(b) of the Article 9-A Regulations also provides that the term
"gross rents" means the actual sum of money or other consideration payable,
directly or indirectly, by the taxpayer or for its benefit for the use or
possession of the property and includes, among other things, any amount payable
for the use or possession of real property, or any part thereof, whether
designated as a fixed sum of money or as a percentage of sales, profits or
otherwise. Section 4-3.2(c) of the Article 9-A Regulations provides that the
term "gross rents" does not include amounts payable for storage, provided such
amounts are payable for space not designated and not under the control of the
taxpayer.
Therefore, real property rented to the taxpayer is included in the property
factor of the business allocation percentage. This would include space rented
at a public warehouse. Storage fees or rental fees at a public warehouse are
included within the meaning of gross rents under section 4-3.2 of the Article 9-A
Regulations if such storage or rental fees are payable for designated space that
is under the control of the taxpayer. See, Richard Berman, CPA, Adv Op Comm T&F,
April 7, 1994, TSB-A-94(6)C.
In this case, paragraph 2 of Petitioner's warehousing agreement with Apple
provides that Apple will provide adequate storage space, including space for
future inventory, that is "sufficient to allow Apple to select and handle each
lot stored by Amjet in a timely and efficient manner."
Paragraph 4 of the
agreement provides that all warehousing space and service provided to Amjet by
Apple is at the warehousing facility used by Amjet at Unit 3, Carteret
Condominium Warehouse, 100 Middlesex Avenue, Carteret, New Jersey. However, in
paragraph 5 of the agreement, Apple may move its main warehouse facility
operation to another location within 35 miles of the Carteret site, and, if such
new facility is at least the equivalent of the current facility, the space and
services provided to Amjet may be moved to the new facility without the consent
of Amjet. Paragraph 6 of the agreement provides that if Amjet's goods are moved
to a new location, Amjet may, at its option, supervise the movement of the goods.
Further, paragraph 7 of the agreement provides that Apple will be required
to keep a locator system upon which each lot can be located by Amjet. Paragraph
3 of the agreement provides that Apple will provide Amjet with "monthly warehouse
activity reports, detailing lots, a description of the make up of each lot, and
location by lot of the goods stored by Apple".
Based on all of these provisions of the agreement, it appears that
Petitioner's lease of cubic footage for warehouse space provided by Apple is not
for a specific designated space, and it also appears that the storage space is
under the control of Apple, not Petitioner. Accordingly, the rent Petitioner
pays for the lease of warehouse space at ASA Apple Incorporated, does not
constitute "gross rents" as contemplated by section 4-3.2 of the Article 9-A

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Corporation Tax
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Regulations and is not included in Petitioner's property factor of the business
allocation percentage.

DATED:

November 5, 1998

NOTE:

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

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