Does a public warehouse that stores and ships customers' inventory provide 'fulfillment services,' and do its out-of-state customers get New York franchise tax or sales tax nexus by using it?
Plain-English summary
Distribution Unlimited, Inc., a New York public-warehousing company, asked whether its services qualify as "fulfillment services" under New York's safe-harbor rules effective September 1, 1997. It stores manufacturers' and distributors' inventory and, on the owners' instructions, selects and ships the product by common carrier; there is no affiliation between the warehouse and its customers.
New York's law shields out-of-state businesses from nexus when they use an unaffiliated fulfillment-services provider:
- A foreign corporation is not doing business under Article 9-A (section 209.2(f)) merely by using unaffiliated fulfillment services and storing property on the provider's premises.
- An out-of-state seller is not a vendor for sales tax (section 1101(b)(8)(v)) on the same basis.
- "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)).
The Department concluded that Distribution Unlimited's activities qualify as fulfillment services for both Article 9-A and sales tax, that the safe harbors apply, and that its 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. (A later companion opinion, TSB-A-98(18)C / 98(68)S, confirmed that adding contract-negotiation and inspection steps did not change this result.)
What this means for you
Storing and shipping inventory is fulfillment services
A warehouse that holds a customer's goods and ships them on instruction is providing fulfillment services within the statutory definition.
Out-of-state customers stay protected
Using an unaffiliated fulfillment provider and storing inventory in New York does not, by itself, create franchise tax or vendor nexus for the out-of-state customer.
Affiliation is the limit
The safe harbor turns on the provider being unaffiliated with the customer.
Common questions
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: Is the warehouse itself taxable?
A: The warehouse is a New York business; the safe harbor protects its out-of-state customers, not the provider.
Q: What if the warehouse and customer were affiliated?
A: Then the safe harbor would not apply.
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)
- Distribution Unlimited, Inc., TSB-A-98(2)C / TSB-A-98(6)S (Feb. 19, 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_2c_6s.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-98-(2)C
Corporation Tax
TSB-A-98(6)S
Sales Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. Z980122E
On January 22, 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
transactions occurring after September 1, 1997, are:
Unlimited,
Inc.,
for
- 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. - 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. - Whether Petitioner’s services qualify as fulfillment services for
purposes of the Sales and Use tax pursuant to section 1101(b)(18) of
the Tax Law, effective September 1, 1997. - Whether, under section 1101(b)(8)(v), effective September 1,
1997, an out-of-state entity that is not otherwise a vendor for
purposes of the Sales and Use tax will become a vendor by reason of
purchasing Petitioner’s services and having inventory stored on
Petitioner’s premises. - 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 tax 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 a
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common carrier). Inventory is held in Petitioner’s facilities until a 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.
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) of the Tax Law, effective September 1, 1997, provides:
(v) Notwithstanding any other provision of the 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
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(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.
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.
Conclusions
Issue 1.
Petitioner’s activities, as described above, 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, as described above, and having its
inventory stored on Petitioner’s premises.
Issue 3. Petitioner’s activities, as described above, 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), effective September 1, 1997,
an out-of-state entity that is not otherwise a vendor under 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, as described above, and
having its inventory stored on Petitioner’s premises.
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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 tax purposes solely by reason
of purchasing Petitioner’s fulfillment services and having its inventory stored
on Petitioner’s premises in connection with the rendition of such service,
effective September 1, 1997.
DATED: February 19, 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.