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)

Date note: the scraper's date heuristic initially picked up the Petition-received date (January 22, 1998) rather than the document's actual DATED sign-off. Corrected issued_date to February 19, 1998, matching the "DATED:" line in the original text below.

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

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 tax pursuant to section 1101(b)(18) of the Tax Law, effective September 1, 1997.
4. 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.
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 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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TSB-A-98-(2)C
Corporation Tax
TSB-A-98(6)S
Sales Tax

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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Corporation Tax
TSB-A-98(6)S
Sales Tax

(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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TSB-A-98-(2)C
Corporation Tax
TSB-A-98(6)S
Sales Tax

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.