If a mail-order retailer closes all its physical New York stores but keeps selling by catalog and internet, does it still need to collect New York sales tax?

Plain-English summary

DJ & J Software Corporation, doing business as Egghead Computer, had operated retail stores and sales offices across the country, including New York, and had also employed direct salespeople soliciting sales from corporate, government, and educational customers in the state. By 1998, Egghead had sold off its direct-sales division (in 1996) and was closing all of its New York retail stores, though some store leases wouldn't fully terminate until as late as July 1999 while it negotiated settlements with landlords. Egghead planned to continue selling into New York through catalogs, other mail-order promotional materials, and its internet website, with sales potentially exceeding $100,000 a year, delivered by common carrier or electronically. Egghead asked whether, once it closed its physical New York stores, it could withdraw its New York sales tax registration and stop collecting tax on its ongoing mail-order and internet sales.

The Department said yes. Under the version of New York's vendor-registration law in effect at the time, a company that solicits sales in the state purely by mailing catalogs or other advertising (without any other in-state connection) is only required to register and collect tax if it also has an "additional connection" with New York satisfying the federal constitutional nexus requirement -- historically, some form of physical presence, like retail stores, offices, or salespeople in the state. Since Egghead was closing every one of its New York stores and no longer had salespeople or offices in the state, the Department found that its New York nexus ended once those stores closed, even though it would keep making substantial mail-order and internet sales into New York. Egghead could then surrender its Certificate of Authority and file a final sales tax return under the standard closing-out procedures.

What this means for you

Mail-order and catalog retailers exiting physical retail

This ruling reflects the pre-Wayfair, physical-presence-based nexus rules that governed sales tax collection duties for out-of-state and remote sellers at the time. Under that regime, closing all in-state physical locations (stores, offices, and in-state sales staff) ended the collection obligation for a company that otherwise sold only by mail, catalog, or the internet -- regardless of how large those remaining sales were.

Historical and legal researchers

Be careful relying on this ruling for anything happening today: the U.S. Supreme Court's 2018 decision in South Dakota v. Wayfair, Inc. overturned the physical-presence nexus rule this opinion applied, and New York (like every other state) has since adopted economic nexus thresholds based on sales volume or transaction count, regardless of physical presence. A company in Egghead's exact position today would very likely still have to collect New York sales tax on $100,000+ of annual mail-order sales.

Accountants and tax professionals

This is a useful historical snapshot of how New York's vendor definition (Tax Law § 1101(b)(8)(i)) operated before Wayfair, and of the mechanical steps (surrendering the Certificate of Authority, filing a final return under 20 NYCRR §§ 533.1(f) and 533.3(e)) for formally winding down a sales tax registration. Don't apply the nexus conclusion to a present-day fact pattern without accounting for economic nexus rules.

Common questions

Q: Could a retailer stop collecting New York sales tax just by closing its physical stores, even while continuing large mail-order sales? A: Under the law as it stood in 1998 (before the 2018 Wayfair decision), yes -- physical presence was the touchstone for nexus, so ending all in-state stores and salespeople ended the collection obligation.

Q: Does this rule still apply today?
A: No. Physical-presence nexus was overturned by South Dakota v. Wayfair, Inc. in 2018, and states including New York now impose economic nexus based on sales revenue or transaction volume, regardless of physical presence.

Q: What steps does a company take to formally stop collecting New York sales tax? A: Surrender the Certificate of Authority to the Department and file a final sales tax return marked "FINAL RETURN," per 20 NYCRR §§ 533.1(f) and 533.3(e).

Q: Can another retailer rely on this ruling for its own store closures today? A: Not for current nexus questions -- the legal landscape has fundamentally changed since 2018. This advisory opinion is also, in any event, binding only as to the petitioner and its specific facts.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(8)(i) (definition of vendor)
• Tax Law § 1131(1) (persons required to collect tax)
• 20 NYCRR § 533.1(f) (surrender of certificates and permits)
• 20 NYCRR § 533.3(e) (final returns)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_66s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(66)S
Sales Tax
September 9, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S980217B

On February 17, 1998, the Department of Taxation and Finance received a Petition for Advisory Opinion from DJ & J Software Corporation, d/b/a Egghead Computer, 22705 East Mission, Liberty Lake, WA 99019. The issue raised by Petitioner, DJ & J Software Corporation, d/b/a Egghead Computer, is whether, under the circumstances presented, a mail-order company which closes its retail stores in New York is relieved of any future sales and compensating use tax collection obligations. 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 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 as a vendor with the State of New York for sales and use tax purposes. Petitioner is closing numerous retail stores located throughout the country. Petitioner indicated that it would close all retail stores that it operates in New York in March, 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. 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 did not have a physical presence in New York, except for the retail stores noted above.

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TSB-A-98(66)S
Sales Tax
September 9, 1998

Petitioner will continue to operate its mail order business and anticipates that sales in New York may exceed $100,000 on an annual basis. These mail order sales will be solicited only through catalogs, similar promotional mailings, or Petitioner’s Internet Web page. All mail order sales will be delivered via common carrier or electronically via the Internet. Petitioner would like to formally withdraw its sales tax registration in New York because it no longer conducts business through in-state retail outlets or in-state salespeople. Applicable Laws and Regulations Section 1101(b)(8)(i) of the Tax Law define the term "vendor" as follows: The term "vendor" includes: (A) A person making sales of tangible personal property or services, the receipts from which are taxed by this article; (B) A person maintaining a place of business in the state and making sales, whether at such place of business or elsewhere, to persons within the state of tangible personal property or services, the use of which is taxed by this article; (C) A person who solicits business either: (I) by employees, independent contractors, agents or other representatives; or (II) by distribution of catalogs or other advertising matter, without regard to whether such distribution is the result of regular or systematic solicitation, if such person has some additional connection with the state which satisfies the nexus requirement of the United States constitution; and by reason thereof makes sales to persons within the state of tangible personal property or services, the use of which is taxed by this article; (D) A person who makes sales of tangible personal property or services, the use of which is taxed by this article, and who regularly or systematically delivers such property or services in this state by means other than the United States mail or common carrier; (E) A person who regularly or systematically solicits business in this state by the distribution, without regard to the location from which such distribution originated, of catalogs, advertising flyers or letters, or by any other means of solicitation of business, to persons in this state and by reason thereof makes sales to persons within the state of tangible personal property, the use of which is taxed by this article, if such solicitation satisfies the nexus requirement of the United States constitution;

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TSB-A-98(66)S
Sales Tax
September 9, 1998

(F) A person making sales of tangible personal property, the use of which is taxed by this article, where such person retains an ownership interest in such property and where such property is brought into this state by the person to whom such property is sold and the person to whom such property is sold becomes or is a resident or uses such property in any manner in carrying on in this state any employment, trade, business or profession; (G) Any other person making sales to persons within the state of tangible personal property or services, the use of which is taxed by this article, who may be authorized by the commissioner of taxation and finance to collect such tax by part IV of this article; and (H) The state of New York, any of its agencies, instrumentalities, public corporations (including a public corporation created pursuant to agreement or compact with another state or Canada) or political subdivisions when such entity sells services or property of a kind ordinary sold by private persons. Section 1131(1) of the Tax Law provides, in part: "Persons required to collect tax" or "person required to collect any tax imposed by this article" shall include: every vendor of tangible personal property or services; every recipient of amusement charges; and every operator of a hotel. Section 533.1(f) of the Sales and Use Tax Regulations provides, in part: Surrender of certificates and permits. (1) Certificates of authority must be surrendered to the New York State Department of Taxation and Finance, Sales Tax Registration Unit, W.A. Harriman Campus, Albany, NY 12227 within 20 days of the registrant's ceasing to do business, and must accompany the final return. Ceasing to do business means that the registrant is no longer operating the business even though the business may continue. (2) Upon surrendering the certificate of authority, the vendor must complete the reverse side of the certificate and indicate the details of the sale or other disposition of the business. Where a certificate of authority has been lost, stolen, destroyed or is otherwise unreturnable to the department, the owner, partner or responsible officer of a vendor which was issued such certificate is required to notify the Sales Tax Registration Unit that such certificate cannot be returned, setting forth the specific reasons for such failure. The notification must be in written form, signed by the owner, partner or responsible officer and received within 20 days of the registrant's ceasing to do business.

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TSB-A-98(66)S
Sales Tax
September 9, 1998

Section 533.3(e) of the Sales and Use Tax Regulations provides, in part: Final returns. (1) A vendor who ceases operation, sells his business, or changes the organizational form of the business must file a final return within 20 days after the occurrence of such event. (2) The return must indicate the actual period covered by the return, calculated from the first day of the period in which the event occurred to the final day of business. (3) The final return is to be on a return for the period in which such event occurs, and must be clearly marked at the top, "FINAL RETURN". Monthly filers are also required to file a final quarterly return.
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(4) The final return is to be completed as set forth in paragraph (b)(3) of this section. (5) The final return must be accompanied with payment of all taxes due, from the first day of the period to the final day of business, as well as any tax collected on a bulk sale, penalties and interest due, and must be accompanied by the certificate of authority to collect taxes. Opinion Petitioner has closed all retail stores that it operates in New York. The stores have varying lease termination dates, with the longest running lease ending 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. Petitioner will not sublease the property. Petitioner will continue to operate its mail order business and anticipates that sales in New York may exceed $100,000 on an annual basis. These mail order sales will be solicited only through catalogs, similar promotional mailings, or Petitioner’s Internet Web page. All mail order sales will be delivered via common carrier or electronically via the Internet. Petitioner would like to formally withdraw its sales tax registration in New York, as it no longer conducts business through in-state retail outlets or in-state salespeople. Since Petitioner solicits sales in New York State by the distribution of catalogs and other advertising materials, Petitioner would qualify as a vendor under Section 1101(b)(8)(i)(C)(II) of the Tax Law if it has an additional connection with New York State which satisfies the nexus requirement of the United States Constitution. It is the Department’s position that, under the circumstances, Petitioner’s nexus with New York ended when it closed all of its retail stores, assuming Petitioner has no other physical presence in New York.

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TSB-A-98(66)S
Sales Tax
September 9, 1998

Petitioner may surrender its Certificate of Authority and file its final sales and use tax return in accordance with the guidelines set forth in Sections 533.1 and 533.3 of the Sales and Use Tax Regulations.

DATED:

September 9, 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.