An out-of-state manufacturer has no New York office and owns or rents no New York property. Its only in-state activity is salesmen soliciting orders for valves and truck parts, with all orders sent out of state for approval and, if approved, filled and shipped from outside New York. Is the manufacturer subject to New York's Article 9-A corporate franchise tax?

Plain-English summary

Geosource, Inc., a Delaware corporation with no New York office and no owned or rented New York property, sold valves and truck parts to New York customers entirely through salesmen who worked out of offices located OUTSIDE New York. Those salesmen solicited orders, but every order was sent out of state for approval or rejection, and any approved order was filled and shipped from a point outside New York. The question was whether this limited activity made Geosource subject to New York's Article 9-A corporate franchise tax.

Federal Public Law 86-272 bars a state from imposing a net-income-based tax on an out-of-state corporation whose only in-state activity is the solicitation of orders for tangible personal property, where the orders are sent outside the state for approval and, if approved, filled by shipment from outside the state. New York has codified this protection at 20 NYCRR § 1-3.4(b)(9), which also confirms that certain activities INCIDENTAL to solicitation don't disqualify a company from the exemption -- including using product samples, passing customer inquiries and complaints back to the home office, using company-furnished vehicles, and being compensated for at-home office space used solely for the salesman's own convenience.

Because Geosource's only New York activity was solicitation by salesmen based outside the state, with every order approved and filled from outside New York, the Department concluded the company was exempt from the Article 9-A franchise tax under Public Law 86-272 and 20 NYCRR § 1-3.4(b)(9).

What this means for you

Solicitation alone, properly structured, keeps you out of New York's income-based franchise tax

If your only New York contact is sales solicitation -- with no in-state office or property, orders approved elsewhere, and shipment from outside the state -- Public Law 86-272 can shield you from the Article 9-A franchise tax even though your salesmen are actively soliciting New York customers.

Certain support activities for your sales force don't blow the exemption

Using product samples, forwarding customer complaints to your home office, providing company cars, or reimbursing a salesperson's home office space (used solely for their own convenience) are all treated as incidental to solicitation and won't disqualify you from Public Law 86-272 protection.

Where your salesmen are physically BASED can matter as much as where customers are located

This ruling emphasizes that Petitioner's salesmen worked out of offices OUTSIDE New York -- pairing that with out-of-state order approval and shipment reinforced the solicitation-only characterization.

Common questions

Q: Does having salesmen solicit orders from New York customers automatically create New York tax nexus?
A: Not by itself -- if the solicitation is the only New York-connected activity and orders are approved and filled from outside the state, Public Law 86-272 can preserve the exemption.

Q: Can I let my out-of-state salespeople use samples or company cars without losing this protection?
A: Yes -- 20 NYCRR § 1-3.4(b)(9) specifically lists sample use and company-furnished autos as activities incidental to solicitation that don't disqualify the exemption.

Citations and references

Statutes and guidance:

• 20 NYCRR § 1-3.4(b)(9)
• Public Law 86-272 (15 U.S.C. §§ 381-384)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h81_27c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(27)C
Corporation Tax
May 5, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810318B

On March 18, 1981, a Petition for Advisory Opinion was received from
Geosource, Inc., 2700 South Post Oak Road, Suite 2000, Houston, Texas, 77056.
The issue raised is whether or not the Petitioner is subject to the New
York State Franchise Tax on Business Corporations imposed under Article 9-A of
the Tax Law.
Petitioner is a Delaware corporation having no office in New York. It
neither owns nor rents property in New York. Its activities within the state are
limited to the solicitation of orders for valves and truck parts by salesmen
assigned to and working out of offices outside New York. All orders are placed,
processed and shipped from outside the state.
Section 1-3.4(b)(9) of the Franchise Tax Regulations describes the
exemption from tax applicable under Public Law 86-272 (15 U.S.C.A. §§381-384) as
follows: "(i) A foreign corporation whose income is derived from interstate
commerce is not subject to tax under article 9-A if the activities of the
corporation in New York State are limited to either, or both of the following:
(A) the solicitation of orders by employees or representatives in New York
State for sales of tangible personal property and the orders are sent outside New
York State for approval or rejection; and, if approved, are filled by shipment
or delivery from a point outside New York State, and
(B) the solicitation of orders by employees or representatives in New York
State in the name of or for the benefit of a prospective customer of such
corporation if the customer's orders to the corporation are sent outside the
state for approval or rejection; and, if approved, are filled by shipment or
delivery from a point outside New York State.
*

*

*

(iv) In order to be exempt by virtue of Public Law 86-272, the activities
of employees must be limited to solicitation. The term "solicitation" is narrowly
construed and is limited solely to offering tangible personal property for sale
or pursuing offers for the purchase of tangible personal property. Some
activities incidental to offering tangible personal property for sale or pursuing
offers for the purchase of tangible personal property will nevertheless be
considered solicitation and will not make the corporation taxable. Examples of
such activities include:
(A) the use of samples in connection with solicitation;
(B) passing product inquiries and complaints to the corporation's home
office;
(C) using autos furnished by the corporation;
(D) compensation for the use of space at the salesman's home solely for
the salesman's convenience .... "20 NYCRR 1-3.4(b)(9).
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-H-81(27)C
Corporation Tax
May 5, 1981

On the basis of the information presented, it is concluded that Petitioner
is exempt from tax pursuant to Public Law 86-272 and Section 1-3.4(b)(9) of the
Franchise Tax Regulations.

DATED: May 5, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau