A recent Advisory Opinion holds that an out-of-state company is not eligible for the Article 9-A fulfillment services exemption, or the protections afforded under Public Law 86-272, where its independent contractors both solicit sales and deliver products in New York State. Advisory Opinion, TSB-A-13(4)C, (N.Y.S. Dep’t of Taxation & Fin., Mar. 4, 2013).
The company seeking the Advisory Opinion does not have any physical sales locations in New York, owns no property in New York, and does not pay any rent for the storage of goods in New York. Instead, the company ships inventory to a sales force of approximately 16 independent contractors located in New York, who store the inventory in their own facilities in the State at no charge. Once a sale is made by the independent contractor, the independent contractor delivers the consigned inventory to the customer, submits a sales slip to the out-of- State company, and the company then bills the customer. The company retains title to the inventory until it is sold.
Public Law 86-272 provides an exemption for state income tax where an out-of-state corporation’s in-state activities are limited to the solicitation of sales of tangible personal property. Under the Article 9-A regulations, “a corporation will not be considered to have engaged in taxable activities in New York State . . . merely by reason of sales in New York State or the solicitation of orders for sales in New York State, of tangible personal property on behalf of the corporation by one or more independent contractors.” 20 NYCRR 1-3.4(b)(9)(ii).
[B]ecause these independent contractors actually made sales, as opposed to just accepting and shipping orders, they exceeded the permissible activities under the fulfillment services exemption.
Under the “fulfillment services” exemption from Article 9-A, an out-of-state corporation will not be deemed to be doing business or owning or leasing property in New York merely because it uses the fulfillment services of an in-State nonaffiliated person, even if it has inventory stored at the fulfillment service provider’s premises. Tax Law § 209(2)(f). “Fulfillment services” are defined as: (i) the acceptance of orders electronically or by mail, telephone, fax, or Internet; (ii) responding to customer inquiries electronically or by mail, telephone, fax, or Internet; (iii) billing and collection activities; or (iv) shipping orders from an inventory of products held in New York and offered for sale by the user of the fulfillment services. Tax Law § 208(19).
The Department addressed both exemptions to Article 9-A and concluded that neither applied. It determined that the fulfillment services exemption did not apply because the independent contractors did not just accept and ship orders in New York State; they also made sales to customers in the State. The Department also ruled that Public Law 86-272 did not apply because the independent contractors did more than solicit orders and make sales, and because the company retained title to the consigned goods located in New York.
While the fulfillment services exemption provides protection from tax even where inventory is stored in, and shipped from, New York, because these independent contractors actually made sales, as opposed to just accepting and shipping orders, they exceeded the permissible activities under the fulfillment services exemption. If the independent contractors had not made sales in New York, the vendor may have qualified for the exemption. Similarly, an independent contractor that engages in any of the four activities defined as “fulfillment services” under New York law would almost certainly be deemed to be engaged in activities beyond the scope of activities protected by Public Law 86-272, and therefore subject the out-of-state seller to Article 9-A except for the fulfillment services exemption.