The New York State Department of Taxation and Finance has determined that an out-of-state vendor, soliciting sales via catalogs, email and national advertisements, and fulfilling all orders from outside New York, is not “doing business” in New York and therefore is not subject to corporation franchise tax. Advisory Opinion, TSB-A-13(6)C (N.Y.S. Dep’t of Taxation & Fin., Apr. 11, 2013).

Facts. The corporation requesting the advice (the “Vendor”) sells women’s apparel, accessories and footwear to customers nationwide through its catalog and website. It owns no retail stores in New York or in any other state. It accepts all of its orders outside of New York, and fulfills all the orders via common carrier or the U.S. postal service, shipping from outside New York. Its website is maintained outside New York. The Vendor did have an online web affiliate program, under which third parties would place a link to the Vendor’s website on their own websites and receive a commission for any resulting “click-through” sales. However, by May 31, 2008, the Vendor terminated all such contracts with New York-based affiliates, and since then has not paid any commissions or fees to any New York residents for website referrals.

The Vendor conducts all of its sales activities from outside New York, and provides all customer service from outside the state. Although it has no employees based in New York, employees did visit New York on a temporary basis for three purposes: to meet with potential merchandise vendors; to engage in “inspirational shopping” trips intended to gather information on fashion trends; and to attend trade shows. These visits involved six to eight of the Vendor’s employees, lasted approximately two to three days, and occurred approximately nine to ten times annually in 2010 and 2011. None of the New York visits involved sales promotion or any selling activities.

Advisory Opinion. The Department concluded that the Vendor was not “doing business” in New York under Tax Law § 209.1 and 20 N.Y.C.R.R. Sec. 1-3.2(b)-(e), so as to be subject to corporation franchise tax. Given that the Vendor did not employ capital, own or lease property, or maintain an office in New York, the regulations direct attention to such factors as the nature, frequency and regularity of the company’s activities in New York, and whether it employed agents, officers and employees in New York. Here, although it found that the visits to New York presented a “close question,” the Department concluded that, given their “limited purposes and duration” the trips did not rise to the level of doing business.

The Department expressly noted that it was assuming from the facts presented that the Vendor had no employees in the state soliciting sales on its behalf. If it had, while the solicitation activity itself would be protected by Public Law 86-272, which precludes a state from imposing an income tax on an entity whose activities are limited to “mere solicitation” of sales, the non-sales related visits to New York would cause the Vendor to fall outside the protection of Public Law 86-272.

Additional Insights

What appeared critical to the Department in issuing this Advisory Opinion is that no solicitation activities were taking place in New York, and that the New York visits were limited to attending but not participating in trade shows, meeting with vendors (but not potential customers) and learning about fashion trends.

The opinion notes that the Vendor terminated all its agreements with New York affiliates in 2008, presumably as a result of the “Amazon” affiliate nexus statute enacted in New York in 2008, which imposes a presumption for purposes of the sales and use tax that an out-of-state vendor has nexus in New York based on such affiliate agreements. This Advisory Opinion deals only with whether the Vendor is itself subject to corporation franchise tax. It therefore does not address the issue of whether the Vendor would have sufficient nexus to New York, based on the employee visits that were found not to be solicitation of sales, so that it is obligated to collect New York sales tax on sales made to New York customers, despite terminating those affiliate agreements.

This Advisory Opinion appears to be a departure for the Department, which in recent years has generally not issued rulings opining on specific nexus questions, finding that the situations presented were too fact-based to permit resolution by Advisory Opinions.