In an Advisory Opinion, TSB-A-11(10)C (Nov. 1, 2011), the New York State Department of Taxation and Finance has ruled that a foreign (i.e., non-New York) corporation selling tangible personal property to customers in New York State is protected by Public Law 86-272 from the imposition of New York State corporation franchise tax, and does not lose that protection as a result of using third-party fulfillment services located in New York.  

The foreign corporation in the Advisory Opinion sells gifts and awards to companies that wish to honor their employees. It has manufacturing and warehousing facilities in North Carolina, where it manufactures certain of the products, and also sells products acquired from third-party vendors, some of whom are located in New York. The foreign corporation uses sales representatives to solicit sales in New York and other states. The representatives’ activities in New York were limited to solicitation of orders for sales of tangible personal property, and the orders were sent out of New York for approval.  

Delivery of the gifts and awards occurred in one of two ways. If the gifts and awards were manufactured at the foreign corporation’s facilities in North Carolina, the foreign corporation shipped the items directly from North Carolina to the employee receiving the gift. If the goods were produced by a third-party vendor, the foreign corporation directed the third-party vendor to ship the gift to the employee. The foreign corporation did not take title to any gift shipped by such a vendor.

Based upon a review of the foreign corporation’s activities, the Department concluded that its activities in New York fell within the scope of Public Law 86-272. Pursuant to Public Law 86-272, a foreign corporation is exempt from income taxation if the only activity of its employees in New York is the solicitation of orders for sales of tangible personal property, which orders are sent out of New York for approval, and, if approved, are filled by shipment or delivery from a point outside New York.  

While the statute contains a requirement that the orders for tangible personal property be satisfied by shipment or delivery from a point outside New York, the Department reasoned that the use of a third-party vendor to provide shipping services from within New York did not disqualify the foreign corporation from the Public Law 86-272 exemption because the use of “fulfillment services” is an exempt activity in New York.  

Under Tax Law Section 209.2(f), the use of the fulfillment services of a person other than an affiliate, as well as the ownership of property on the premises of the fulfillment service provider in conjunction with such services, does not subject a foreign corporation to New York corporation franchise tax. Fulfillment services are defined as 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. Tax Law § 208.19. Since the use of a fulfillment service in New York is a protected activity, the Department found that the filling of orders by such services would not disqualify the foreign corporation from Public Law 86-272 protection as long as it is not affiliated with any of the vendors.  

Additional Insights. This Advisory Opinion correctly concludes that use of an in-state fulfillment house to ship merchandise should not cause an out-of-state company to forfeit its Public Law 86-272 protection. Any other result would make the fulfillment house exception meaningless. The fact that the foreign company does not take title to some of the products it sells was also not a relevant factor. Other states have raised arguments concerning the lack of title to the goods sold, but they have not been successful. See Schering-Plough Healthcare Prods. Sales Corp. v. Pennsylvania, 861 A.2d 259 (Pa. 2004), in which the Pennsylvania Supreme Court held that a related party that solicited sales for its parent was entitled to the protection of Public Law 86-272, even though it never took title to the goods. The court found that a company that solicited sales of products it did not own had no greater nexus than a company soliciting sales of products it owned.

It is worth noting that even if the foreign corporation in the Advisory Opinion had owned the property located at the fulfillment house, the result would have been the same because the fulfillment services exemption extends to the ownership of property on the premises of the fulfillment services provider in conjunction with such services.

While not discussed in the Advisory Opinion, New York also has a provision that an out-of-state company does not become a New York “vendor” responsible for collecting sales and use tax if its only connection with the State is the use of fulfillment services. Tax Law § 1101(b)(8)(v). However, many sellers of tangible goods that qualify for protection from income taxation under Public Law 86-272 would nonetheless be subject to a New York sales and use tax collection obligation on their sales to customers in New York because of the presence of in-state employees soliciting sales. Public Law 86-272 protection for solicitation activities does not extend to state sales and use taxes.