A recent ruling issued by the New York State Department of Taxation and Finance (the “Department”) provides some interesting guidance with respect to just how many contacts a company can have with the state before the Department deems the contacts sufficient to establish taxable nexus for the company. In TSB-A-13(6)C (April 11, 2013) (the “Ruling”), the Petitioner (the “Company”) requested the Department to rule on whether during the relevant time period it was “doing business” in New York, and consequently, subject to the state’s corporate income tax.
The Company, a corporation incorporated in a state other than New York, had its headquarters and principal place of business located outside of the state. During the years at issue, the Company sold women’s clothing, accessories and footwear to customers nationwide by catalog or via the internet. The Company did not operate any “bricks and mortar” retail stores in any state. The Company had no subsidiaries or affiliates.
The Company solicited sales by distributing catalogs in the mail, and sending out e-mails and other forms of direct solicitation to prospective customers nationwide, including to customers in New York. The Company also advertised in national media, but none of its advertisements were specifically tailored for New York residents. Customers ordered the Company’s products by internet, telephone, fax or mail. The orders were accepted and fulfilled from points outside of New York. All orders were shipped to customers by common carrier or by the US Postal Service.
The Company did not have any employees, sales representatives, agents, independent contractors or any other parties soliciting sales on its behalf in New York. However, on nine or ten occasions annually, six to eight of the Company’s employees traveled to New York to attend (but not participate in) trade shows, engage in “inspirational shopping” trips to gather information on fashion trends, and meet with potential merchandise vendors. The employees did not meet with potential customers or solicit sales in any way during the trips.
The Company had an online web affiliate linking program, whereby various unrelated third parties placed a link to the Company’s website on their own websites and were paid a commission with respect to any “click through” sales. However, by the middle of 2008, the Company had terminated all contracts with New York based web affiliates. Since that time, no commissions or fees had been paid by the Company to New York residents for website links or referrals.
The Company did not have any in-state service facilities, nor did it use any third parties in New York to perform any activities or provide any customer service on its behalf. The Company provided all customer service by telephone or online from a location outside of New York. All customer merchandise returns were made by mail or by common carrier to an out-of-state Company facility.
The Department’s Analysis
The Department commenced its analysis by asserting that the ruling requested involved an issue that was highly factual in nature, and as a result was best handled on audit. Notwithstanding that pronouncement, the Department proceeded by concluding that since the Company did not employ capital in New York, own or lease property in the state, or maintain an office in New York, the pertinent question to be addressed was whether the Company was “doing business” in the state. To answer that question, the Department turned to the Tax Regulations, which provide in relevant part that “[t]he term doing business is used in a comprehensive sense and includes all activities which occupy the time or labor of people for profit.” Further, under the Regulations, the determination of whether a corporation is doing business in the state requires an examination of all the facts presented by the case.
After analyzing all of the facts, including that on nine or ten occasions annually during the years at issue six to eight of the Company’s employees came to New York and stayed for two to three days at a time to do “inspirational shopping,” attend (but not participate in) trade shows, and meet with merchandise vendors, the Department decided that, although the question was a close one, the level of the activity was not such as to constitute “doing business” in the state. Interestingly, in arriving at its conclusion, the Department provided in the ruling that if in addition to the contacts that existed during the relevant period, the Company engaged in solicitation activities in New York that would normally fall within the protections of Public Law 86-272 (thus not giving rise to nexus), the level of activity of the Company in the state would exceed the “doing business” threshold.
Rather than clarifying the Department’s position regarding the number and types of contact a company needs to have with New York before it is deemed to be “doing business” in the state, its conclusion in the Ruling “muddies the waters” even more. How can the addition of protected activities to those not falling within the statutory protections change the balance of the nexus equation? Either a taxpayer’s unprotected activities in the state constitute “doing business,” or they don’t.
If you have any questions regarding this article, please contact State and Local Tax Director Tom Corrie at firstname.lastname@example.org or 212-842-7019, or contact your Friedman LLP tax professional.