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Delivered by Independent Contractors, Undelivered by P.L. 86-272: Order Fulfillment Activities Subject Out-of-State Seller to New York Corporation Franchise Tax

By Sahang-Hee Hahn and Prentiss Willson

The New York State Department of Taxation and Finance ruled in an

By Sahang-Hee Hahn and Prentiss Willson

The New York State Department of Taxation and Finance ruled in an Advisory Opinion that a Virginia corporation was subject to New York corporation franchise tax because it hired independent contractors to store its consigned inventory and to solicit orders from and deliver products to New York customers. In this case, the taxpayer consigned inventory to approximately 16 independent contractors located in New York, who maintained the taxpayer’s inventory at in-state locations and delivered the products sold to New York customers. The taxpayer neither owned physical sales locations in New York nor paid rent to such independent contractors for storing inventory at their locations. The taxpayer did, however, retain title to its products until they were sold. The Department ruled that the taxpayer was “doing business,” as defined under N.Y. Tax Law § 209(1), because the taxpayer owned the products that it consigned to its independent contractors until sold to New York customers. The Department further determined that the statutory “order fulfillment” exemption under N.Y. Tax Law § 209(2)(f) did not apply because the independent contractors did “more than just accept or just ship orders in New York State.” The Department likewise took the position that P.L. 86-272 did not protect the taxpayer’s activities because the independent contractors both solicited orders from New York customers and delivered the products to them. TSB-A-13(4)C, New York Dept. of Tax. & Fin. (March 4, 2013).

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