In a recent advisory opinion, the New York State Department of Taxation and Finance found that an Ohio corporation was not "doing business" in New York and, therefore, was not subject to New York’s franchise tax, even though one of the company’s directors lived in New York and maintained a local telephone listing for the company. The opinion also concluded that independent repair centers in New York, although authorized to perform warranty repairs on equipment manufactured and sold by the taxpayer, did not create any obligation to pay the tax. See TSB-A-04(15)C, N.Y. Dept. of Tax. & Finance, Office of Tax Policy Analysis (Aug. 31, 2004).
The Company’s Business Operations
Petitioner is an Ohio corporation that designs, manufactures and sells currency changing equipment from its offices and manufacturing facilities in Ohio. It has no employees, offices, property or other traditional physical presence in New York and does not solicit sales in New York. Instead, the company solicits sales by telephone from Ohio, where it receives, accepts and fulfills all orders.
One of the company’s directors resides in New York. Although her involvement with the company is limited to attending Board meetings in Ohio, she did maintain a telephone listing for the company in a local New York telephone book. The listing was identical to her personal phone and residence and was listed without the company’s knowledge.
The company’s website also contains a list of authorized service centers. This list identifies various independent repair organizations that have been trained to repair the currency changing machines manufactured and sold by the company. These repair organizations are fully independent organizations with no contractual obligations to the Company. They are "authorized" to provide warranty and non-warranty repairs because they have been trained to repair equipment that the company has sold. All of the training takes place in Ohio. If a repair occurs, the independent service organization bills the company in accordance with the terms of the warranty.
Pursuant to Section 209.1 of the New York Tax Law and section 1-3.2(b), (c),(d) and (e) of the corresponding Business Corporation Franchise Tax Regulations (the "Regulations"), a corporation organized outside of New York State is subject to the franchise tax imposed under Article 9-A if the corporation is doing business, employing capital, owning or leasing property in a corporate or organized capacity, or maintaining an office in New York State. The New York State Department of Taxation and Finance (the "Department") concluded that based on the facts presented above, the company was not "doing business" in New York and was not subject to the franchise tax.
The Local Listing Does Not Create Franchise Tax Obligations
Section 1-3.2(e) of the Regulations provides that "a foreign corporation which maintains an office in New York State is engaged in an activity which makes it subject to tax." The Department found that the company did not "maintain an office" within the meaning of this regulation, even though one of the company’s directors lives in New York State and listed the company in the local telephone book under her home address. This listing did not create a tax obligation because the director is not actively involved in the operations of the company, does not conduct any business from her home, and does not solicit sales or take orders for the company’s products.
The Authorized Repair Centers Do Not Create Franchise Tax Obligations
The Department also concluded that the authorized repair centers did not create tax obligations for the company. In reaching this conclusion, the Department focused heavily on the fact that the repair organizations were "fully independent organizations" and thus appeared to be independent contractors, not agents.
Section 1-3.2(b)(2)(iv) provides that a foreign corporation is doing business in New York if it employs "agents, officers and employees" in New York State. The Department reviewed the law and concluded that services performed through independent contractors did not constitute doing business in New York by the company, unless it was established that the contractors had an agency relationship with the company. The Department concluded that "[i]t appears that the authorized service centers are independent contractors, and . . .the activities of such authorized service centers in New York State are not considered activities conducted by Petitioner. Petitioner is not deemed to be doing business in New York under section 1-3.2(b)(2) of the Regulations as a result of such independent contractor activities in New York.
Under New York regulations, therefore, an outof- state company will not be deemed to be doing business based on the activities of third parties in New York unless those third parties actually function as an agent of the out-of-state company. Absent an agency relationship, the company is not "doing business" and will not incur franchise tax obligations in New York State.
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