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New York – Advisory opinion clarifies franchise tax rules governing out-of-state companies using in-state independent contractors

 In advisory opinion TSB-A-13(4)C, the Department of Taxation and Finance (the “Department”) found that a Virginia corporation (“VirginiaCo.”) headquartered in Pennsylvania that did not have a physical sales location in New York but used 16 independent contractors located in New York was subject to the business corporation franchise tax in New York.  Before proceeding to discuss the main findings of the opinion, below is a brief overview of the business corporation franchise tax in New York.

Overview of New York franchise tax on business corporations

New York imposes the business corporation franchise tax on domestic and foreign corporations for the privilege of exercising its corporate franchise, doing business, employing capital, owning, or leasing property in New York in a corporate or organized capacity. Franchise tax is also imposed if a corporation maintains an office in New York. However, New York law does not deem a foreign corporation to be conducting any of the activities that would subject it to New York franchise tax if its only New York activities are fulfillment services provided by an independent contractor (the “Fulfillment Exception”).

What is included in the definition of “fulfillment services” is key to determining the application of the Fulfillment Exception. Fulfillment services in New York generally include accepting orders by electronic means or mail, responding to customer inquiries electronically or by mail, conducting billing or collection activities, or shipping orders from an inventory of products offered for sale.

Additionally, a foreign corporation will not be considered to have engaged in taxable activities in New York merely by reason of sales or the solicitation of orders for tangible goods in New York by an independent contractor.

All these exceptions make it initially appear fairly easy for businesses to avoid the New York franchise tax by using independent contractors to run their fulfillment operations within New York. Unfortunately, based on this recent advisory opinion, escaping the broad reach of the New York franchise tax is not as simple as it may initially appear.

Facts and findings of the advisory opinion

VirginiaCo. shipped products by a common carrier to its independent contractors who would store and treat the products as inventory. These contractors were responsible for the products shipped into New York and held the products at locations located throughout New York. The contractors sold the products on a consignment basis on behalf of VirginiaCo. Furthermore, the contractors made in-person sales visits and sold VirginiaCo.’s products at the customer’s site, wrote orders at the customer’s site, and accepted and sent credit information to VirginiaCo. VirginiaCo. would then decide whether to approve the customer’s credit application, approve the sale and then bill the customer.

The Department found that VirginiaCo. failed to avoid being subject to New York corporate franchise tax for several reasons. First, VirginiaCo. retained title to the inventory located in New York. This gives VirginiaCo. nexus because the consignment arrangement resulted in VirginiaCo. owning property in New York. Second, the services provided by the contractors did not fall into the fulfillment services exception. The contractors did more than accept or ship orders in New York -- they made sales visits, processed orders and physically delivered VirginiaCo.’s products. Finally, because the contractors were doing more than just soliciting orders for sales in New York, it did not satisfy the mere solicitation exception described above.

Note that advisory opinions are not binding on anyone other than the petitioner. If your business is currently conducting activities in New York through independent contractors, it would be prudent to evaluate your activities to ascertain if the advisory opinion discussed above could negatively impact your operations in New York, thus subjecting your business to the New York business corporation franchise tax.

Missouri – Bill to lower income taxes, increase sales tax moves to House

The Missouri Senate passed a bill earlier this month that, if enacted, would change numerous provisions of Missouri’s tax code. Among the changes in the more than 200-page bill are decreases in the individual and corporate income tax rates, a new business income tax deduction, and an increase in sales tax rates. Slightly more detailed highlights are:

  • Reducing the maximum tax rate on individual income by 0.75 percent over five years, beginning in the 2014 tax year. For tax years beginning on or after 2018, the maximum rate would be 5.25 percent.
  • Creating an individual income tax deduction for business income that would be phased in over a five-year period beginning in the 2014 tax year. Taxpayers would be allowed to deduct 10 percent of business income in the first year and 50 percent once fully implemented.
  • Reducing the maximum tax rate on corporate income by 0.75 percent over five years, beginning in the 2014 tax year. For tax years beginning on or after 2018, the maximum rate would be 5.25 percent.
  • Applying a further tax reduction of 0.25 percent to the tax tables applicable to individual and corporate income taxes if the Marketplace Fairness Act of 2013, or similar legislation, is passed.
  • Raising the sales and use tax from 4 percent by 0.1 percent each year for five years until it reaches 4.5 percent. This change would begin on January 1, 2014.  

This proposed legislation is another great example of a state taking into consideration the Marketplace Fairness Act of 2013 and its impact on a state’s ability to tax sales from online retailers. Clearly, Missouri, like other states, sees the potential of additional revenue from the Marketplace Fairness Act of 2013 that can help reduce taxes for individuals and corporations.

Click here to review the full text of S.B. 26.

Pennsylvania – Senator introduces Commercial Activity Tax legislation

On February 20, 2013, Pennsylvania Senator Anthony Williams introduced legislation, SB 202, which would replace Pennsylvania’s corporate net income tax with a Commercial Activity Tax (CAT) similar to the CAT in effect in Ohio. The CAT is based on the principal that businesses should be taxed for the privilege of doing business in a state, measured by gross receipts from business activities in such state.

Senator Williams said, “the current Corporate Net Income (CNI) tax puts local businesses at a competitive disadvantage. Pennsylvania-based businesses are forced to bear the tax burden, however out-of-state businesses can adopt tax strategies to avoid paying the CNI tax. Our current CNI tax rate is 9.9 percent, which is the second-highest state corporate income tax in the United States.”

The proposed Pennsylvania CAT provides for a broad-based, low rate tax on taxable gross receipts that applies to most business types, such as retailers, manufacturers and service providers. Businesses with “substantial nexus” with Pennsylvania and more than $150,000 in taxable gross receipts in a calendar year would be required to pay the tax. Under the proposed CAT, a business will have “substantial nexus” with Pennsylvania if it:

  • Uses all or part of its capital in Pennsylvania;
  • Is authorized to do business in Pennsylvania;
  • Has any one of the following in Pennsylvania in a calendar year:
    1. at least $50,000 in property;
    2. at least $50,000 in payroll;
    3. at least $500,000 in taxable gross receipts;
    4. at least 25 percent of its total property, payroll, or gross receipts; or
    5. its domicile; or
  • Otherwise has the nexus necessary under the Constitution of the United States to be subject to tax in Pennsylvania.

The gross receipts that would be subject to the proposed legislation are broadly defined to include most types of receipts from the sale or lease of property or the performance of a service. Gross receipts would not include interest (other than from credit sales), dividends, capital gains, wages reported on IRS Form W-2, or gifts. Generally, such gross receipts would be taxable in Pennsylvania only if the property is located in Pennsylvania or if the purchaser ultimately uses the property or receives the benefit of what was purchased in Pennsylvania.

Under the proposed CAT, a taxpayer would pay $150 on the first $1 million of its annual taxable gross receipts. Thereafter, the taxpayer would pay tax at a rate of 0.26 percent of all of its taxable gross receipts per tax period minus the $1,000,000 annual exclusion amount for calendar year taxpayers, and the $250,000 quarterly exclusion amount for quarterly taxpayers (with a three-quarter carry forward for any unused exclusion amount). Under the proposed legislation, the CAT would begin to be phased-in for certain taxpayers starting in 2014.

The proposed CAT would not apply to certain types of businesses that are subject to other provisions of the Pennsylvania tax code, such as financial institutions, insurance companies, nonprofit organizations, and some public utilities.

The bill is currently awaiting hearing in the Senate Finance Committee. 

Click here for the full text of S.B. 202.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall


Susan Millradt McGlone


Jeremy J. Schirra


Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.