A wholesaler pays full-time commission salesmen, assigns them exclusive territories, and requires daily call-ins and sales-meeting attendance, but doesn't control their day-to-day sales routine, doesn't withhold payroll taxes, and doesn't reimburse expenses. Are these salesmen 'employees' for purposes of the corporate franchise tax's business allocation percentage?

Plain-English summary

El Greco Leather Products Co. Inc., a wholesale importer of women's shoes, asked whether the full-time, commission-paid salesmen who sold its products should be treated as "employees" for purposes of Tax Law § 210.3(a)(3) -- one factor in computing a corporation's Article 9-A business allocation percentage, since the wages of "all the taxpayer's employees" go into that formula.

The salesmen worked exclusive territories, had no written contracts, set their own hours, and weren't required to submit timesheets. But they had to call the home office daily to report activity and receive input, attend sales meetings and trade shows, get permission for vacations, and follow prices and terms set by the company. The company also didn't withhold income or FICA taxes, or pay FUTA tax, on their commissions.

The Franchise Tax Regulations (20 NYCRR 4-5.2(b)) define "employee" using the common-law control test: an employer-employee relationship exists when the company controls not just the RESULT the individual must achieve, but the MEANS by which they achieve it. Relying on Matter of Liberman v. Gallman -- a closely analogous case involving a shoe salesman with a similar reporting and territory arrangement -- the Department held that El Greco's oversight (daily reports, meeting attendance, vacation approval) didn't amount to control over the salesmen's actual sales ROUTINE or techniques, which is the key factor. The absence of tax withholding reinforced that conclusion, as it had in Liberman. The Department also rejected Petitioner's argument that a federal employment-tax regulation controlled the outcome, noting that federal employment-tax rules serve a different purpose (protecting workers and collecting federal revenue) than New York's franchise-tax apportionment rules (measuring where a corporation's business activity actually occurs), so the two contexts aren't comparable despite a general rule that Franchise Tax Regulations otherwise borrow federal tax-law definitions.

What this means for you

Businesses with commission-based sales forces

Requiring daily check-ins, meeting attendance, and vacation approval does not, by itself, make your salespeople "employees" for New York franchise-tax purposes. What matters most is whether you control their actual sales ROUTINE and methods -- how they approach and persuade customers -- not just administrative oversight of results.

Payroll tax treatment is strong (but not sole) evidence

Not withholding income/FICA taxes or paying FUTA tax on a worker's pay is meaningful supporting evidence that the worker isn't an employee, though the Department noted it "is not by itself dispositive" -- the control test is the core inquiry.

Federal employment-tax classification doesn't automatically carry over

Even where Franchise Tax Regulations generally borrow federal tax-law terminology, a federal employment-tax regulation addressing worker protection isn't necessarily controlling for New York's franchise-tax apportionment question, which serves a different purpose (sourcing a corporation's business activity, not protecting individual workers).

Common questions

Q: Do commission-only salesmen with exclusive territories count as "employees" for the business allocation percentage?
A: Not automatically. The test is whether the company controls the MEANS by which the salesmen do their work (their sales routine and techniques), not just administrative requirements like reporting or vacation approval.

Q: Does not withholding payroll taxes on the salesmen matter?
A: Yes, it's meaningful supporting evidence for non-employee status, though not decisive on its own.

Q: Can another wholesaler with a similar commission sales force rely on this Opinion?
A: No. It binds the Department only as to El Greco's own facts and can't be relied upon by other taxpayers, even those with similar sales-force arrangements.

Citations and references

Statutes, regulations, and cases:

• Tax Law § 210.3(a)(3)
• 20 NYCRR 4-5.2(b) (definition of "employee")
• Matter of Liberman v. Gallman, 41 N.Y.2d 774
• Raynor v. Tully, 60 A.D.2d 731
• 26 C.F.R. § 31.3121(d)-1 (held not controlling)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a83_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(2)C
Corporation Tax
June 2, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C811207D

On December 7, 1981 a Petition for Advisory Opinion was received from El Greco Leather
Products Co. Inc., 2 Harbor Park Drive, Port Washington, New York 11050.
The issue raised is whether certain of Petitioner's salesmen are "employees" of Petitioner, for
purposes of section 210.3(a)(3) of the Tax Law, contained in Article 9-A thereof. Article 9-A
imposes the Franchise Tax on Business Corporations. Such statutory provision provides for the
computation of a taxpayer's business allocation percentage, one of the factors included in such
computation being the total wages, salaries and other personal service compensation of "all the
taxpayer's employees."
Petitioner is an importer and wholesaler of women's shoes. The salesmen at issue herein are
full-time salesmen, paid on a commission basis. There are no written contracts between Petitioner
and its salesmen. Each salesman is assigned a specific territory, in most cases on an exclusive basis.
The salesmen are required to solicit orders solely for Petitioner, at prices and upon terms set by
Petitioner. The salesmen do not work regular hours, nor are they required to submit time sheets or
other work schedules to Petitioner. However, they are required to contact the home office, by
telephone, on a daily basis, to report on their activities "and to receive input on sales promotions,
additions to the lines and other matters." In addition, the salesmen are required to attend regular sales
meetings and to participate at seasonal trade shows, and must obtain permission for vacations from
Petitioner.
Petitioner states that the "salesmen are expected to call personally on customers with a degree
of regularity; [Petitioner] closely monitors performance results and has the right to direct the
activities of its salesmen." Petitioner states, further, that the salesmen "receive monthly aged trial
balances of outstanding accounts receivable and are required to investigate and explain past due
accounts and to attempt to resolve differences with customers."
The salesmen are not provided by Petitioner with either a pension or medical insurance plan,
although Petitioner asserts that the provision of the latter is presently being contemplated. In
addition, Petitioner does not withhold income or FICA taxes, nor does it pay FICA or FUTA taxes
with respect to the salesmen. Petitioner states that such failure is in accordance with the provisions
of section 530 of the Revenue Act of 1978.
Petitioner provides its salesmen with order forms, promotional and advertising material,
samples "and generally whatever other supplies are required to produce sales and maintain good
relations with the customer." However, the salesmen are not reimbursed for expenses. Petitioner
states, in this regard, that the salesmen's commissions and drawing account payments are sufficiently
generous to enable them to cover their own expenses.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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In response to an inquiry as to the nature of Petitioner's control over the salesmen's sales
techniques, sales routine and the like, Petitioner stated that it maintains "constant and close
supervision of its sales force," citing the daily telephone reports required of the salesmen. In addition,
Petitioner indicates that on occasion the salesmen are required to target their efforts on particular
types of stores or otherwise to coordinate their efforts with national goals. Petitioner states, further,
that the salesmen "are counseled as to display techniques and receive head office aid as to any
problems they encounter."
Finally, while Petitioner does not control the salesmen's schedule of appointments, it does
monitor the results of the salesmen's efforts, and has discussions with its salesmen in an effort to
improve their performance. Petitioner states that although it has no quota system as such, individual
goals are established with respect to each sales person.
The term "employee," as used within the above statutory context, is defined in the Franchise
Tax Regulations as follows:
4-5.2 Definition of employee.
. . .
(b)
Generally, the relationship of employer and employee
exists when the taxpayer has the right to control and direct the
individual not only as to the result to be accomplished by him but also
as to the means by which such result is to be accomplished. If the
relationship of employer and employee exists, the designation or
description of the relationship, and the measure, method or
designation of the compensation are immaterial. 20 NYCRR 4-5.2
This provision of the Franchise Tax Regulations, of course, merely restates the common law
rule for determining whether one individual is an employee (or "servant") of another. Although there
does not appear to be extant any judicial authority for the proper application of this rule within the
context of Article 9-A of the Tax Law, there is abundant such authority developed with respect to
the Unincorporated Business Income Tax, and which is applicable herein. A leading case in this area
is Matter of Liberman v. Gallman, 41 N. Y. 2d 774, which upheld a Tax Commission decision
holding a particular salesman not to be an employee. The court there stated that it"is the degree of
control and direction exercised by the employer that determines whether the taxpayer is an
employee." Id., at 778. Further, speaking with specific regard to the issue of salesmen as employees,
the court said that "In the absence of supervision and control of the sales routine, salesmen do not
become employees." Id., at 779. The court found such control and direction lacking with regard to
the manner in which Liberman's customers were approached and persuaded to make purchases,
although Liberman did take direction in a number of other significant areas. For example, as is the
case with respect to the salesmen in the present matter, Liberman was directed to visit particular
areas or customers; was required to report frequently on his sales activities; was occasionally
required to concentrate on specific duties, to attend to specific accounts, to emphasize the sale of
certain shoe styles and to attend sales meetings and conventions; and was prohibited from taking
time off without permission. Nonetheless, the court held that the lack of control over Liberman's

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sales routine, coupled with the fact that Liberman was responsible for office and clerical expenses
and that there was no withholding of income tax from his commissions, was sufficient to support the
Tax Commission's finding to the effect that Liberman was not an employee. In accord is Raynor v.
Tully, 60 A. D. 2d 731, which upheld a similar Tax Commission decision, in large part based upon
a determination to the effect that the purported employer "did not exercise any real supervision over
the Petitioner's sales methods and was more interested in the results obtained than the means used."
Id., at 732.
In the present matter, Petitioner does not demonstrate the type of control and direction over
its salesmen's sales activities which would warrant a finding that the salesmen constitute its
employees. Petitioner does state that it "has the right to direct the activities of its salesmen."
However, the instances of the exercise of such right adduced by Petitioner do not relate to the area
of sales routines and the like, but to matters of the same type as those mentioned in Liberman.
Petitioner presents neither contractual provisions indicating the requisite right of control, nor is there
demonstrated a course of conduct which would give rise to an inference of the existence of such
right. Accordingly, under the facts presented herein, the salesmen at issue must be held not to
constitute employees of Petitioner, for purposes of section 210.3(a)(3) of the Franchise Tax
Regulations.
This conclusion is supported by the fact that Petitioner does not withhold income or social
security taxes from its salesmen's commissions, nor does it make payments of FICA or FUTA taxes
with respect to such salesmen. While this factor is not by itself dispositive, it is important, as was
indicated by the court in Liberman. Petitioner argues that such factor is not significant in the present
case because its failure to withhold and pay income and employment taxes is based on the provisions
of section 530 of the Revenue Act of 1978. However, that Federal statute merely relieves taxpayers
from employment tax liabilities where such taxpayers did not treat a given individual as an employee
for employment tax purposes, based on a "reasonable basis," for any period ending before January
1, 1980, and in addition filed certain required tax returns. A "reasonable basis" is stated by the statute
to exist only where there was reliance on any of the following:
A) judicial precedent, published rulings, technical advice
with respect to the taxpayer, or a letter ruling to the taxpayer;
(B) a past Internal Revenue Service audit of the taxpayer in
which there was no assessment attributable to the treatment (for
employment tax purposes) of the individuals holding positions
substantially similar to the position held by this individual; or
(C) long-standing recognized practice of a significant
segment of the industry in which such individual was engaged.
Accordingly, Petitioner's treatment of its salesmen as non-employees pursuant to section 530
of the Revenue Act of 1978 must of necessity derive from some type of determination by a court or
the I.R.S., or from Petitioner's own self-determination in conformity with industry practice, to the
effect that the salesman are not employees, which is precisely the conclusion arrived at herein
In no event, then, would the effect of Petitioner's failure to pay employment taxes be in any way
obviated by its reliance on section 530.

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Finally, Petitioner contends that the present matter should be concluded by a consideration
of 26 C.F.R. 31.3121(d)-1. This Federal regulation, which, inter alia, explicates section 3121(d) of
the Internal Revenue Code, provides for the inclusion of travelling salesmen in the category of
employees for employment tax purposes. Such inclusion is not controlling herein, despite the terms
of section 1-2.1 of the Franchise Tax Regulations, which provide that terms used in the Franchise
Tax Regulations have the same meaning as when used in a comparable context in Federal income
tax laws and regulations. In the present instance the two contexts in which the term is used are not
comparable. In the case of New York's franchise tax, it is necessary to determine whether certain
individuals are employees of a corporate taxpayer in order to determine whether it is appropriate to
utilize payments to such individuals as a measure of the activity of the taxpayer itself within or
without New York. Federal employment tax provisions, on the other hand, are intended to provide
protection to certain individuals, as well as to secure revenue therefrom, and not to determine
whether their activities within a given state are in effect the activities of a corporate entity. See in
this regard United States v. Silk, 331 U.S. 704. Accordingly, the provision of Federal regulations
cited by Petitioner does not compel any conclusion contrary to that expressed hereinabove.

DATED: June 1, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau