Does an out-of-state manufacturer that sells only through independent (non-employee) commissioned sales representatives lose the protection of federal P.L. 86-272 -- which shields mere order-solicitation from state income tax -- because it rented a New York showroom for those representatives' convenience for part of the year?

Plain-English summary

Hugo Bosca Company manufactures small leather goods entirely out of its Springfield, Ohio headquarters and plant. It sells nationwide through independent freelance salesmen -- not its own employees -- who work on commission representing Bosca and other manufacturers, carry sample product lines to retailers, and take purchase orders. Every order is sent to Springfield, where Bosca's own employees decide whether to accept it; accepted orders are filled by shipping goods from Springfield directly to the retailer, and any repairs or returns go back to Springfield too. Two independent salesmen cover New York State retailers. As a convenience to those salesmen, Bosca rented a showroom at the Empire State Building until February 14, 1986, when it assigned away the lease; the independent reps used it roughly every two weeks on average (daily during three annual "market weeks"). Bosca argued that, at most, it should owe New York tax only for the partial-year period the showroom was rented (January 1 - February 14, 1986), since its solicitation-only sales activities would otherwise be protected by the federal P.L. 86-272 statute, which bars states from taxing net income when a company's only in-state activity is soliciting orders that are approved and filled from outside the state.

The Department agreed that Bosca's core sales activity -- independent reps soliciting orders that get approved and filled entirely from Ohio -- is exactly the kind of activity P.L. 86-272 protects. But it held that renting the showroom is a SEPARATE activity that falls outside that federal protection: New York's own regulations treat "owning or leasing property" in New York as an independent nexus trigger, regardless of whether the property is actually used in the company's core business, and P.L. 86-272 doesn't extend its shield to property-leasing activities -- only to solicitation of orders under specific conditions. Because Bosca leased real property in New York (the showroom) for part of 1986, its overall activities in the state exceeded P.L. 86-272's narrow protected zone. And critically, Article 9-A's franchise tax attaches "for all or any part of" a corporation's taxable year in which it engages in a nexus-creating activity -- meaning Bosca is subject to tax for the WHOLE 1986 taxable year, not just prorated down to the six-week period the lease was actually in effect.

What this means for you

Out-of-state manufacturers relying on P.L. 86-272 protection for independent sales reps

P.L. 86-272 is a narrow shield -- it protects mere order solicitation (by employees OR independent representatives) approved and filled from outside the state, but it does NOT extend to renting or owning any real or personal property in the state, even a small showroom used only periodically as a convenience for your sales force. Adding a leased New York location, even briefly, can pull your entire business out of P.L. 86-272's protection.

Companies that terminate a New York lease mid-year, hoping to limit their tax exposure to that period

Don't assume ending the lease caps your tax liability to the months the lease was active. Under Article 9-A, having a taxable nexus activity for ANY PART of the year subjects the corporation to franchise tax for the ENTIRE taxable year -- there's no proration based on how many months the disqualifying activity was ongoing.

Businesses providing "convenience" showrooms or sample rooms for independent contractors

Even a modest, occasionally-used space (here, used roughly biweekly plus daily during three market weeks) counts as "leasing property" for nexus purposes -- there's no de minimis exception based on how lightly the space is used.

Common questions

Q: Would Bosca have been protected by P.L. 86-272 if it had never rented the showroom?
A: Based on the Department's reasoning, yes -- its core activities (independent reps soliciting orders approved/filled entirely from Ohio) fall squarely within P.L. 86-272's protected solicitation activities.

Q: Does it matter that the showroom was for the sales reps' convenience rather than Bosca's own direct use?
A: No -- the regulation makes clear that property "owned by or held for the taxpayer in New York State, whether or not used in the taxpayer's business," is sufficient to create nexus.

Q: Can another manufacturer using independent sales reps and a showroom rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other taxpayers, even similarly structured manufacturers with a New York showroom.

Citations and references

Statutes and regulations:

• Tax Law § 209.1 (Article 9-A franchise tax, "for all or any part of" the taxable year)
• Business Corporation Franchise Tax Regulations § 1-3.2(a)(1), § 1-3.2(d) (leasing/owning property as nexus)
• P.L. 86-272, 15 USC § 381 (federal solicitation-of-orders protection)

Related rulings:

• TSB-A-85(26)C -- an earlier P.L. 86-272 showroom case involving a related manufacturer and its exclusive single-principal sales agent, decided on similar office-maintenance reasoning

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (7) C
Corporation Tax
April 7, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C861230A

On December 30, 1986, a Petition for Advisory Opinion was received from Hugo Bosca
Company, Inc., 1905 W. Jefferson St., P.O. Box 777, Springfield, Ohio 45501.
The issue raised is whether Petitioner's activities in New York State are sufficient to make
Petitioner subject to tax under Article 9-A of the Tax Law for taxable year 1986.
Petitioner is a manufacturer of small leather goods. Its headquarters, manufacturing plant
and sole place of business are located in Springfield, Ohio. Petitioner's products are sold by
freelance salesmen throughout the United States. These salesmen, who are not employees of
Petitioner, work on a commission basis, earning fees by representing Petitioner and other
manufacturers. The salesmen purchase samples of Petitioner's product lines, take them to the
retail stores in their assigned geographical area and obtain purchase orders. The orders are then
sent, by either the salesmen or the retailer, to Petitioner in Springfield where Petitioner's
employees accept or reject them. If the order is accepted by Petitioner, it is filled by sending the
goods from Springfield to the retailer at an address specified by the retailer in the purchase order.
If there is a defect in the product or the goods are not accepted, all repairs and returns are made
directly to Petitioner in Springfield.
There are two independent salesmen who are responsible for showing Petitioner's
products to retailers located in New York State. As a convenience to these salesmen Petitioner
rented a showroom at the Empire State Building until February 14, 1986 at which time it
assigned its lease for this space. Petitioner understands that the independent sales representatives
used the showroom until February 14, 1986 on the average once every two weeks except during
market week when it was used every day. There are three market weeks a year when the
showroom is so used. Since February 14, 1986, Petitioner has ceased renting space in New York
State.
It is Petitioner's position that it is at most only liable for taxes from January 1, 1986 to
February 14, 1986 and that if it was ever doing business in New York State, it stopped when it
assigned its lease on February 14, 1986.
Section 209.1 of the Tax Law, contained in Article 9-A thereof, imposes the Franchise
Tax on Business Corporations, as follows:

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

-2­
TSB-A-87 (7) C
Corporation Tax
April 7, 1987

"For the privilege of exercising its corporate franchise, or of doing
business, or of employing capital, or of owning or leasing property in this
state in a corporate or organized capacity, or of maintaining an office in
this state, for all or any part of each of its fiscal or calendar years, every
domestic or foreign corporation, . . .shall annually pay a franchise tax. . . ."
Section 1-3.2(a)(1) of the Business Corporation Franchise Tax Regulations provides, in
pertinent part, that "[t]he tax is imposed on every foreign corporation . . . whose activities include
one or more of the following:
. . .
(iii) owning or leasing property in New York State in a corporate or organized capacity
or in a corporate form . . . ." 20 NYCRR 1-3.2(a)(1).
Section 1-3.2(d) of such Regulations provides, in pertinent part, that, "[t]he owning or
leasing of real or personal property within New York State constitutes an activity which subjects
a foreign corporation to tax. Property owned by or held for the taxpayer in New York State,
whether or not used in the taxpayer's business, is sufficient to make the corporation subject to
tax." 20 NYCRR 1-3.2(d).
Petitioner states that it rented a showroom in New York City until February 14, 1986 for
use by Petitioner's independent sales representatives. Even though Petitioner has since ceased to
rent space in New York State, the rental of property in New York for a portion of the year
constitutes "leasing property in this state" within the meaning of section 209.1 of the Tax Law.
P.L. 86-272 (15 USC 381) limits the power of a state to impose a net income tax on
"interstate income". Income derived from the interstate business activities of a corporation
incorporated outside a state may not be taxed by that state if the activities carried on with the
state are limited to:
"(1) the solicitation of orders by such person, or his representative, in
such State for sales of tangible personal property, which orders are sent
outside the State for approval or rejection, and, if approved, are filled by
shipment or delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative, in such
State in the name of or for the benefit of a prospective customer of such
person, if orders by such customer to such person to enable such customer
to fill orders resulting from such solicitation are orders described in
paragraph (1)."

-3­
TSB-A-87 (7) C
Corporation Tax
April 7, 1987

While Petitioner's activities in soliciting, approving and filling orders, as described
earlier, are activities of a type described in the foregoing federal statutory provision, the leasing
of property within this state extends the sum of Petitioner's activities in New York beyond the
protected zone established by P.L. 86-272.
Accordingly, Petitioner is subject to New York's Franchise Tax on Business
Corporations, imposed under Article 9-A of the Tax Law, for all of taxable year 1986, pursuant
to section 209.1, which imposes the tax on foreign corporations "owning or leasing property in
this state in a corporate or organized capacity, for all or any part of each of its fiscal or calendar
years. . . ." (emphasis added).

DATED: April 7, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.