When you think about states that aggressively enforce sales tax compliance, New York needs to be at the top of the list. New York was the first to develop and enforce the “Amazon nexus rule” and its also been a leader in other state tax nexus enforcement. Despite this well earned reputation for being aggressive in finding out-of-state businesses that should be registered for New York sales tax, there is one very unique opportunity in New York that might prove to be a valuable planning opportunity for remote sellers. Like all sales tax planning, this opportunity needs to be carefully evaluated in light of all the other connections your company may have in New York.
As stated in New York Advisory Opinion No. TSB-A-12(1)C, (2/9/12): “To be required to collect sales an use tax, a seller must qualify as a vendor, which is defined in (New York) Tax Law Section 1101(b)(8).” Section 1101(b)(8) outlines a variety of activities that, if performed in New York, create nexus for an out-of-state seller. However Section 1101(b)(8)(v) specifically excludes from the definition of a vendor “a person who is not otherwise a vendor who purchases fulfillment services carried on in New York by a person other than an affiliated person”
As used in this definition, the following activities constitute “fulfillment” services: (New York Section 1101(b)(18))
Any of the following services performed by an entity on its premises on behalf of a purchaser:
(i) The acceptance of orders electronically or by mail, telephone, telefax or internet;
(ii) Responses to consumer correspondence and inquiries electronically or by mail, telephone, telefax or internet;
iii) Billing and collection activities; or
iv) The shipment of orders from an inventory of products offered for sale by the purchaser.
In order for this exclusion to apply, the company acting as the fulfillment agent, must not be an “affiliated person.” Under this provision, persons are “affiliated” if there is an ownership interest of more than 5 percent, whether directly or indirectly, in the other entity. This can also apply to a corporate ownership structure. In other words, companies cannot create wholly owned subsidiaries to act as fulfillment agents for purpose of escaping New York sales tax nexus. To take advantage of this exclusion, the fulfillment company should be an independent 3rd party.
What does New York’s “Fulfillment Exception” Mean for Online Sellers?
As outlined above, fulfillment services include order taking, credit card processing, customer support, and actual order packing and shipping from an inventory in New York. Normally, the presence of inventory in a state will create nexus. However, given this very narrow exception, it appears that where the inventory is in the possession of an independent fulfillment center, nexus will not be created in New York.
Be very careful of this exclusion. Notice that the exception only applies to “a person who is not otherwise a vendor.” If your company meets the requirements of a vendor as outlined in Section 1101(b)(8)(i) through (iv), may not apply. If you already have nexus in New York, then putting a fulfillment center in the state will not make your situation any worse.
For remote sellers looking for an east coast fulfillment center and who don’t otherwise have nexus in New York, this very unique exception to the general rule may be worth investigating.
Do you have questions or comments about the New York fulfillment exception? Start the conversation in the comments.